#138 Cryptocurrency Part 1- The History of Money and Currency

When presenting in the community one of the most common questions we get is “what about crypto?” To kick off season six we reached out to our top Certified Financial Planner (CFP) volunteer Paul Lim and asked him to breakdown cryptocurrency. The result, a two episode special on everything crypto.  

Before one can understand why cryptocurrency was invented and how it gets its value we need to look back at the early days of currency. In part one we take it back to the days of kings and gold coins with a history of currency. Paul explains some of the fundamentals of all currencies and how they gain, or lose, value. If you like this episode stick around for part two next week.     

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Intro 0:09

Welcome to Talk Wealth To Me, a safe space podcast, where we chat about anything and everything related to personal finance, The information contained in podcast is for educational and entertainment purposes only. It does not constitute as accounting, legal tax or other professional advice.

Chase Peckham 0:31

Hello everybody. And welcome to the latest edition and season six of talk wealth to me. And I can't believe we've got five seasons in the books and as always my , uh , cohort Felipe Arevalo, and we've got a special treat to start off season six, Phil, we're gonna start us off with a two part series.

Felipe Arevalo 0:55

Yeah.

Chase Peckham 0:55

And considering what's going on in the news with, and the people just not understanding what really is cryptocurrency, even though it's been around, we are going to explain it, and we are gonna explain it in detail. And we've got the , a great professional to do just that

Felipe Arevalo 1:14

It is. It's one of the questions that we get most, especially when we're talking to youth, college age students, you know, it , it it's, what about crypto? Um , and then the answer we go

Chase Peckham 1:25

and we go, yeah What about crypto crypto?.

Felipe Arevalo 1:27

What about crypto? <laugh> , uh , you know, there's so much to go with crypto with the, the whole, I mean, it's new, it's the newest form of things that we gotta learn in personal finances , uh , and, and youth sometimes see the big success stories and they think it's the next big thing, but they fail to sometimes see the full picture .

Chase Peckham 1:53

Yeah, they YouTube it, or, you know, they hear people talk about it on TikTok and whatever other social media , uh , platform people are listening to. It's the next can't miss thing. And , but the interesting thing is, is it's a currency , uh , but is it a currency that we are going use? Is it currency that , uh , we are going to just trade on the stock market? What, what is it, what was it intended for? And to do that, we gotta kind of understand how currency works in general. And so when we met with Paul Lim, who is the San Diego financial Literacy Center's, top Certified Financial Planner, and , uh , our volunteer that runs our financial opportunity clinics. He's phenomenal. He's incredibly knowledgeable and he just loves this stuff and he knows it inside and out. And he really gives us his own thoughts on this. Now this is not , uh , you know, he's not given his advice on what you should go do with it. He's, he's , he's given hi his what he thinks it's all about. Not whether you should trade , uh , and buy it or not. That being said, he did such a good job of explaining how currency in general works

Felipe Arevalo 3:08

Kind of from the beginning,

Chase Peckham 3:09

From the beginning of money, right? Like

Felipe Arevalo 3:11

We're talking coins,

Chase Peckham 3:12

Trades, and services and all that kind of stuff.

Felipe Arevalo 3:15

Right.

Chase Peckham 3:15

It was so good that we had were like, this is not just one episode. This is two episodes. So today we are gonna talk about the history and how money works.

Felipe Arevalo 3:27

Right.

Chase Peckham 3:27

How is it traded? How is it used in the us and abroad? And then we're gonna follow that up in its part two series. And we're gonna talk about crypto in general. So you're not gonna want to miss this. So Paul, I'm gonna lead right in. I'm gonna say, thank you for being with us, but for most of us, even myself and Phil, we talk about it all the time. What really is crypto?

