Money

1. Money is a shared fiction, not a cold mathematical reality

Money is a made-up thing, a shared fiction. Money is fundamentally, unalterably social.

Social construct: Money only has value because we collectively agree it does. It's not inherently valuable like food or shelter. This shared belief allows us to use money as a medium of exchange, store of value, and unit of account.

Historical evolution: Money has taken many forms throughout history, from cowrie shells and metal coins to paper notes and digital currencies. Each transition required a shift in collective thinking about what constitutes "money."

Trust is key: The effectiveness of money depends on trust in the issuing authority (e.g., government, central bank) and the broader economic system. When trust erodes, as during hyperinflation or financial crises, money can quickly lose its perceived value.

2. The origin of money is messy, bloody, and intertwined with human relationships

Marriage and murder are part of it. So is the invention of writing.

Beyond barter: The conventional story of money emerging from barter is largely myth. In reality, money grew out of complex social relationships, ritual obligations, and systems of credit and debt.

Early forms:

• Gift economies: Societies built on reciprocal gift-giving and obligations
• Tally sticks: Recording debts through notches on wooden sticks
• Temple economies: Religious institutions managing economic activity

Writing and accounting: The earliest forms of writing were developed to keep track of economic transactions, debts, and inventories. This demonstrates the deep connection between money, record-keeping, and the development of civilization.

3. Paper money revolutionized economies but faced resistance and setbacks

People prostituted the concept by putting garbage in the funds and reaching for yield.

Chinese innovation: Paper money was first developed in China, allowing for easier trade and economic expansion. However, it also led to periods of hyperinflation when governments printed too much.

European adoption: Paper money faced skepticism in Europe but gradually gained acceptance:

• Goldsmiths' receipts evolving into banknotes
• Creation of central banks to manage paper currency
• Struggles with maintaining public trust and preventing forgery

Boom and bust cycles: The ability to create money more easily through paper currency led to economic booms but also catastrophic busts, such as the Mississippi Bubble in France.

4. The gold standard's rigidity contributed to economic disasters

The gold standard locked countries in a terrible economic cycle. Breaking the link to gold broke the cycle.

Perceived stability: The gold standard was seen as providing monetary stability and discipline against government overspending. Countries fixed their currency's value to a specific amount of gold.

Deflationary pressures: During economic downturns, the gold standard prevented countries from expanding their money supply to stimulate growth, often worsening depressions.

Great Depression catalyst: The gold standard's constraints severely limited policymakers' ability to respond to the 1929 crash, deepening and prolonging the Great Depression. Countries that abandoned the gold standard earlier recovered faster.

5. Central banks emerged as crucial but controversial economic stabilizers

The essence of finance is time travel. Saving is about moving resources from the present into the future; financing is about moving resources from the future back into the present.

Evolution of role:

• From private banks serving governments to public institutions managing monetary policy
• Lenders of last resort during financial crises
• Controllers of money supply and interest rates

Balancing act: Central banks must navigate competing pressures:

• Maintaining price stability vs. promoting economic growth
• Independence from political interference vs. accountability to the public
• National interests vs. international cooperation

Criticisms: Central banks face accusations of:

• Enabling government overspending
• Favoring financial elites over ordinary citizens
• Creating boom-bust cycles through monetary policy

6. Technological advances created new forms of money and financial instruments

Shadow banking, and the shadow money it created, managed to get all of the safety net, after going decades without paying any of the cost. Shadow money was now real money.

Electronic payments: The rise of credit cards, online banking, and mobile payments has dramatically changed how we use and think about money.

Financial innovation:

• Money market funds: Blurring the line between savings and investments
• Derivatives: Complex financial instruments based on underlying assets
• Securitization: Bundling and reselling loans as tradable securities

Shadow banking: Non-bank financial institutions began performing bank-like functions without the same regulations, contributing to the 2008 financial crisis.

7. Bitcoin and cryptocurrencies challenge traditional notions of money and banking

The point of bitcoin is that no one is in charge. (You could also say that everyone is in charge, but that amounts to the same thing.)

Decentralization: Bitcoin operates without a central authority, using blockchain technology to verify transactions and create new units.

Key features:

• Limited supply: Only 21 million bitcoins will ever exist
• Pseudonymity: Transactions are recorded publicly but without real-world identities
• Borderless: Can be sent anywhere in the world without intermediaries

Challenges:

• Price volatility makes it difficult to use as a stable currency
• Scalability issues limit transaction speed
• Energy consumption of mining raises environmental concerns

8. The future of money may involve the disappearance of cash or radical banking reforms

Cash is dying. So here come Bitbux, E-Cash, Netchex, Cybercash, Netbills and Digicash, through the Patent and Trademark Office and into the marketplace.

Cashless society: Many countries are moving towards digital payments, with some (like Sweden) nearly eliminating cash use.

Potential reforms:

• Central bank digital currencies: Government-issued digital money
• Full-reserve banking: Separating money storage from lending functions
• Modern Monetary Theory: Rethinking government spending and monetary policy

Considerations:

• Privacy concerns in a fully digital money system
• Financial inclusion for the unbanked population
• Balancing innovation with financial stability and consumer protection

Last updated: August 25, 2024