top of page
  • Writer's pictureDavid A. Schneider

What is Money - and how to benefit from it

Updated: Aug 5, 2022


Why Money is necessary


We live in a very advanced society nowadays.

Technology is taking over in most aspects of our life, we are used to getting things faster and cheaper, and want to get more done in less time with less effort.

While this part is obvious to most of us, and it certainly makes our lives a lot easier and comfortable, many tend to ignore what the driving power behind all this is:


The working of money.


Let’s dive into the mystery of what money is and how money works.



Money is around us since we are born, hardly anyone questions where it came from or if it is actually doing a good job for us (since it is a system that WE humans invented and installed).

There is never a debate about the value of money, we rather tend to use it as a given value controlled by outside circumstances.

But that has not always been the case if we look at history.

Let's step back for a few minutes to realize what the system we live and work in exactly does:


Money in its essence is a medium of exchange.

It is meant to conserve a certain amount of value.

Money can be silver coins, paper, or purely digital.

It becomes valuable at the moment when people agree to use it as an exchange for value.



This means in our society we have (willingly or not) more or less agreed to use the money in circulation as an exchange for value like good and labor.

As long as others are willing to accept the money I pay with, I can get goods and services from others for it.

Also I can store value with it and save money for larger investments for example.



Here comes the interesting part:

The money we use today has no inherent value.

The paper we call a 100$ bill is not really different from the 5$ bill.

It is all in our imagination - or in our acceptance of how we as consumers see a 5$ bill compared to the 100$ bill.


Money thus only has value, as long as we think it has value.

To understand how this came about, let’s go back in history and look at how the money we use today became so dominant in our society.


(Note: The emergence of money and today's system is long enough to fill a series of books with it, I want to focus here only on the most important aspects that are important for our lives today)

What is money
How come some paper rules our daily lives?

The Creation of Money

Far back in the days, before money was invented, people used barter for their trades.

Without any medium for exchange, this was the direct way people interacted and traded goods and services among each other. One thing was exchanged through another.

You traded your candles for a loaf of bread.

Then you swapped a knife for a chair.

Or you may barter your clock on the wall for a set of new plates.


One good or service was traded for another thing or service.

It is a give and take approach.

There was no medium used for exchange between these barter trades.

It was a direct way for people to either accept what was offered, or not.


This form of dealing had a few difficulties to make the trades between merchants fair.

The value of the goods that were being exchanged was highly subjective and intransparent. Different goods meant a different value for different people.

For instance:


How many pieces of bread do I get for a pair of shoes?

Is a carrot worth more than an apple?

How many potatoes do I get for an hour of work?

Are 10 pieces of wood worth more than a Shirt?


The system could not really make up fixed prices, or a generally accepted value of goods.


Values and thus prices differed from one situation to the other.

It was possible to get an ounce of grain for a glass of beer one day, and to have the same ounce of grain exchanged only against trousers the next day, if the farmer suddenly needed new trousers for example.

Since there were no prices in the form of currency, and the value depended always on what the other person needed at that particular moment, it was a time of constant insecurity.

You never knew what tomorrow would bring.

You never knew if you could provide for your family with what you have the other day or not.



"How much do I get for my pair of shoes?"


In this kind of trading system, it was almost impossible to find a fair deal.

Almost all transactions in such a system are based on sentimental value and the personal circumstances that you and other people are in.


Things like market value did not exist, and a comparison of prices seemed not like an easy thing to do, as again it was all based on individual situations and values.



To prevent these sorts of problems, ancient emperors and kings started making their own monetary system for their empires and kingdoms.

It consisted of precious metals and had the downside that there was only a fixed amount of money available in the system - usually depending on how much gold, silver or other precious metals the empire possessed.


Thereby this system had a fixed economic growth rate, bound to the wealth of the king who issued the currency.


But still, this made things a lot easier.

For barter trading you had to carry your inventory, and often people would not accept what you are currently carrying with you, but wanted something else instead.

This first money system based on simple coins helped to remove this problem.

The coins allowed people to set prices for their goods and services.


Coins could be carried with a person much easier than any inventory necessary for trading.

Instead of carrying heavy inventory to trade, merchants now could set prices for their goods and buy and sell similar to the modern ways of trade that we experience nowadays.



In this former monetary system however, there was one massive difference to the system we have today: banks did not exist.


What is money
Before banks, money was createsd by kings and emperors.

Money thus could only come from the local emperor or kingdom.

The entire amount of money circulating in the system was based on how much money the king issued, wanted to issue, or could issue.

There was no outside force that could have affected the amount or the worth of the individual coins that were used.


The kings and emperors controlled the amount and therefore also the worth of money in the system, which is governed by the law of supply and demand.

