What Is Money?

What is Money? Why Money At some level, we all know what money is. It's the number attached to our bank accounts and stock portfolios that tells us what we can buy and when we can retire - measured in something like Dollars, Euros, Yen, or Pounds. Well, not quite. Those are currencies, different from money in that they have no "intrinsic value." We'll come back to that. For now we will examine money specifically but many of the considerations for money and currency are the same. In broad academic terms, money (or currency) is something like "a distributed medium that transmits information about value and scarcity over time." It is what gives everything a price, and allows one to price everything in terms of everything else. Historically, money has been gold and silver. To really understand money, though, or why it was historically gold and silver, it is useful to think through the implications of using other things in that role. Let's imagine we're a baker in a world with no money. What immediate problems do we have? Well, we have needs to produce our primary good, bread let's say, but no means to store the value of our labor across time. That is, if we make a loaf of bread, we have to trade it for whatever the person who needs a loaf of bread has to trade. Or, if we need flour, we have to hope that whoever has flour wants some of our day old bread. In short, we are in a bartering system, and each transaction we make carries with it a cost of transaction in that we may not have what our suppliers need, or need what our customers have. We need to invent a kind of money. Well, what do we have? We have bread. Suppose we have hundreds of loaves of bread; our first immediate problem is that they have a shelf life. In a week or two our bread will rot. So we've discovered the first problem we must solve - whatever we use for money must not degrade over time. Let's call this durability. Whatever new money we choose must be durable. We have flour, why not use flour? With a shelf life in months it is certainly more durable than bread. The problem with flour is that it is easy to produce in large quantities (at least in modern times), and very heavy if we have such a quantity of it that we could, say, buy a new bakery. So we've discovered two new problems. The money we pick must be hard to create. Let's call this scarcity. The money we pick must also be easy to transport. Let's call this portability. What is durable, portable, and scarce? Now it's getting interesting. Diamonds? They certainly meet all criteria so far. Well, arguments over scarcity aside, diamonds aren't very divisible - how many loaves of bread would we have to sell in each transaction if they were priced in diamonds? So our money must be divisible. And how do we value diamonds? Each diamond has a unique worth based on weight, clarity, color, and cut. Let's call this fungibility. That is, each unit of our money must be interchangeable with other units of that money. And so, finally, we have our list. Money must be durable, portable, scarce, divisible and fungible. This brings us to gold. Gold is durable - pure gold does not tarnish, does not rust, and has a high melting point, nor will it evaporate or deteriorate across long periods of time. Gold is portable - all of the gold in the world could fit in a few Olympic-sized swimming pools. Spread over the population, this roughly 200,000 tonnes of gold translates to less than 1 troy ounce per person, were it all to be divided equally. So its scarce as well. Gold can be divided into grams or grains, so it's divisible (albeit not easily, historically necessitating silver as a kind of micropayment substitute for gold in small transactions). Finally, gold is fungible - even gold of dubious origin can be melted and recast, making it indistinguishable from any other gold. Why don't we use signed Babe Ruth baseballs. They're durable enough, if well kept. They're portable due to their small size. And pretty scarce. Well, now we run into the final few problems we must solve. What if we want to buy something worth less than the value of such a ball? This is a problem. So our new money must be divisible into smaller units. And what if someone claims that our signed Babe Ruth baseball is a forgery? Well, now its tainted by the accusation, and given how few there are in circulation, it's possible that anyone trading for it will recognize it and not want it due to the risk of it being a forgery. So it must resist forgery. And, finally, how many different signed Babe Ruth baseballs are there? Hundreds or thousands. Why is it that you can give somebody 500 thousand dollars and they will, in turn, give you a house? It may seem obvious that you would want the 500 thousand dollars or the house. You may even prefer to have the 500 thousand dollars. But why is that? You can't do anything with the 500 thousand dollars. And obviously this is situational. If you were stranded in the desert you might rather have a gallon of water or a beat up (but working) truck than the 500 thousand dollars. The short version is that you want the money because you believe others will want the money. A house is a house, but 500 thousand dollars, in a working economic system that can support it, is a car, a burrito, a computer, a trip to Venice and a thousand other things. If or when you want those things. The 500 thousand dollars provides you with the ability to satisfy future planned or unplanned needs or desires. It does this because of the mutual and mass delusion that it has value. We want it, simply, because other people want it and because we believe they will continue to want it in the future. The role money serves in the broader market is as a distributed communication medium for information about value and scarcity. Imagine there's some global nuclear war and your country of residence starts printing money to fund their part in it. They'll still collect taxes in it, as best they can, and expect others to transact in it. The government hasn't changed their decree that money has value, and the intrinsic properties of alternative monies haven't changed, yet all of a sudden people are unlikely to want them anymore. More valuable will be tangible assets that serve immediate needs - food, weapons, medicine, etc. The subconscious calculation that everyone is simultaneously doing at this moment is neglecting the chance at transactions in the future for current immediate needs. The risk that someone might not take your 500 thousand dollars in the future makes that 500 thousand dollars (or brick of gold or Bitcoin or diamonds or whatever) much less valuable. Its easy to calculate that nobody else will want it, because you don't want it, because it doesn't serve an immediate need and it is easy to project your thoughts on the current (and accurate) assessment of the situation to others. If you don't want it, they won't want it for similar reasons. If you do want it, others will also want it for similar reasons. Storage of Value Across Time and Money Alternatives There is an old proverb in the Talmud that says, "let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve." The modern equivalent portfolio would look something like, 33% invested in the stock market, likely an index fund, 33% invested in real estate or possibly a REIT, and the remainder invested in something like dollars or euros. But this isn't what we see in modern times, at least recently. Instead we see investors, on average and depending on their risk profile, invested heavily in stocks and bonds with only a small allocation to liquid assets like dollars, euros, or gold. This is because the modern consensus wisdom is that one should be Money vs Currency and Intrinsic value What is money and what is currency? The distinction that you'll often hear is that money has an intrinsic value where currency does not. That is, money has all of the properties of a currency except that it is also used for something aside from storing value for future transactions. The classic example here is that gold has intrinsic value because it is used for things, while fiat money has no intrinsic value, it has only value as a promise (as it used to be backed by gold) or government decree. This sneaks in the assumption that something called intrinsic value exists in a meaningful way. Lets unpack and explore that assumption. What does it mean for something to be intrinsic? Well this may be the easier of the two parts; it means that whatever quality you are discussing is essential to or contained within whatever object you're talking about. Great. What does it mean for something to be valuable? Oh, buddy, here we go. First, lets tackle the problem of measuring value.

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