*Updated Oct 19, 2019
What is the cycle of money in finance? The life cycle of money is not as quick as that of a butterfly but worth all the attention.
You may have noticed that in life everything goes in cycle. Money is not exception.
Basically, the life cycle of money is when money goes from being gold and silver to being copper and zinc (or other low-value base metals), and back again to gold and silver.
Mike Maloney is the founder of the money cycle
Mike Maloney is essentially the ‘founder’ of the money cycle. A self-taught financial historian and educator, he speaks on the history of finance around the world.
How did Mike discover the money cycle?
First of all, Mike Maloney started to study history of finance because of his mother’s personal accountant that Mike wasn’t happy with. He ‘went back to school’ besides being dyslexic.
Difficulty with ability to read forces him to acquire and analyze information differently. Yet, this also helps him see what others can’t see.
Mike Maloney noticed that there is a pattern in how humankind handles money.
First, people start with gold and silver-based money. Then devalue it. Then come back to gold and silver.
This cycle of gold and silver to base metals and back again repeats itself over and over throughout history.
In the video below Mike talks about the money cycle. Starting at 4:18, he discusses the money cycle of ancient Greece. Ancient Greece was supposedly the first civilization to undergo the cycle.
Only a few rulers learn from the money mistakes of others
Many know that history repeats itself but only a few learn from the past. Rulers repeat the mistakes of the rulers before them.
There are two major mistakes.
First, rulers want their countries to look superior. So, they build ‘the largest towers’, ‘the largest bridges’ and other public works.
Second, rulers want their country to actually be superior and exercise control over other countries. So, they start wars.
Public works and wars is what ultimately makes a country go from gold and silver money to base metals ‘money’. This sooner or later results in the collapse of the economy of that country.
Money plays a pivotal role in the history of any country. Before moving into the details of the money cycle, let’s see how money cycle integrates into economic history of a successful country.
Mike divides economic history of any successful country, which too, goes in cycles, into 7 stages (jump to 9:15 in the video).
7 seven stages of a successful country
Stage 1. A country introduces gold and silver or something that is backed by gold and silver
Stage 2. As a country grows economically, it spends more and more on public works – infrastructure, architecture, art. This is the first mistake.
Stage 3. As economy of that country grows further, its political power over other countries grows as well. At this point a country begins to focus its spendings on military. This is the second mistake.
Stage 4. With time, that military is put to use. A country starts a war and its spendings increase exponentially. This is the second mistake at its apex.
Stage 5. When run out of means to fund a war, the government of this country takes away wealth from its people.
A goverment does so by mixing base metals (copper, nickel, zinc) into gold and silver coinage. Or it introduces currency that is backed by nothing of value (called fiat currency)
Stage 6. As more low-value coinage or fiat currency is created, its purchasing power shrinks. People sense this and begin to lose faith in their coinage or currency.
Stage 7. Eventually, people turn to gold and silver.
The worth of gold and silver against low-value coinage or currency goes up exponentially. This results in a collapse of the economy of that country. This also transfers massive wealth to those who happened to own gold and silver at the time.
4 stages of the money cycle
According to above 7 stages, the life cycle of money can be expressed in 4 stages.
Below I created a diagram to illustrate the 4 stages.
For the simplicity of the diagram, I made copper that low-value metal.
To summarize the diagram, money goes from being gold and silver to being copper and back again to copper and silver.
Before wrapping up, a few crucial things to acknowledge.
In the year of the video — 2013 — Mike positioned the US, a country with the main reserve currency, in Stage 6 and early Stage 7.
Today, I think, the better half of the US stands firmly in Stage 7.