The Evolution of Money

by David Orrell

  THE EVOLUTION OF MONEY

  Columbia University Press

  Publishers Since 1893

  New York Chichester, West Sussex

  cup.columbia.edu

  Copyright © 2016 Columbia University Press

  All rights reserved

  E-ISBN 978-0-231-54167-1

  Library of Congress Cataloging-in-Publication Data

  Names: Orrell, David, author. | Chlupatý, Roman, author.

  Title: The evolution of money / David Orrell and Roman Chlupatý.

  Description: New York : Columbia University Press, [2016] |

  Includes bibliographical references and index.

  Identifiers: LCCN 2015050683 | ISBN 9780231173728 (cloth : alk. paper)

  Subjects: LCSH: Money—History.

  Classification: LCC HG231 .O77 2016 | DDC 332.4/9—dc23

  LC record available at http://lccn.loc.gov/2015050683

  A Columbia University Press E-book.

  CUP would be pleased to hear about your reading experience with this e-book at cup-ebook@columbia.edu.

  COVER DESIGN: Noah Arlow

  CONTENTS

  Acknowledgments

  Introduction

  1 Origins

  2 The Money Magnet

  3 Virtual Money

  4 New World

  5 A Wonderful Machine

  6 The Money Power

  7 Solid Gold Economics

  8 New Money

  9 Changing the Dominant Monetary Regime, Bit by Bitcoin

  10 Utopia

  Notes

  Bibliography

  Index

  ACKNOWLEDGMENTS

  Many people contributed to this book. We would like to thank Myles Thompson and Robert Lecker for their advice and encouragement, and Stephen Wesley, Irene Pavitt, and Ben Kolstad for their expert editorial and copy-editorial advice. Credit also goes to all those who have shared their time and expertise on various subject matters related to The Evolution of Money, especially Parag Khanna, Tomáš Sedláček, Marek Palatinus, and Rob Carnell and James Knightley of ING’s London office.

  Roman would like to thank his dear friend and mentor Roger Tooze for providing him with invaluable advice and serving as a critical voice during the writing of this book. He would also like to extend his deepest and sincerest gratitude to his lovely wife, Klara, and his lively daughter, Dominika, for their help, support, and patience (not only) during the time spent writing this book. David would like to thank his wife, Beatriz (better than money), and his daughters, Isabel and Emma, who also evolved as this book was written.

  Finally, the authors would like to thank each other for an enjoyable and mutually inspiring collaboration.

  David would like to dedicate this book to Emma, and Roman would like to dedicate it to Sebastian.

  Introduction

  The thing that differentiates man from animals is money.

  GERTRUDE STEIN, “MONEY”

  “Money talks” because money is a metaphor, a transfer, and a bridge.

  MARSHALL MCLUHAN, UNDERSTANDING MEDIA: THE EXTENSIONS OF MAN

  This book is about the nature and future of money—that mercurial substance that dominates so much of our lives, remains strangely elusive and misunderstood, can drive us forward or dash us against the rocks, and whose evolution may play a deciding role in the future success and prosperity of our species.

  Money is one of mankind’s earliest inventions. Its history appears to be as old as that of writing, and the two are closely connected—some of the oldest written artifacts in existence are 5,000-year-old clay tablets from Mesopotamia that were used to record grain deposits. Both money and writing are a way of using symbols to describe the world. Both are used as a means of communication, and thus are fundamentally social and central to the relationship between individuals and the state. Money, in many respects, is as closely tied to our way of thinking as words.

  Like language, money is based on social conventions, the most important being agreement on what constitutes a standard of currency. In the same way that words for the same thing differ between languages, so the choice of money is flexible, everything from cowrie shells in ancient China to cigarettes in postwar Germany having served as lucre. The first metal coins appeared around 600 B.C.E. when the small but trade-friendly kingdom of Lydia (in present-day Turkey) introduced tokens made from a naturally occurring alloy of gold and silver. Today, money has transcended a physical relationship with precious metals, or for that matter anything else. The concept of currency has become increasingly abstract, to the point where actual coins and notes form only a small portion of the money in existence. Like words in the cloud, money exists as an abstract set of symbols that can be created or destroyed with the press of a keyboard button or the touch of a screen. Cybercurrencies are revolutionizing the financial industry in the same way that e-books are revolutionizing the publishing industry.

