Why do we believe in money? Why would people take jobs they’re really not quite interested in and work the majority of their life only to get money out of it? Why have we given so much importance to money? And how does it work in the first place?
Let’s try answering these pressing questions.
Money has become such a huge part of our lives that we often take its innovation for granted. Without money, advanced civilization like the one we live in today would be far from possible.
But wait, what is money?
Money is not just banknotes or coins or numbers on a computer. Money is anything we are willing to use in order to represent the value of things as an exchange for goods or services. Best described as a medium of exchange, the value of money does not depend on the worth of the material from which it is made and expressed. Banknotes and coins are a form of money which we’ve assigned a value upon. Money exists in our shared imaginations (more on this later).
So, what does it do?
Money converts, stores, and transports value. Money can convert almost any objective thing to any other objective thing (if you’ve got enough to pay for it). Money is easy to store. The forms of currency used nowadays can easily be stored. Earlier, if you used barley as a form of barter or a medium acting as money then it was rather hard to store piles of it. But now, money can be stored simply and efficiently, if you have a safe (because everyone wants money—we’ll come to why that is so in a bit). Lastly, money transports value. You can work for a company and they’ll pay you a salary according to the value (often measured in time) you provide to the company.
A short history of money
To understand the current situation with money, let’s go back. Back to a time when there was no money. How do you think we lived way back then without any money?
Before money there was another system in place to trade things you had for things you wanted. The Barter System. But more on that in a moment.
When it comes to trading, for most of human existence we have been living on a behavioral law. The Rule for Reciprocation.
Earlier we lived in small groups or tribes. And everyone was connected to each other. We humans cannot survive without a community. Literally. You need a group of diverse people to help you live. No doctors? Disease kills you. No farmers? Hunger banishes you. No love? A lack of mating makes your genes go extinct when you die. So we need to have people around us to help us live and they need us to surround them to help them live. In the primitive tribes they had as hunter-gatherers and even early agriculturists, everyone knew each other and everything was usually peaceful. Since this was the case and there was no money back then what used to happen was that people would help each other out due to the Universal rule for reciprocation which worked on debts and obligations.
Back then, if I were a doctor and the son of a shoemaker got badly injured, I would treat him. And be fine with not getting anything in return just then. Why would I do such a thing? Because once I’d treated the shoemaker’s kid, the shoemaker would be indebted to me. According to the rule, this would put an obligation onto the shoemaker to reciprocate kind behavior when I were to be in need. In this case I’d probably get a shiny new pair of boots from the shoemaker when need came.
This system totally worked in those indigenous tribes. You were for some reason always obliged to help the person who had once helped you. If you didn’t reciprocate that behavior the tribe would consider you untrustworthy and no one would want to help you when in need. Everyone kept a mental record of their debts and obligated favors. Because the consequences were severe; if you weren’t a kind of person who repaid your debts you’d soon become an outsider; and nobody wants to be an outsider. So the fear of not getting accepted by the tribe (which had its own really harsh consequences) made people sincerely pay their obligations. Therefore, this system was a success with a tribe of around 150 people. Above that, it’s hard to maintain stable relationships (for more info read about Dunbar’s number).
But the Law of Reciprocation had some problems inhibiting growth of communities and trade. What about people from a different tribe? How can you trust them? Simple answer: You can’t. Trust takes a while to build. Inevitably then, we came up with the barter system. Back then, one of them would be like, “Hey, I can’t trust you because I don’t even know you so take this much of my wheat produce and give me that much of your apples so that I don’t have to give extra wheat to the doctor, I’ll just make my family and myself eat an apple a day by buying your apples.”
Such an amazing idea, wasn’t it? This way you didn’t need to trust people to do business with them. You didn’t even need to know them. Simply by giving something you had plenty of to someone who needed it, you could get your desired thing.
But even the barter system had some flaws. As human civilization grew and more and more people started living together you couldn’t trust everyone for a return favor. That is what made the barter system effective. But what if you go to the apple farmer and you say, “I’ll give you wheat for your apples.” and the apple farmer doesn’t want any of your wheat? But still you really need those apples. So what do you do? You ask the apple farmer, “Okay, what do you want then?” and let’s say he says, “A haircut.” So you find the town haircutter and then you give him a kilogram of wheat for a haircut of the apple farmer and then the apple farmer pays you your required apples. But what if the haircutter doesn’t crave for any wheat either? What if he wants a pair of shoes? So you go to the shoemaker and give him wheat and the shoemaker gives shoes to the haircutter and the haircutter gives a haircut to the farmer and the farmer gives you his apples. Okay… this is definitely not efficient. To tackle this issue, we came up with a common form of currency as an exchange for the goods and services one wants. We came up with The Monetary System. It took a while to evolve and now we use it so efficiently that we don’t even need to think about how it all got started in the first place.
So we’ve got three systems: Reciprocation, barter and monetary. The monetary system is now all that’s used in formal trade.
That ends our short history of money.
Why do we want so much of it?
Money works on trust. I mean seriously why would anyone sell all their wheat produce for a bunch of [base] metal coins or cowrie shells (an early type of currency used in China)? What’s so special about coins? Gold or not, they’re just coins at the end of the day. It doesn’t seem to have any objective value.
What makes money special is that everyone trusts in it. While we may not agree on religious or ethical or political or economical values, we all agree to agree with the American Dollar.
There’s a simple reason behind what makes money such a desirable thing:
Everyone wants money because everyone else also wants money.
If the shoemaker is content on getting ten green pieces of paper for his handmade shoes, you start realizing the power of having these bills. The more you find people willing to accept money, the more you accept money yourself.
The Deal with Trust
To trust is to believe that that which you trust will do what is expected. It’s the early days of currency and if someone gives you some coins with a weird stamp on them why would you choose to believe in those coins? What makes you think that you can give one kilogram of your wheat to a random guy who’s giving you five coins for it? You need to know that you can use those coins in return to buy whatever you want. You need to be certain to be able to trust in money that it performs its task.
You need to believe everyone else believes in money. That’s how you’ll have trust in it.
This is essentially how humans built the most universally efficient system of mutual trust. The Monetary System.
This is the end of part one of a two part blog series on money. Stay tuned for part two where we’ll explore money as it is in the world today and how we’re being misled by it.
- Sapiens: A Brief History of Humankind by Yuval Noah Harari