What is money ?
Medium of exchange
There are millions of things that you could do with your time. However, it is not possible to do all of them, hence you have to choose one which best suits you.
Similarly, others choose to do things according to their preference.
As a result, humans end up with a surplus of a single commodity to which they devote their time.
Human time is limited but wants are limitless. Hence humans trade things they have in surplus with the things they desire.
Money acts as a signal that helps coordinate actions of millions of humans.
For example imagine prices of pencil increase because there is shortage of wood because of forest fire in Africa, from where the manufacturers get their raw material.
People will start using pens instead of pencils because the price of pencils shoots up.
Other places with trees will start supplying wood to pencil manufacturers as they will find it profitable to sell their raw material because of increased prices of pencils.
All this happens without everyone knowing the details of forest fire in Africa.
We believe(based on our past experiences) that the money I receive in exchange for my labor will be useful in buying goods/services in the future.
Till the time everyone believes this, the system continues to play its role as money.
What is perfect money ?
Different places have experimented with different forms of money in the past. Some money systems were more successful than others and lasted longer. However, humans have not found a perfect form of money till now in their millions of years of existence.
Perfect money will have all the following characteristics:
- Medium of exchange: Ideal money is widely accepted as mode of payment.
- Portability: It is easy to carry money from 1 place to another.
- Store of value: I do not need to spend my money rightaway. I should be able store my money awithout it loosing its value so that I can spend it later.
- Unit of account: Money should have divisible and recombinable units so that all shops can denominate their goods in units of money.
- Recognisablity: People should be able to identify real from fake money easily.
- Fungibility: Units of money should be identical and indistinguishable from one another. This also preserves privacy of people transacting.
- Scarcity: Humans have unlimited desires. Hence they will try to accumulate as much commodity that is being used as money as possible. Supply of ideal money must be difficult to increase even when it is universally desired.
- Censorship resistance: Third party party should not be able to stop a voluntary transaction between two individuals.
- Cannot be confiscated: Ideal money is difficult to steal and confiscate by force.
Various experiments in money
Like every technology, money is also subject to market driven evolutionary forces. Various commodities have been used as money at different places at different period of time based on the resources and technology available.
Different humans specialized in using different tools and developed different interests, some became farmers, hunters, blacksmiths, painters etc.
Humans carved for variety of goods being produced by others, however it was not possible for him to produce all variety of goods himself.
Eventually, he met other humans who were interested in goods produced by him and would happily exchange their produce for his goods. This system is also known as the Barter system.
However, barter system had several limitations:
- Trade will not take place if one party is not interested in the product being offered by the second party. Hence a lot of time was wasted in finding parties to conduct barter trade.
- Trade was not always feasible. For example, if value of 1 sheep is equal to 10 apples. I cannot cut my sheep in half for 5 apples.
Commodity as money
Eventually, commodities that were universally desired and accepted for barter became money. Different commodities played the role of money at different places at different periods of time.
Salt as money
Salt is used for flavoring food and preservation. It was a rare commodity in ancient times as salt is commonly produced by evaporating seawater and most humans did not live along sea shores.
There are several examples in recorded history when salt was used as money:
- By Phoenicians in 1200BC.
- By Chinese in 700BC.
- Roman soldiers were paid in salt.
- The word ‘salary’ is derived from the Latin word Saltsalarium which means salt.
- Greeks traded slaves for salt. The common English phrase “not worth his salt” comes from the saying that the slave was not worth the salt paid to purchase him.
Cigrettes as money in jail
Prisoners are cut off from rest of the world in jail, where basic joys of life like good food and entertainment are absent.
Even large amount of money cannot buy much stuff in jail as compared to a shopping mall.
Hence commodities like cigarettes, coffee and Top Ramen are used as currency for favors and buying basic stuff.
Silver is an industrial metal used in:
- Dental alloys
- Electrical contacts etc
It is quite rare and does not decay quickly. As a result, it was used as money at several places in history:
- In 2686BC value of silver was more than gold in Egypt.
- British pegged their currency to silver: 1 pound of silver was used to make 240 Sterling coins.
- 1 Dollar was pegged to 20.056g silver.
- Roman Dinaries were made of silver.
Money need not be a useful commodity. There are several instances in history where commodities that did not have much utility were used as money.
Yap islands are located in the Caroline Islands of the western Pacific Ocean, as part of Yap State.