The more money existed in such a monetary system, the less the individual coins had in value (higher prices).

The less money existed, the higher the value of the individual coins (lower prices).

The same principle goes for today's currencies worldwide, the more money gets printed, the less is it worth, a.k.a. the law of supply and demand.


We can see this effect right now very clearly as inflation is raging after the Central Banks have printed money non-stop for more than 10 years.

This emperor-based system of individual currencies lasted for thousands of years and used to work very well in most areas.

Then something changed at the beginning of the 19th century.

It took place in central Europe, allegedly it was the ideas of German and Italian guilds of goldsmiths.


The biggest theft of mankind


With the former precious metal-based system came along again a number of difficulties, for example:


If a man was rich, it was very difficult to protect one's money from theft as the coins were heavy and difficult to hide.

If you had to travel or transfer your money from one place to the other, a huge amount of coins was heavy to carry.

And it was obvious to see for all kinds of thieves or highwaymen, which were very common at that time.


So security was expensive, theft was almost unavoidable and big fortunes were mostly reserved for the kings and nobility, as they were the only ones who could afford to protect themselves and their fortunes in big castles or fortresses.

As an average citizen, even if you made lots of money, protecting it was a major issue.

Please read carefully now as these steps are crucial to understanding how money works today!

Now the goldsmiths had to have by the nature of their profession a large vault in their houses to protect the gold they were working with everyday.

That's when they had a brilliant idea that would change the world forever:


The goldsmiths suggested that people could use our vault as storage for their money, and instead they would receive a bill over the same amount they had deposited.

So if they deposited 100 coins in the goldsmith's vault, they would receive a 100 coin bill for it (notice any similarities here?).


The bills were made of paper with special seals from the smiths themselves to make sure nobody could reprint or fake the bills.


Soon the goldsmiths became the only ones who could certificate such a bill.

This prevented other people from participating in issuing the money.

And since the bills were used to exchange goods and services like money, the goldsmiths were now in charge of the money creation.

No longer a king or emperor.

Very soon, the people saw that it was more comfortable to use the paper bills that equaled their worth in coins to pay for their goods, instead of carrying heavy loads of coins with them.

This was when the essence of our modern paper money system was born.

It did not take long until most goods were paid for with the goldsmiths paper bills instead of the local coins.

When the goldsmiths realized how effective their system was, they decided to implement another function into the system:

As the vaults got bigger and bigger and it soon became expensive to care for them and keep them safe, they demanded a little fee from the people to “cover the costs”, as it was told.


So for every bill that the people used and for every coin that was deposited, the goldsmiths now demanded a small seemingly fee, which they called “interest”.



how money works
1% as interest sounds fair, right?

"It's just a small fee to provide you with the Service!"


This was probably one of the best tricks since humanity exists:

Nobody noticed that this “fee” or “interest” as it was called has never been integrated in the system!

This means in order to pay the interest that the Goldsmiths demanded, you now had to get money from other people.

Very soon people had to fight” with each other economically in order to be able to meet the demanded interest.

And this is still how our modern money works today.



To make it simple to understand without any math, here an example:


The amount of money in the world at that time is 100 coins, and the interest you have to pay is 1 coin.


You will have to “get” that 1 coin you owe to the goldsmith from somebody else who is in the system.

Eventually these extra coins for the interest started to be missing (because they were never issued into the system).

People were told to “work harder” or “be a better businessman” in order to get them from their fellow men.


So where should you get that 1 missing coin?

What actually happened is that people tried to solve a puzzle that was unsolvable.

The math behind the system was an impossible equation.

It was simply wrong in any mathematical sense, it could not be solved.

And it was never designed to be solved.

Instead what the interest-based currency does is it puts pressure on people.




Interest-based money uses the “debt” (which is intended and unavoidable) to take advantage of others within this system.

The entire operation was controlled and managed by the guild of goldsmiths, which thus controlled the money supply.

In today's society, this would be the central banks.


And would later become powerful enough to control even whole nations with it.

Conspiracy theories claim that families like the Rothschilds and others were among those who first issued this system.

Of course there is no real evidence for it.


Let’s recap here for a moment:

The initial 100 coin bills first issued into the system were backed up with real coin value in the goldsmith´s vaults.

The 1 coin interest that is now demanded does actually not even exist!

You have to get it from somebody else and so the next person will be missing it.

This starts a vicious cycle.

To the people, it seemed like a totally fair system at first.

What could be wrong with a simple fee?

People were sold fast on the idea, since the paper bills were actually very convenient compared to bartering.


In reality however, very soon the first people could not pay the demanded interest because they did not receive enough money from their fellow men.

When at first you just had to break even with your business and finances, now you have to make a profit. This was new and unknown at that time.


Why Are We in Debt?


