What is Money?

A while back, I wrote about the Internet currency, the Bitcoin. This blog is a deeper exploration of what money is. I read this Brett Scott article on what money is. And, more importantly, what money could be. It was an eye opener. Because:

“The more we abstract and fetishise money as a thing in itself, the more we lose sight of its sources and its goals.”

Wait a minute. Isn’t money just Barter 2.0? A way to exchange goods or services? Scott says No. So what’s the difference between barter and money?

“In the former, nothing is left unresolved and no faith is required. It’s a closed circuit, a like-for-like swap. By contrast, money transactions are never closed; you pass on an abstract, faith-based claim in exchange for a tangible good.”

At first, this sounds like a technicality. If everyone in the economy accepts that form of money, what’s the risk? The risk comes from the fact that there exists an entity that can print money. To see why that matters, consider this: if the number of goods and services remains the same and the government prints more money, it reduces the purchasing power of the existing money (aka inflation).

Scott asks whether anything can serve as money? The surprising answer: only something with no inherent value is a candidate! Here’s why:

“For the most part, when something is truly valuable in itself, people are disinclined to part with it (why swap rum for something else when you can just drink it?).”

So how does something with no inherent value become, well, accepted currency? That’s where the power of the king or government comes in. They enforce money as the medium of exchange. Then, of course, once that money has achieved critical mass, the system is practically impossible to change:

“At that point, it’s the dissidents who seem mad, while the people swapping useful goods for bits of metal, paper or meaningless electronic data look perfectly sane.”

(Bitcoins, of course, are the exception: they became popular without any government backing; and their supply is controlled by “‘apolitical’ mathematical protocols”. The King (Government) is dead, long live the Algorithm!)

So is the maximum possible variation in money just about who issues it? Or is there more?

“What energies would we unleash if we were to break open that opaque shell and split the monetary atom?”

His answer? Different forms of money could be invented for different reasons:

1)      Localizing: Money that is valid only in small regions, like the Brixton Pound.

2)     Nationalizing: what “regular” money like the dollar and the rupee do.

3)     Ease of commerce: Like the Euro.

4)     Decentralising and internationalizing: what Bitcoin and other Internet currencies aim for.

5)     Promote economic activity: Demurrage currencies are deliberately engineered to lose value over time. Which means there’s no point hoarding them. That acts as an incentive to use them, which create more economic activity! The Freicoin is one such currency, albeit it too is a digital world currency.

Now why don’t they teach such things in Economics at school? It’s interesting stuff, and even better, makes you think.