What is Money, Anyway?
What is Money, Anyway?
we basically have four things we can do with our resources: consume, save, invest, or share.
- Consume: When we consume, we meet our immediate needs and desires, including shelter, food, and entertainment.
- Saving: When we save, we store our resources in something that is safe, liquid, and portable, a.k.a. money. This serves as a low-risk battery of future resource consumption across time and space.
- Invest: When we invest, we commit resources to a project that has a decent likelihood of multiplying our resources but also comes with a risk of losing them, by trying to provide some new value to ourselves or others.There are personal investments, like our own business or education, and there are external financial investments in companies or projects led by other people.
- Share: When we share, or in other words give to charity and those in our community, we give some portion of our excess resources to those that we deem to be needing and deserving.
The majority of people in the world don’t invest in financial assets; they are still on the consumption stage (basic necessities and daily entertainment) or the saving stage (money and home equity), either due to income constraints, consumption excesses, or because they live in part of the world that doesn’t have well-developed capital markets.
In developing countries that tend to have a more recent and extreme history of currency devaluation, people often put more thought into what type of money they hold. They might try to minimize how much cash they hold and keep it in hard assets, or they might hold foreign currency, for example.
history of Money comparable to the turning points of 1971-present (Petrodollar System), 1944-1971 (Bretton Woods System), the 1700s-1944 (Gold Standard System), and various commodity-money transition periods (pre-1700s).
If we condense those stages to the basics, the world has gone through three phases: commodity money, gold standard (the final form of commodity money), and fiat currency.
A fourth phase, digital money, is on the horizon. This includes private digital assets (e.g. bitcoin and stablecoins) and public digital currencies (e.g. central bank digital currencies) that can change how we do banking, and what economic tools policymakers have in terms of fiscal and monetary policy.
Commodity Money
Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.
-Carl Menger, 1840-1921
The more complex an economy becomes…the society begins requiring something divisible and universally acceptable.
In this way of thinking, Money should be divisible, portable, durable, fungible, verifiable, and scarce.
- Divisible means the money can be sub-divided into various sizes to take into account different sizes of purchases.
- Portable means the money is easy to move across distances, which means it has to pack a lot of value into a small weight.
- Durable means the money is easy to save across time; it does not rot or rust or break easily.
- Fungible means that individual units of the money don’t differ significantly from each other, which allows for fast transactions.
- Verifiable means that the seller of the goods or services for the money can check that the money is what it really appears to be.
- Scarce means that the money supply does not change quickly, since a rapid change in supply would devalue existing units.
- Utility means that the money is intrinsically desirable in some way; it can be consumed or has aesthetic value, for example.
Back in 1912, Mr. J.P. Morgan testified before Congress and is quoted as having said the famous line:
Gold is money. Everything else is credit.
We can define Currency as a Liability of an institution, typically either a commercial bank or a central bank, that is used as a medium of exchange and unit of account.
In contrast to currency, we can define Money as a liquid and fungible asset that is not also a liability.
In some eras, Money was held by banks as a reserve asset in order to support the Currency that they issue as Liability.
Under Gold Standard systems, Currency represented a claim for Money. The bank would pay the bearer on demand if they came to redeem their banknote paper currency for its pegged amount of gold.
A good concept to be familiar with here is the Stock-to-Flow Ratio, which measures how much supply there currently exists in the region or world (the stock) divided by how much new supply can be produced in a year (the flow).
high Stock-to-Flow Ratio tends to be the best way to measure scarcity for something to be considered Money, along with the other attributes on the list above, rather than absolute rarity.
Gold is the best among just about every attribute, and is the commodity with by far the highest stock-to-flow ratio.
silver has actually been the winner in terms of usage. It has the second-best score after gold across the board for most attributes, and the second highest stock-to-flow ratio
Rai Stones
Japanese Invasion Money
Other Types of Commodity Money
The Gold Standard
Fiat Currency
Debasing Currency and Empowering Wars
Bretton Woods and the Petrodollar
Potential Post-Petrodollar Designs
Price Inflation from a Negative Baseline
The MMT Description of Fiat Currency
The Monetization of Other Assets
Sovereign International Reserves
Fiat Summarized
Digital Assets
The Discovery of Digital Scarcity and the Invention of Bitcoin
Bitcoin’s Bottom-Up Monetization
Bitcoin is becoming a rather salable good, in other words. And with a higher stock-to-flow ratio than gold.
Censorship-resistance is a significant feature when it comes to payments, and self-custodying money that cannot be diluted with more supply is a significant feature when it comes to savings.