With the search for the missing coins in interest, more and more people suddenly could not pay their dues anymore.

Some people suddenly were in debt to the goldsmiths.

And thus a slow process started that is getting the average people every year more and more into debt.

The more money circulated in the system, the higher the debt of society because there was also more interest to pay off from it.


And the more people struggled to pay back their debt, the more new interest was issued into the system - making it even harder to pay off those new interest payments.

The system demanded more and more capital to be issued every year to function.

Yet the more capital you induce, the more debt has to be paid off again the next year.

The system can be seen as a hamster wheel - if you go fast, you have to go even faster and so on.

Until one day you slip and fall flat on your financial face.


Put simpler: Fiat-Currencies such as the US-Dollar, are a giant Ponzi-Scheme.


To escape the penalties that were installed for not paying debt, the people started to work harder and longer hours.

People invented things to start new businesses, and some even became criminals in desperation to pay their debt.

Debt started to become the new phantom that haunted society with seemingly invisible influence and pressure in all areas of life.

The game was on. Money no longer served people, it enslaved them slowly. And it gave total power to a very tiny minority.


The birth of Banks


how money works
Banks as we know them started with Goldsmiths and their vaults to deposit money.

As everybody was now used to paying with paper bills instead of real coins, the vaults in the goldsmiths treasuries were filled with precious metals.

They gathered most of the capital that existed.


Soon the goldsmiths discovered that only around 10% of the population actually wanted to use their deposits in the vault.

The rest was left completely untouched because it was easier to tell the Goldsmith to just send a certain amount of coins to the books of another person, instead of withdrawing your deposits and handing over the coins.

The actual coins thereby never get touched.


And when more and more people started to ask the goldsmiths for loans, they decided to give out loans backed up by the coins in their vault.

These loans again were earning the Goldsmiths even more interest.


They used other people’s capital to give out loans that profited themselves.

But this was someone else´s money, and the Goldsmiths actually were just storing it for other people.

The act itself is totally wrong actually.


But still the goldsmiths could keep all the capital gains from the interest for themselves.

The people actually depositing capital, making the loans possible in the first place were not compensated.

And here you can see how today's modern banks developed.

People deposited their money at the Goldsmith’s Vault, the Goldsmiths used the people’s money to lend loans to other people for their own profit.


Let's look at this in detail:

The loan by the bank is not backed up by a real value at all.

Instead they only use their customers' untouched deposits to create the illusion that the credit you received is real money.


Additionally you have to pay interest amount x, which has never entered the system.

Thus it has to be gained by earning it from fellow men to “pay it back” (even though nobody ever received it).

This means that our monetary system is from a mathematical point of view not only incorrect - it is impossible.

Please read the last sentence again and let that sink in for a moment.


But nevertheless the system does a great job for human psychology to get people going.

As the pressure to pay your debt in the form of interest is so high, and penalties are strictly enforced for not paying, people are way too busy looking for the next chance to earn a few more bucks than to question the system in general.

They overlook that their debt is either not really existent, or that it was part of the money creating process as interest being issued.


So for every loan that is granted to a person, a state or a company, more interest has to be paid and taken out from the markets.

Therefore pressure is rising.

But to pay the existing debts, there have to be constantly more loans granted.

A vicious circle.

To make it simple: Creating money creates debt.

The more money circulates in the system, the higher the debt.

The system has to grow every year to pay off existing debt.

Which creates more debt.

This means in our system money equals debt.

Paying back the debt is impossible as there is not enough money to pay back the debt at all.


One interest rate to rule them all

what is money
The new form of paper-money was easy to carry and store, but came with strings attached

And so the steadily growing amount of money, debt and interest leads to another effect, the mightiest of them all: compound interest.


It creates a debt claim for actually nothing - the debts just keep increasing all by itself because they exist.

So you have to pay debt for your debt (what a sick thought!).

The only ones who make enormous profits from this system, are the modern equivalent of the former goldsmiths guild who introduced this monetary system:

banks and central banks.

They are in control of the money creation process and therefore have a monopoly on gaining interest - like the goldsmiths used to in the former ages.


As we have learned so far, money creates debt, and debt creates interest.

So only the ones who are legally permitted to create money are the ones who also reap the interest payments.

Banks and Central Banks are the only ones to benefit from this system.

It is not only a monopoly, but essentially a dictatorship.

For the rest of humanity, this system is a rat race.

It does not matter how hard you work, or how passionate and ambitious you are.

Whether you are in the working class, or if you have a high paying job.

Even if you are an entrepreneur and run a successful business.

You are going to be penalized by the system of compound interest.

And with every generation the amount of debt within the system just keeps rising exponentially.


The only way to benefit from it is to acquire enough money to receive compound interest yourself, which only very few individuals ever come to achieve.

