The Creation Myth of Money
(Originally posted in "The Zen of Value")
Discussions about how money originates often start with the assumption that it evolved to facilitate trade and "store value". Otherwise, so the story goes, you and I would simultaneously want something somebody else had (say, you have more fish than you need and I have extra sheep).
There is scant evidence for "cash" arising out of this situation. Evidence for another narrative can be found in human behavior that naturally arises when "cash" is in short supply.
Say, you go fishing and catch 5 nice big salmon. It would not be unusual at all for you to show up at my door and offer me a fresh salmon "for free". On the other hand, we would tacitly understand that this establishes a debt. Perhaps at some point, I'd mow your lawn or give you a basket of berries, or jam from my last berry picking trip. The math doesn't need to work out. If I'm in bad shape and have nothing to give in return, it would not be unusual for the fish to keep appearing at my door (perhaps even more frequently).
Such a system is not "communism", where all goods are held in common, no matter how and by whom they were produced. It's based on sharing, generosity and reciprocity between friends and neighbors. It is embedded in a wider set of customs that add up to encouragement of behaviours that tend to bind he community together while discouraging freeloaders and cheaters. All the great apes seem to behave in this way to some degree.
Bringing the discussion into the 21st century, we see that money is just a standardized form of an "IOU". A dollar bill is an IOU from the Government. If I give you a dollar, the Government owes you one more dollar and me one dollar less. Most of my "dollars" are actually numbers in a bank account, which record an IOU from the bank to me.
If there were no banks and all cash magically vanished, we would instantly go back to an IOU-based economy. This apparently happened in Ireland during a 6 month strike of bank employees. Magically, the economy boomed without "money".
Money based on specie (such as gold) is actually a step backward from the natural system. It quickly converts itself back into an IOU system. Gold certificates (IOU gold) replace actual gold for all but the smallest transactions. Banks naturally step in to the void to "do the math" in a complex web of who owes what to whom. Quite naturally, we evolve into a system where most debts directly or indirectly are owed to or from a bank. Nations establish "central" banks and currency that is, in effect, an IOU from the central bank (the Nation).
Of course, "official" money has a serious drawback. The assumption is that all things traded (or "owed") can be measured in money, which flies in the face of both everyday experience and the way our "great ape" minds work. Value is based on what one individual perceives to be needed at a particular time. Such needs are not subject to the rules of arithmetic. Failure of money as a proxy for value results in all kinds of distortions, including the illusion that
Discussions about how money originates often start with the assumption that it evolved to facilitate trade and "store value". Otherwise, so the story goes, you and I would simultaneously want something somebody else had (say, you have more fish than you need and I have extra sheep).
There is scant evidence for "cash" arising out of this situation. Evidence for another narrative can be found in human behavior that naturally arises when "cash" is in short supply.
Say, you go fishing and catch 5 nice big salmon. It would not be unusual at all for you to show up at my door and offer me a fresh salmon "for free". On the other hand, we would tacitly understand that this establishes a debt. Perhaps at some point, I'd mow your lawn or give you a basket of berries, or jam from my last berry picking trip. The math doesn't need to work out. If I'm in bad shape and have nothing to give in return, it would not be unusual for the fish to keep appearing at my door (perhaps even more frequently).
Such a system is not "communism", where all goods are held in common, no matter how and by whom they were produced. It's based on sharing, generosity and reciprocity between friends and neighbors. It is embedded in a wider set of customs that add up to encouragement of behaviours that tend to bind he community together while discouraging freeloaders and cheaters. All the great apes seem to behave in this way to some degree.
Bringing the discussion into the 21st century, we see that money is just a standardized form of an "IOU". A dollar bill is an IOU from the Government. If I give you a dollar, the Government owes you one more dollar and me one dollar less. Most of my "dollars" are actually numbers in a bank account, which record an IOU from the bank to me.
If there were no banks and all cash magically vanished, we would instantly go back to an IOU-based economy. This apparently happened in Ireland during a 6 month strike of bank employees. Magically, the economy boomed without "money".
Money based on specie (such as gold) is actually a step backward from the natural system. It quickly converts itself back into an IOU system. Gold certificates (IOU gold) replace actual gold for all but the smallest transactions. Banks naturally step in to the void to "do the math" in a complex web of who owes what to whom. Quite naturally, we evolve into a system where most debts directly or indirectly are owed to or from a bank. Nations establish "central" banks and currency that is, in effect, an IOU from the central bank (the Nation).
Of course, "official" money has a serious drawback. The assumption is that all things traded (or "owed") can be measured in money, which flies in the face of both everyday experience and the way our "great ape" minds work. Value is based on what one individual perceives to be needed at a particular time. Such needs are not subject to the rules of arithmetic. Failure of money as a proxy for value results in all kinds of distortions, including the illusion that
- The more money you have, the more goods and services of value you will be able to access.
- If you don't have enough money for food and shelter, you are allowed to die, establishing a rather precise money "value" of a human life.
- Any given object has the same value to anyone at any time
- Anything of value has a price
Violation of rule 3 results in the common situation where person A values the same object less than person B, resulting in his willingness to "sell" the object to B. We sometimes forget that the result of this transaction is an increase in total value, while the amount of money in the system remains constant. The increase is a direct consequence of the fact that money is not a proxy for value.
The trouble starts to arise when we separate the role of the "social IOU" from the context of community. Money is an abstract IOU from an imaginary "person" - a debt that no longer contributes to strengthening the social fabric. Our money transitions that buy and sell, hire and work are conducted with strangers or even completely abstract theoretical "persons".
Or are they? Does it make sense to re-introduce the social aspect of money through things like customer loyalty, "nepotism", referring friends to friends ...
It does appear that, as societies grow larger and more complex, there is a tendency to:
It does appear that, as societies grow larger and more complex, there is a tendency to:
- minimize the value of human effort (driving wages to the bottom)
- ignore "externalities" such as the decrease in common values such as clean air, open space, personal choice etc.
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