In search of Money — episode 1: What money really is?
Hello people of Earth! We live in an exciting time.. as if there was a generation who could say the opposite.. Anyways, as we’re dashingly moving into new decentralised model of economy we decided to cover the topic of money as we think that its form is transforming extremely fast creating gaps in understanding its nature which is essential for making smart moves in the coming future world. You all use cryptocurrency term a lot, most of you are very well aware of the stablecoin notion, maybe not so well of the decentralised reserve currency ideas while many probably struggle to understand the mechanics behind token minting process performed by various DAOs offering crazy APYs. As this is quite a topic, the material will be released in four episodes:
What money really is?
Issues with the modern fiat money
Cryptocurrency to replace fiat?
Stablecoins and future of money
What money really is?
Fundamentally it is just a tool to facilitate the exchange of goods and services. Imagine you have a Lambo and two apartments in Hackney, London and some guy named Nicolas has a house in Bebek, Istanbul. You want a house in Bebek and Nicolas does not mind exchanging his house for something equal in value because he decided to leave Turkey for some reason. You negotiate and agree that you give him your Lambo and one of the apartments in Hackney for his house in Bebek. In this case you do not need money as you have exchanged valuables in kind and both got what you wanted. If people around the world would be always able to exchange things in kind then there would be no place for money. In the early years of humanity that was the case — people just exchanged things they needed — fur for a bow, potatoes for tobacco etc.
As human appetite grew, natural exchange became highly inconvenient as you might not always need what other person is able to offer you and vice versa. Say, Nicolas does not want Lambo but fancies Harvard diploma. Yes, you still might get whatever you want eventually for what you have via a chain of swaps, i.e. Lambo for a ton of white truffles, a ton of white truffles for an education at Harvard and an education at Harvard plus an apartment in Hackney for a house in Bebek. But it will take time and efforts to connect different needs. Plus the mobility of value becomes very costly — you need to move your Lambo to Italy, where that white truffle farmer lives and then find a way to store those white truffles. For those transportation and storage services you’ll be asked to do something in return (say, massage or accounting services if you are good with numbers).
To avoid all that hustle money was invented back in the days. The universal denominator of goods and services. You can exchange your Lambo and the apartment in Hackney for some money and then exchange the money for the house in Bebek and you do not have to hook up with Nicolas. Money dramatically increases the speed and convenience of exchange of valuables as well as decreases the transactional efforts. As a result much more services and goods can be created and consumed when they are needed if you have such tool as money. Without it everything would be very slow and costly and people would suffer from starvation or illnesses because they did not get potatoes or cure in time in return for the clothes they might have produced.
You probably know that in the past the role of money was played by various things — sea shells, gems, furs, gold etc. — something that was not easy to reproduce otherwise the cost of producing money would be much less than to produce actual product or service thus the craftsmen and merchants would not exchange their goods and services for something that they could get themselves for free or close to that. The role money was played by something that was hard to get for the majority of population. As the trade grew across the continents, the competition between what could be hard to get also grew therefore sea shells, furs and other exotic things were left behind while precious stones, silver and gold prevailed as the universal denominator since these materials were really hard to get no matter where you lived and what skills you had.
Then gold and gems also got inconvenient (heavy, decimals, fractions, perceived worth of each specific stone). The next level of derivative was physically minted or printed money by the official mint (set up by the local king, knight or public parliament who used to look after certain territory). The mint would accept gold, silver, gems and would give a coin or printed note in exchange which would reflect the value of gold, silver, gems submitted (for the following chain of thoughts let’s stick to gold only for simplicity). Thus having coins and printed notes meant that its owner has the same value in gold locked in the mint reserve. Initially the printed money were linked to the second derivative, i.e. gold — the mint would release only such amount of printed money which would correspond the worth of the gold locked. So theoretically anyone could go to the mint (by the time a part of the central bank) and swap, say, 10 USD note back for a specific piece of gold and then go and swap that gold for a haircut worth of 10 USD. The mint would either had to burn that 10 USD note or keep it until someone brings 10 USD worth of gold and only after release this note back to the circulation via that person. Because money should not have been created without depositing the corresponding value of the collateral, the officials took over control of this process. The central banks were established, only state mints were kept, the official money received sophisticated security features so others can quickly check if a banknote was authentic or not. If anyone would have tried to forge the local money they would have been executed. This is how the condition to ensure that the ‘price’ of printing money should be always higher than to produce certain goods or services that you then can exchange for money. This condition helped to maintain this formula: volume of money = (more or less) value of all goods and services created.
Therefore money is good but in isolation it is worth nothing. Money just represents the value of something else — ultimately goods and services available in the specific kingdom or empire or tribe or modern state. At least they should. This is important to remember for the next chapters of this material.
Now, human beings being intellectual creatures quickly realised that if money represents value and once the banknote is printed it is not hardwired to a specific product or service anymore, i.e. it just holds some universally agreed value and it is not necessary to immediately exchange it for some goods services. You can keep and accumulate money as store of notional value which then can be transformed into actual value by exchanging it for specific goods and services when you need it. So this is how money became also very convenient in terms of carrying the value through time without having to convert it to available goods and services but hoping to convert it to the goods and services in the future. It also allowed to accumulate and redistribute value as needed to create more complex goods (e.g. skyscrapers) and services (e.g. railways). This is again a great feature of money but such delinking from the value of actual goods and services also brought curse on the current financial systems which we’ll ponder on in the second episode.
See you soon!