The problem is that interest rates are calculated in everyday goods like our food, housing, cars etc. to produce them.

And as the production process cannot pay off these additional costs, they are getting transferred to the end customer - YOU.

So whether you know it or not, you are actually paying interest rates even if you yourself do not have any credit or loan.

You pay it by buying bread, by paying the gas for your car or by buying a new pair of shoes. Everyday things are loaded with interest payments calculated in producing them.


An estimate was made that a loaf of bread has around 40-50 different interest rates calculated in its price, from the harvester machines to the bakery.

Imagine now what this means to our daily living costs.


Only those who receive interest can benefit from this monetary system.

And here's the 1-million dollar question:

How do you earn compound interest to benefit from this system?



Financial Freedom in 2 Easy Steps

We have to keep in mind that receiving compound interest does not only mean to be rich - in fact it means to be so rich that even if you do not work at all, your net worth still rises every day without any additional effort.

No surprise here, as this means you are now on the receiving side of the system, while 99% of the population are on the giving and working side of it.


It means that your wealth rises because you are wealthy, that you gain interest simply because of your possessions.

But be careful here - it has to be the right possessions!


Owning a luxury SUV with high fuel consumption won't bring you any compound interest, let alone interest at all.

In fact it will even decrease your earnings because it loses its value instead of gaining value.



So the first and most important lesson here is: to earn interest you have to be in possession of things that increase in value.


These are called “assets”.

The opposite of an asset is a thing that loses its value, these are called “liabilities”.

To make it simpler to understand, I think Robert Kyosaki has the best explanation in his books for this topic:

An asset is a thing that brings money into your pocket.

A liability is a thing that takes money out of your pocket.

Here are a few examples for what is an asset and what it is not:



Real estate

e.g. you own a flat or house that rent to other people.

how money works

As the real estate market is growing in most years, the value of your rental property will also increase.

Additionally, inflation boosts the value of real estate as money naturally loses its value.

Plus in most countries you enjoy tax advantages due to owning real estate.

Estimated 3% per year increase in worth of the structure (depending on the market) + monthly rental income.


Rental Property = ASSET

Luxury car

Even if you do not drive a single time with it, a car is losing value only by standing in your driveway.

It has the opposite effect of the rental property in our previous example. A fancy car also brings many other costs with it, such as insurance, erosion of the vehicle itself which results in parts that have to be replaced, fuel consumption, tires will have to be replaced, and other expensive car services.


On average, a car loses between 50-60% of its value in the first two years alone (depending on the market and model) + constant (fuel), monthly (insurance) and annual costs (tires, car service, etc.)

Luxury Car = LIABILITY

Stock ownershipWith stocks you are investing in shares of a company. This means you participate if the company is doing well, but you also participate if it is doing not so well.

Fortunately, most publicly traded companies are performing well in the long run, meaning that despite some drops that occur over time, the company is overall doing well and is growing in value. And so is the stock.


Most stocks of big companies can easily earn capital gains of 3-4% per year, plus you earn dividends annually which will further increase your earnings.

Stocks = ASSET

Get the idea?

For our monetary system to be beneficial and work in your favor, you will need to acquire assets in order to receive interest payments.

This is the core principle of how money works.


Of course there are many more ways that will bring you interest payments.

Every one of those assets you own will rise in value every year, even if only at a low rate like 2%.


The most important thing of all is that you receive interest.

Even if it is just a tiny percentage in the beginning.

Those small steps will start compounding over time.

After a few years and a certain amount, these gains will result in compound interest - and this will slowly but surely lead to money working in your favor.


Otherwise, if you live the consumer lifestyle like most people, and spend the most money you make, you will have to stay in the rat race.

Possibly forever.

But now that you understand what money is, you have the knowledge you need to break out of the rat race. Forever.


That means, now since you understand the system, what should you do?


Step 1:

Reduce all debt and interest payments you have to pay to absolute zero as fast as you can. As soon as you have removed the debt you had, use this money now as savings for future investments.

To learn how to do that in detail, check out our blog post on How To Get Out Of Debt.


Step 2:

After saving a certain time, you should have enough capital to become active in the market yourself. You can choose whatever vehicle for creating interest suits you, just make sure that it is earning a surplus of interest for you.

The most common ways to earn interest are businesses, investing in the stock market or real estate.



That’s it actually.

The process is simple if you want to break out of the rat race.

So why isn’t everybody doing it?


It will require you to work hard, live frugally and safely with discipline for around 20 years. Sometimes even more.

That is the hard part.

Not figuring out what to do, but having the discipline and willingness to live your life accordingly.

Now it is your turn.

You know how money works and what money is.

Will you continue to live in the rat race?

Or will you start to make money work in your favor?


Comments


bottom of page