Batch 2 - Class 302 - Crypto Currency - Understanding Money

• In a special chess game played on 10x10 board, a "Camel" can do a 1,3 move i.e. move 1 square in any direction, and then 3 squares in a perpendicular direction. Is it possible for the camel to move to an adjacent square through a sequence of moves?
• Answer: No. The camel always remains on the same colored square

• What is money? What is this used for (store of value, medium of exchange)?
• What were we using for store of value and medium of exchange before money was invented?
• Grain, Gold
• Barter system
• What are the drawbacks of these?
• Specialization makes barter impractical - everyone needs to agree on relative value of lot of things pairwise to make this work
• If I want something from someone who doesnt want what I have, what do I do?
• What if the two people wanting to exchange dont want to exchange the same quantities?
• What if the two people dont want to exchange at the same time?
• What if the two people are not at the same place?
• To get around all these issues, we can invent a medium of exchange - something that everyone (who wants to exchange) is happy to exchange with. This medium of exchange is money.
• Early money was grains, gold etc.
• Why are some of these choices of money good or bad? What are the characteristics of good and bad choice of store of value and of medium of exchange?
• Salability - across target goods, across time, across space
• Value should be permanent - what happens it its not? Then people want to spend quickly rather than saving. The medium of exchange should be able to hold value
• For value to be permanent, someone should not be able to product a lot of it easily (otherwise value drops) - this property is called hard money and is the new supply per unit of stock (also called stock to flow ratio)
• The properties above motivate a lot of people to adopt that money, and hence introduces liquidity - ability to transact. So ultimately money is about the trust that a lot of people are willing to place in the above properties of a particular money
• Uniformity - to ascribe value to each piece uniformly. 
• Granularity - ability to break into subparts, so that smaller transactions can take place
• Easy to carry and transport
• For example, in early days sea shells were used as money. Technology then made it easier to extract more sea shells. What will happen with increased supply of sea shells - they will lose value. More importantly, people dont really trust that they will hold value. So sea shells cease to the money, and people who accumulated that money lose their wealth.
• Gold emerged as the currency for a long time - basis the characteristics above, can you argue why?
• Apart from the above, it also helps that gold is not really "consumed" and hence doesn't reduce in circulation. So holders of gold are not competing with consumers of gold. It is also chemically stable and hence doesnt destroy easily. Growth rate has been 1.5-2% per year.
• But gold is not granular, so people used silver as a secondary currency (With higher growth rate though)
• The rise of banking systems required quick transfer of money, and gold needed to be physically carried. So bank notes ("IOU") started to be used. 
• When you use rupees, what does the note say? It is a promise to pay, and not money itself. What is it promising to pay? It was initially a promise to pay the Gold stored as backup to notes.
• Initially, all national currencies were described in terms of conversion to gold. So if you wanted to convert between two currencies, you just took the ratio of their conversion factor to gold. you could only create more currency by creating more gold.
• However, as nations got powerful and wars more frequency, countries wanted to be able to spend more money and hence 1:1 correspondence between money and gold started to break. Now a country (a powerful country like great britain) could hold a fraction of gold against its currency - in essence, the credibility of the country made its currency "as good as gold" assuming that not everyone would show up to demand their share of gold simultaneously.
• Governments also nationalized and centralized gold so that they held most of the gold, and hence there was no "sounder" currency than the national currency, For example in mid-1930s USA nationalized gold at $20 per ounce. Today gold is worth $1700 per ounce. What happened?
• https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart (see non-inflation view in linear scale) In 1914, most european countries formally went off the gold standard. The two wars also required governments to spend more, and hence they started to print more money, backed by less gold. After second world war, most countries adopted US dollar as the reserve currency - in effect shipped gold to US and got $35/ounce in return. In 1971, when price was still around $35, US announced free market pricing of Gold, delinking it from US dollars. All countries were still holding US dollars and could not redeem it for gold anymore. In effect, if lot of people wanted to buy gold by paying US dollars, the price of Gold would go up, meaning the US dollars wouldnt be worth as much in terms of gold. Since then value of dollar has dropped 50x - in essence all nations except US have lost their wealth by that magnitude. Can you locate further spikes in the chart since then and explain them? Note that spikes mean value of gold is increasing in US dollar terms, which means that the US dollars we own are shrinking in value (even if we are not US citizens)
• If you knew that money was going to be half its value in next 5 years, would you save more of spend more? This example illustrates that value of money is not just a paper concept, but affects the investment and consumption decisions. 
• What would happen if countries like India adopted bitcoin instead of US dollar as reserve currency? (Once volatility issues are resolved)

• MartinShColl 2.4 - Three points are selected at random on a sphere's surface. What is the probability that they fall within the same hemisphere?
• Answer: 1 (It is a certainty)