Paul Lim 3:56

Yeah. First of all, thank you guys so much for inviting me on your show here. Just some quick things to start up front . I'm not a lawyer, I'm not a CPA. Don't give tax or legal advice. The financial advice we'll be talking about is gonna be general in nature, because I don't know your listener. I don't know their circumstances, anything we talk about for informational purposes, only all the things I'll be sharing with you today. Virtually. Nothing's my original thought. I do try to give attribution whenever I can, but I can't always remember where I read something or where something came up, but I'll try my best. Everything I'm talking about here is my opinion only is not reflect my employer or my broker dealer. And I'm here appearing in my capacity as a financial volunteer with San Diego financial literacy center. Cuz you guys do such good work. So again, thank you very much for inviting me on the show here.

Chase Peckham 4:46

Thank you. Thanks for having us.

Felipe Arevalo 4:48

Yeah, Thanks.

Paul Lim 4:49

Ah , of course, course . So, so I want to answer your question about, you know, what is cryptocurrency in general and in order to understand that we have to understand about how regular money works in general. And one of the things I like the most in terms of understanding the world is forming your understanding based on axioms things that you definitely know to be true. And I'll tell you where this came up for me and really hit me hard. It was watching this documentary about this really famous mathematician and they were interviewing him and they were asking him , they were saying, Hey, you know what really got you into becoming an expert at math? That just doesn't seem like something that a lot of people get into. And he was telling the story about how one day he was forced to do an exercise where you basically take a Stockwatch at a pendulum and you lengthen the string and then you see it move back and forth. And you time how long it takes to make this many repetitions. And then you shorten the string and then you time it again. And he was putting it on graph paper. And he was like halfway through the exercise. He started to get chills because he saw that the pendulum was forming a parabola. And he was like, how does this pendulum know math ? And it was just shocking to him because of the fact that things that he was learning in class was explaining something in nature . And , and the answer to it was the parabola doesn't know , uh , you know , the pendulum doesn't know math, math knows the pendulum. And if anything, it's conforming to rules that it itself made understand. So that was just dead set proof to him. That math was a real thing and that he should really pay attention to it. That's what really got him into it. So can we take some of those lessons and apply it to money? And the answer is yes. So I'm gonna tell you some of the axiomatic rules of money and here's how this works. Pretend you guys crash, landed on a desert island or something like that. And you're in charge of rebuilding society. And someone's put you in charge of determining what we should use for money on this little island of ours. Cause we're gonna be here for a while . Should we use sand? Should we use apple? Should we use seashells? Like what's what's the right way. As far as rules of money. Well, Ludwig von Mises figured this out a long time ago. And the acronym to remember here is DDPULSA. It's not perfect, cuz there's only one U in this whole thing, but I'm gonna go through this acronym for you. And this is what we'll use to determine the rules of money. So the first D is durability, right? You can't have a storage of currency. That's gonna rot for something like that. So using food on the desert aisle , that would be a bad idea, right? The divisibility, you gotta be able to divide it into small pieces to give people change. So giant rocks wouldn't work because you need to be able to give people change or something like that. Same reason. Portability is P you gotta be able to carry this thing around. Another reason why giant rocks would be a bad decision, right? Uniformity. They all have to kind of look the same. So whatever you're gonna use, as far as your currency has to be instantly recognizable. And you have to be able to tell one for something that's not money on this desert island, right? Limited supply. So we shouldn't use sand for money cuz then people can just pick up sand and just use that as currency, right? There has to be a limitation. As far as the amount goes, acceptance. This currency is only gonna work on this desert island because that's our little society and you not gonna be able to use that and take it to the mainland and buy goods and services with it , obviously. Right? So anyway, durability, visibility, portability, uniformity, limited supply and acceptance that's DDPULSA, right? So that's what you use as an axiomatic rule for money. Now, how does this apply in the real world? Well, Roger Ver pointed this out and he was like, prisoners, understand this. He's like prisoners use currency in jail. They'll use things like cigarettes, ramen noodles, or stamps, things like that to trade with each other behind the prison walls. And those things all meet the definition of DDPULSA cigarettes. They're durable, they're divisible, they're portable. They're uniform. They're limited supply cigarettes. Everyone will take it. Same thing with stamps, cuz you gotta be able to send letters back home and everything like that. They're durable. They're divisible. They're portable. They're uniform, all this kind of thing right now. What's amazing about this is that the prisoners figured this out on their own without studying Ludwig von Mises right. And just like math was explaining the pendulum. These rules of money are explaining the prisoners. The prisoners don't know Ludwig von Mises, von Mises knows about the prisoners and therefore knows a little bit about people. Does that make sense so far?

