Money: Is it really the root of all evil? Those who agree with this cliché are usually the people who don't have much of it. Money is just a tool people use to make trading wealth or items of value easier. Let's begin with a short history of money and then analyze how it works in Capitalist America.

Before money was invented people produced their own food, made their own clothing and built their own shelter. Some people were better hunters, builders or tool makers and had extra meat, wood or hammers available. They simply traded the extra items they owned for the things they needed or were not good at producing. This type of trade is called "bartering".

Unfortunately, the problem with bartering is that the person you need to trade with may not want what you have to trade at the time. Imagine you produce Rocawear jeans, your barber provides haircuts, and you two agree to barter. The agreement is your barber will give you two haircuts in exchange for your one pair of Rocawear jeans. 

Everything is great in the beginning, but after eight haircuts your barber decides he does not need anymore jeans. So what do you do? Well, to keep receiving hair cuts, you have to determine what your barber needs and then go find it. That could take forever. And then once you do find someone who has what your barber needs, you find out they don't want or need Rocawear jeans either, so you're back to square one yet again. But instead of Rocawear jeans what if you had an item that everyone accepted? Now we add money to the picture.

Did you know money was not always made out of paper or metal? Throughout history different countries have used various items as money. For example, cows, gold, and spices were all used as money in Europe during the middle ages because most of the people in that society either always wanted or needed those items. And since everyone was willing to accept cows, they became the money. In 1393, the price for two pounds of corn in Europe was one cow. Eventually, people got tired of trying to haul cows around town and so other items like gold became the new money. 

It was during the American Revolution, in the late 18th century, that the American government issued "paper notes" promising to pay soldiers for their service because they ran out of gold and silver. And since the government guaranteed these notes, soldiers had no problem trading them with the local citizens for other items they wanted or needed like tobacco or boots. 

So today we use paper money that is guaranteed by the Federal government, and everyone accepts dollars because the government says on the dollar "this note is legal tender for all debts public and private." As you can see, money is simply the tool that makes it easy to trade wealth. And wealth is everything that has value: tobacco, boots, houses, and those Rocawear jeans. 

Money also makes it easier to measure the value of various items like Rocawear jeans, and Music Cd's. Remember in the earlier example when we were trading with the barber, that the price of two haircuts was one pair of Rocawear jeans? Well, what if we ran into someone who wanted to trade Cd's for our Rocawear jeans? What are the prices? Just like we did with the barber, we negotiate until we agree that three Cd's are worth 1 pair of Rocawear jeans, which now means three Cd's are worth two haircuts. Why? Because if the price of two haircuts is worth one pair of Rocawear jeans, and three Cd's are worth one pair of Rocawear jeans, then three Cd's must be worth two haircuts. Here is why! The CD guy can trade his three Cd's with me and I will give him one pair of Rocawear jeans, he can then go to the barber and trade the Rocawear jeans for his two haircuts, just like I did.

Now lets say we get tired of hauling jeans, and Cd's around to each other and decide to use paper notes guaranteed with our signatures on them. So when my barber calls me and wants to trade my one pair of Rocawear jeans for two hair cuts, I deliver the jeans, but don't need the haircuts just yet, so he gives me a piece of paper with his signature on it saying "this note is good for two haircuts." I save the note in my pocket until I need to use it. 
 
My favorite rapper just released his new album so the CD guy knows I want to trade for his Cd's, but he has some bad news, he has too many pair of jeans and does not need anymore. No problem, I notice his hair is getting pretty nappy and long so I hand him the barber's signature paper and he gladly accepts and gives me three new Cd's including my favorite rapper's CD.

Now the CD guy can take the note to the barber and get his haircuts, without having to negotiate or bring all those Cd's with him. That's the beauty of money, but as we can see it's the wealth or items of use and value that really count. You don't really need money to get everything you want or need, but money makes it easy to trade and you don't have to worry about transporting wealth or those Rocawear jeans around all day and hoping everyone accepts them.

With more than $7 trillion dollars in notes, coins and checking accounts circulating in America's economy, who creates the money? And how does it all work? 
Well, the Federal Reserve is the bank that decides how much money is created or taken out of our economy and regulates most of the banks in the U.S. In the news you may hear "the Fed is lowering interest rates." That means the Fed is going to create money out of thin air. How do they do it? The Fed buys securities mostly treasuries in the form of bonds, notes and bills from investors, but the Fed does not pay cash for them, they simply credit the investor's account at his or her bank. The investor's bank then notices it has more money available to make loans and so the bank lowers the interest rates (or the price of money) it charges you and me for personal and business loans, car loans and credit cards to encourage us to borrow money. 

The reason banks do this is because they don't make a profit when money is sitting idle, so when banks receive more money they try to make loans as fast as they can and charge us higher interest, or the cost of using the money. If the Fed decided to take money out of the economy, or "raise interest rates," they would sell those securities to investors and simply debit, or subtract, money from the investor's bank account. Once the investor's bank realizes it has less money to make loans, the bank will raise interest rates on those short-term loans mentioned above. And since it now cost banks more to borrow extra money, the banks will charge you and me more to borrow money by raising interest rates.  
   
How can all this information be applied to your daily life? You must learn to read and really ask yourself that question every time you pickup a magazine or newspaper. Otherwise you are just exercising your eyes and not your brain. And that's not how millionaires think. First of all, we learned about bartering, or simply trading items of value we own for other items we want or need. When bartering you can actually lower your cost or expenses for the item you need. I actually traded my barber two haircuts that cost $30 for one pair of Rocawear jeans that cost me only $15. If I had paid my barber in cash it would have cost me $30 since he charges $15 per haircut, but instead I bought Rocawear jeans for $15 and then traded them for the two haircuts. 

So I actually reduced my haircut expense by $15 and so my haircuts only cost $7.50 each. I have not paid that much for a haircut in a major city since the mid 1980's. Not only have I done this with haircuts, but also my dry cleaning, airline tickets, landscaping, rent, clothes, and other expenses. Regarding the discussion on the Fed and interest rates, you can plan when it will be cheaper to borrow money for cars, personal and business loans and credit-cards. Since it usually takes about 3 to 9 months for the Fed's money magic to work and your local bank to act on increasing or decreasing those short-term interest rates, you can plan your borrowing and investment strategies.  

Create Wealth, Enjoy Life!
James "Bird" Guess
President & Founder

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