Rai stones have been used as currency in Yap islands since 500 AD.
The stone was valuable because it was made out of limestone which was not found at Yap island and had to be procured from Palau island which was 290 miles away.
The stones were heavy and difficult to ferry from Palau island on a bamboo boat. Hence they were scarse at Yap island and were a proof that the owner had done tremendous work in getting the stone.
Once brought to the island the stones were kept at a central place.
Stones were not moved even when the owner traded them to someone. Instead, everyone in the village would gather and the owner would announce that the stone owner has changed and everyone would update their mental ledgers.
However, the system had several limitations:
- It became difficult to record every transaction as the number of people grew on the island.
- Transaction speed was slow.
- In 1871 Irish American explorer David Dean O’Keefe discovered the system. He used modern ships and machines to get Rai stones from Palau, flooding the Yap islands with Rai stones.
Eventually, Yap stones lost their scarcity and value. Last Rai stone was shipped from Palau island in 1932.
Sea shells are beautiful to look at and have been used in jewelry for centuries. They are rare because they are found only along sea shores.
There are several instances of seashells being used as currency:
- Indus valley civilization used seashells as money from 3300BC to 1300BC.
- Maldives central bank logo is seashell.
However, seashells also had several limitations:
Eventually, human species stumbled upon something that everyone found valuable – Gold:
- It was rare, not easy to find.
- It is not toxic
- It does not decay, erode
- It is shiny and attractive
- It is malleable – we can make designer jewelry from gold
However gold standard also had several problems:
- It was not easily divisible.
- People started to counterfeit. Hence everyone needed to be an expert in differentiating counterfeit and actual gold.
- Thieves could steal it.
Humans started storing their gold with goldsmiths to avoid the headache of theft. The goldsmiths would give receipts in return that could be redeemed for gold whenever needed.
Eventually, people started trading their gold receipts in open market in exchange for goods and services, as anyone with the gold receipt could go to the goldsmith and redeem it for underlying gold.
Goldsmiths accumulated huge stockpiles of gold as more people trusted them with their gold. This also grew their power and influence.
Eventually, Goldsmith became banks and the gold receipts became currency notes as we know them today. That is the reason most currencies are actually measurements of weight – Pound, Sterling etc!
Banks and governments started abusing their power and printed more paper currencies than the gold held in their treasuries.
This was possible because everyone would not go to the banks to redeem their gold at the same time.
Government printed a lot more currency notes than their reserves. As a result, they started finding it difficult to return gold to everyone who came with the currency notes.
Subsequently, the governments came off the gold standard on one pretext or another.
US President Nixon’s announced that US will no longer be on gold standard ie currency notes are no longer redeemable in gold.
See how he complicates such simple stuff to confuse the public that what they are doing is in the public intrest.
Off the gold standard, there was nothing stopping the governments to print as much money as they desired.
What are the effects of printing money ?
A country can produce limited amount of goods and services depending on its human labor and raw materials.
Governments printing money does not have any effect on production of these goods as they are result of human ingenuity and hard work.
The goods supply being fixed and number of paper notes increasing results in the same goods getting expensive in relative terms.
This means if an apple costs 1 currency note before the government started printing money, will now cost 2 currency notes as more money is being printed.
Moreover, depreciation of purchasing power is not equal for everyone. Those who are close to money printer(Hint: Government’s friends) enjoy from printing of money whereas middle class which has a fixed income but has to buy ever more expensive everyday goods suffer the most.
In short money printer is a way to redistribute wealth from the poor to the corrupt.
Ability to print money gives governments power to fund worthless projects, which would not have been possible if they had to convince citizens to pay even more taxes.
Birth of Bitcoin - Immaculate inception
An anonymous person/group by the name of Satoshi Nakamoto published Bitcoin whitepaper in an online cryptography forum in 2008 and disappeared.
Remaining anonymous and disappearing was an act of courage. This makes Bitcoin truly decentralized as no single person can influence how Bitcoin is developed.
How does one fairly distribute a new global currency?
Bitcoin protocol uses proof of work to mint new Bitcoins. Bitcoin was first mined and bought by individuals who educated themselves on how money work.
This is not the perfect way to distribute a global currency but much better than a central government deciding who gets the money.
Bitcoin is the best form of money
Bitcoin fulfills most characteristics of ideal money.
Bitcoin will have to update its protocol to become private which will make it fungible and completely uncensorable by governments.