Chase Peckham 9:58

Yep.

Felipe Arevalo 9:58

Yes.

Paul Lim 9:59

Alright. So let's take our DDPULSA framework and attach it to the most ancient form of money, which is gold. Right? Gold, same thing, durable, divisible, portable, all that kind of stuff. Right? It , it serves as a , a nice way to understand it in primitive terms. And if you melt it down, all the gold on the planet, it would form like one 70 square foot cube or something like that. So limited supply, a really important part. Right. All right . So let's examine what ancient Kings used to do with gold because this will explain inflation, which is a central criticism of current money. And then you'll begin to see why it is that crypto became so popular. So what ancient Kings used to do is they would come into power and they would confiscate everyone's gold coins because what they said they wanted to do was they wanted to melt down the old coins and then mint new ones with their face on it instead. So everyone would come into the middle of the village, they would turn in their coins. They would say how many they gave and then they would know how many of the new coins they should get once the whole exercise was done. Right? So what the king would do is they would melt down all the gold, they put it in a big pile, but then in order to create new money at a thin air, they would take some cheaper metal and they would blend it into it. So let's just say they took half of the amount of cheat metal and they blend it all in and they make a new alloy of these coins. Well, they would make enough of the new alloy to give all the villagers all of their money that they had. But then they would also make a stash for themselves thinking that no one could tell the difference, right? So let's just say they were a million coins in the village and the king decides to mint half a million fake coins for himself. Right. Well, what would happen? Those coins only have value when they spend it, right? So the king goes out into the village and buys half of all the stuff that's in the village. Cause let's pretend that this particular place had their currency. Exactly match all their GDP. So therefore, if you printed half a million coins, you'd be able to buy half of the goods and services in the village. Right?

Chase Peckham 12:18

In theory. Yeah.

Paul Lim 12:19

So you'd be able to buy half the number of horses, half the number of saddle bags, half the number of shovels that are in there. Right? And so now everyone's happy because now there's 1.5 million coins flowing around in that little economy. Everyone feels rich and now the king has half of their stuff. Now what happens when the people who are feeling very rich, go to spend all of their money, well inflation manifest, and here's how let's pretend there was some shovel shop and there's 10 shovels before the king did his shopping spree. And now there's only five shovels left because king bought half of them with the fake money that they made out of thin air . Right? Well, normally 10 shovels was sufficient in order to meet supply and demand for this village , with its previous economy. Right? But see , now there's only five shovels left. 10 people want those shovels, but there's only five because the king came in and bought half. Right? Well , what's gonna happen. The shopkeeper obviously has to increase their price in order to make it so that only five people want shovels left. So they'll keep bidding up the price of the shovel until half the people go away and decide they don't want one anymore. Right. So now instead of charging 10 bucks for a shovel, they have to charge $15 just as an example. Right? Well it , it is the shovel owner, any richer, not really let's think about it in the old currency, 10 shovels for 10 bucks means that selling all the inventory would've meant a hundred dollars as far as revenue goes, right? Well, king comes in, bought five of them for 10 bucks . So 50 bucks is out there and then they got to sell the last five shelves for 50 15 bucks . So the 75 there, oh, now the shovel owner has $125 . They're richer, right? No. If they had known that the currency was debased before they sold all those shovels, they should have made 150 bucks . Right?

Chase Peckham 14:33

Right.

Paul Lim 14:33

That's the new price in the diluted currency that they should have received, but they only have $125 in their pocket. That is how inflation hurts people. That's what happens is anytime you have more dollars chasing after the same number of goods inflation occurs. So that shop owner, even though they have a 125 instead of a hundred, like they would've in the old system, they're poorer because that amount that they have, doesn't reflect how much more expensive everything else is in the village . Does that make sense? So far ?

Chase Peckham 15:09

A hundred percent .

