Money vs. Currency | Hidden Secrets of Value Ep. 2 | Alan Hibbard

Here's a comprehensive summary of the provided YouTube video transcript:

Key Concepts

• Weimar Hyperinflation: A historical event of extreme price increases in Germany post-WWI.
• Currency vs. Money: The core distinction between a government-issued medium of exchange and a store of value.
• Medium of Exchange: An asset designed for frequent transactions and movement.
• Store of Value: An asset designed to preserve purchasing power over time.
• Proof of Work: The concept that money represents value created through labor.
• Honest Database: A system that accurately reflects value creation and ownership.
• Gresham's Law: The principle that "bad money drives out good" in a monetary system.
• Central Issuer: An entity that controls the creation and rules of a currency.
• Decentralized: Lacking a single point of control or authority.
• Universal Asset: An asset with value and usability across different jurisdictions.

The Perils of Hyperinflation: The Weimar Republic Example

The transcript begins by recounting a 10th-grade history lesson on the Weimar hyperinflation in Germany after World War I. The speaker vividly illustrates the catastrophic loss of currency value by describing the price of a loaf of bread. Initially costing one mark, it escalated to one hundred, then thousands, and eventually over a billion times its original price. This extreme example highlights the fragility of currency and prompts the question of what property allows it to lose value so rapidly. The speaker expresses personal shock and concern, imagining the impossibility of such a scenario in their own life and questioning how it could happen.

The Fundamental Difference: Money vs. Currency

The speaker attributes their understanding of this phenomenon to Mike Maloney's "Hidden Secrets of Money," which introduced the critical distinction between "money" and "currency." The key insight is that hyperinflation, as seen in Weimar, can only occur with currency because it can be "printed out of thin air." In contrast, money must be "worked into existence," implying a tangible basis for its value.

The Role and Nature of Money

Conceptually, money is defined as "what you want when there's nothing else you want." This profound statement explains its function as a tool to carry the value created in the present into the future. When individuals have no immediate desires, they seek money to acquire future goods or services. In Wall Street terms, holding money is a "bullish bet on society in general," signifying confidence in future production and availability of desired items.

The US Dollar and the Abandonment of the Gold Standard

The transcript then addresses the potential for hyperinflation in the United States. It points out that the US abandoned the gold standard in 1971, meaning its currency is no longer backed by gold. This theoretical abandonment implies that the US dollar could, in principle, be hyperinflated without limit. The speaker suggests that any system not using "honest money" like gold, silver, or Bitcoin is susceptible to similar hyperinflationary risks.

Elon Musk's Perspective and the "Honest Database"

A quote from Elon Musk is introduced: "Money is essentially just an entry in a database." The speaker largely agrees with this, but emphasizes a crucial requirement: the database must be "honest." An honest database accurately represents who has done work and created value. The example of a $20 bill at a grocery store illustrates this: it signifies that the holder has performed $20 worth of work for someone else and expects $20 worth of work in return. The problem arises when an entity can produce these entries in unlimited quantities, corrupting the honesty of the system and leading to value depreciation. Therefore, money, in any form, is fundamentally a "receipt for proof of work done."

The Impact of Unbacked Currency Creation

A hypothetical scenario is presented to demonstrate the consequences of unbacked currency creation. If hardworking Americans collectively earned $100 million, and this is reflected in the database, it signifies $100 million worth of value created. However, if the government prints an additional $100 million, the database becomes inaccurate. The purchasing power of the original $100 million is halved, as the government now claims half the goods without having produced any. This illustrates how currency, when not tied to actual value creation, fails to be an accurate representation of work and value.

Money as an Honest Database vs. Currency

In contrast, "money" is described as an entry in an "honest database." Using gold as an example, the transcript explains that governments cannot magically create gold; they must mine it, just like individuals. This inherent scarcity ensures that a unit of money is earned honestly. The distinction is clear: currency is an entry in a potentially dishonest database, while money is an entry in an honest one.

Medium of Exchange vs. Store of Value

The transcript then delves into the functional differences between a "medium of exchange" and a "store of value."

• Medium of Exchange: Designed for movement and frequent transactions, optimizing for circulation. Analogous to a car, which is for transportation.
• Store of Value: Designed to be held and preserve purchasing power over time, not for frequent movement. Analogous to a house, which secures valuables and stays in place.

The speaker argues that using the same asset for both purposes is detrimental, likening it to living in one's car. The US dollar is presented as a prime example of a medium of exchange, not a store of value, which is why its purchasing power erodes over time, manifesting as rising prices. Holding a fixed amount of dollars buys less and less.

Defining Money and Currency by Function

Based on these functions, the speaker proposes:

• Currency: The best word to describe a medium of exchange.
• Money: The best word to describe a store of value.

The distinction between money and currency is thus the difference between a store of value and a medium of exchange.

Examples of Currencies and Money

The transcript provides numerous examples:

• Currencies (Mediums of Exchange): Monopoly money, US dollars, airline miles, hotel points, arcade tokens, rewards points, credit card points, news subscription site credits, audiobook credits, virtual Visa gift cards. These are typically issued by a central entity (company, country) with defined rules and a fixed jurisdiction.
• Money (Stores of Value): Gold, silver, and Bitcoin. These lack a central issuer, are decentralized, and are universal assets.

The Proper Use of Stores of Value and Mediums of Exchange

The proper way to use a store of value is to hold it. Spending or selling it occurs only when one is "done using it," akin to selling a house. Money like gold, silver, or Bitcoin should be held for preservation of value.

Conversely, a medium of exchange is used by spending it. Holding onto a medium of exchange for extended periods means not using it correctly, leading to value depreciation. The speaker advises redeeming currencies like credit card points or airline miles quickly before rules change.

Gresham's Law: The Free Market's Verdict

The transcript explains how to identify whether an asset is a store of value or a medium of exchange through the free market, specifically via Gresham's Law. When multiple candidates for money exist (e.g., gold and the dollar), people will hoard the perceived more valuable asset (money) and spend the perceived less valuable asset (currency). This leads to the most valuable asset being hoarded and the least valuable circulating.

The free market's application of Gresham's Law indicates that the US dollar is a good medium of exchange, while gold is a good store of value. The common criticism that Bitcoin is not spent is explained by its nature as a store of value, similar to gold, rather than a medium of exchange.

Conclusion and Call to Action

The speaker concludes by thanking the viewer and emphasizing that the "best investment you can make is your own financial education." The website golds.com is promoted as a resource for free research and tools to protect one's future.