Felipe Arevalo 15:10

Yeah.

Chase Peckham 15:10

It's, it's what we're seeing right now.

Paul Lim 15:15

It that's exactly right. This is what the politicians do to our currency right now. What happens is they deficit spend. So they bring in this much tax money, but they spend in more than the amount of taxes that they bring in. So what do they have to do? They have to create the money out of thin air and they get to spend it before currency hits the ordinary person. And then by the time it makes it all out in the system. Now everything has to adjust accordingly, that kind of a thing. So that is exactly what is happening with our currency. The only way the king could have done his thing, where he made 50% more money is if they found some magical cave and inside that magical cave was exactly half the GDP of the village . Well , in that case , you can print more currency to denote the newfound amounts of goods and services that you just discovered overnight. But no such thing happens . So when the politicians do that, they deficit spend, that is what creates the inflation. Here's a little crazier part. And honestly this is a whole other episode, but the people who print our money are little green pieces of paper, the federal reserve.

Chase Peckham 16:37

Mm -hmm <affirmative> ,

Paul Lim 16:38

That is a private institution,

Chase Peckham 16:40

Right.

Paul Lim 16:41

That is not part of the us government, a little crazy. Right. But the joke in our industry goes, the Federal Reserve is as federal, as Federal Express. That's how much people kind of know about it, right?

Chase Peckham 16:54

That's extra . Yeah.

Paul Lim 16:56

Here's the issue when it comes to insulating more money because people might think , oh, that's no big deal. This is print more money and we'rell adjust our prices. And it's not a big deal, right? No. What happens is if you wanna create more money in very simplified terms, the U.S Treasury has to give a treasury bond to the federal reserve in order to get a thousand new dollars of money treasury bond, just to tell everybody it's an IOU, it's a thousand dollars IOU and it's gotten interest rate associated with it. It's a promise to pay plus interest, that kind of thing. So in order to create a thousand new dollars, our country has to give a thousand dollars IOU with interest to some third party entity. That's not a part of the government cause you know, how can you owe money to yourself?

Chase Peckham 17:46

You can't.

Paul Lim 17:46

That sounds silly, doesn't it right. But that's exactly what happens. And that's what this whole national debt thing is. It's the outstanding value of all the IOUs that the government has created again, a gross oversimplification, but that is what gets the point across that sort of thing. We really don't need that to be in place. And I'll prove it to you. If you look in your pocket and you see coins, right, coins are not backed by debt. That's just minted. Every government has the right to print its own money. But because there's this third party entity, it's kind of a scam. They basically profit from overspending on the us economy. All right . So why do I bring this all up? It's because this is the reason why cryptocurrency was created. It's one of the main reasons as to why it's because of all of the silliness that the politicians do to our own money, let's take the us dollar and do the DUL test a dollar it's durable, it's divisible, it's portable. It's uniform. Is there a limited supply of it? I don't know if you can just keep deficit spending out of thin air . Is there a limited supply? I guess there's a limited supply because what happens is we're no longer backed by gold cuz that went away in 1971, right? You're basically creating new money out of IUs that are backed by the American taxpayer , cuz you're basically saying, oh, the us dollar is going to be made good because you have a whole country of taxpayers backing this currency. So I do suppose there's a limited supply because there's only so many us taxpayers. Right. But that's sort of the idea behind it. Acceptance, will people accept it? Yeah. I mean, as long as the us dollar can be used to pay us taxes, it always has value. So that is satisfying the acceptance test of the whole thing. All right . So anyway, I went through that whole exercise to just explain to you a little bit why there are reasons why people would want to look into this new cryptocurrency thing. Cause if the us dollars work could just fine, why would I create this new thing? Right. That's the idea behind it ,

Chase Peckham 20:12

Phil? I don't think anybody could have explained this any easier than Paul just did. Uh , and I , I know that people are , if they're listening to this, they're like, wait, wait. It's , it's it can't be over. And it's not just wait till next week. It'll be out and we're gonna talk cryptocurrency. And what really is cryptocurrency next Friday in part two.