  This virtual, ethereal form of money underpins modern capitalism, and its pursuit determines much of the structure of our lives. Jobs are often seen largely as a means to obtain it. Our houses are seen not just as homes but as stores of wealth—where wealth is defined as something that can be converted, at least in principle, to money. An important measure of success for people is the numbers they make or the net worth they accumulate over their lives; for a country, its gross domestic product as measured in its national currency. Displays of wealth provide a form of validation within the community, and the pursuit of riches lends shape and meaning to our lives. Money, for many people, is not just a necessity of modern life; it is something closer to a religion (indeed, without such faith, the system would collapse). As the British Museum observes, money has become “the main motivating factor behind western culture … the prime focus of political debate and personal endeavor, both despite and because of its increasing elusiveness and power. This kind of attitude has been aptly termed ‘fetishistic,’ in the sense that it attributes a quasi-supernatural quality to the object of its adulatory devotion, in this case money.”1

  Money is also a source of worry. According to Gallup, “Half of Americans have substantial financial anxiety.”2 A survey by Britain’s Observer newspaper portrayed a nation “anxious about numbers. We are, collectively, twice as worried about money as we are about family or health.”3 And yet, despite its obvious importance in our lives, we often tend to downplay money, saying it is nothing special in itself, no more than a glorified system for exchange and accounting. And despite the long history of our relationship with it, we don’t seem to know it very well. Its properties are something of a blank page.

  For example, the credit crunch in 2007 that kicked off the ensuing financial crisis was one of a long series of such events caused in large part by the dynamics of money and our inability to understand them. Like those other events, it came as a complete surprise to nearly everyone, including major financial institutions such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). We appear to be as helpless in the face of financial storms as our ancestors were to more natural cataclysms such as storms or volcanoes. Wealth that is built up over decades can seem to vanish into the ether, as if it had no substance.

  A commonly held currency is seen as a unifying force, which bonds people together, like a shared national anthem. In Europe, the euro was intended to bring disparate member states together and eliminate the risks of the deadly conflicts that characterized much of its history. While that goal has been reached, the common currency has in some respects had the opposite effect, enhancing the differences between north and south, between Greeks and Germans. Indeed, money often seems to have a way of pulling people apart even within a single country: a defining fe
ature of modern capitalism is extreme wealth inequality and the resulting threat of social conflict.

  Our ignorance about money is not relieved by the field of economics, which—contrary to what one might expect—is surprisingly mute on the subject. Mainstream “neoclassical” economic theory, which has long shaped our attitude toward the economy, is based on the peculiar notion that money is just an inert medium of exchange, a passive facilitator of transactions that are based on rational decisions to optimize utility. As a result, most of the models used by economists and policy makers do not take money explicitly into account, treating it only as a metric rather than a thing in itself. But as marketers and advertisers know, financial decisions are often governed less by reason or calculation than by emotion—and money is about the most emotionally volatile substance imaginable. We will go to war for it, marry for it, sacrifice for it, obsess over it, go crazy for it—and never have enough of it!

  Money is widely associated with happiness and well-being, which is one reason we desire it. However, the relationship between wealth and happiness is complicated and often paradoxical. For example, experiments show that we are often happier if we give money away than spend it on ourselves.4 At the same time, the quest for wealth has the undesirable side effect of environmental destruction—affecting not just our happiness but the health of the planet.

  Money is like oxygen: a substance that surrounds us, is usually invisible, but is vital for our survival. It is also potentially explosive. But we often seem about as advanced in our understanding of it as a clumsy nineteenth-century scientist tinkering with the confounding and dangerous properties of phlogiston (believed at the time to be the source of fire). This book investigates the properties of this mysterious substance that so affects our lives—and points the way to a future in which money may play a very different role.

  The book is essentially divided into two main parts. The first part (chapters 1–5) traces the development of money from ancient times to the present day, explores its fundamental properties, and shows how modern alternative currencies are just the latest step in a long historical process. The evolution of money has involved a number of transitions. The first version of money (we’ll call it Money 1.0) appeared as part of an elaborate credit system in ancient Mesopotamia. The first actual coins (Money 2.0) were minted in Lydia, and the idea soon spread (or appeared concurrently) around the world. In the Middle Ages, a shortage of precious metals, combined with the lack of a strong central government, meant that—like the bitcoins of today—Money 3.0 was more an accounting system than something you could weigh in your pocket.

  The discovery of the New World by Spain—and the plunder of vast quantities of precious metal—marked the beginning of Money 4.0. Mercantilist governments attempted to accumulate the maximum amount of treasure, and value could be explicitly calculated in terms of a weight of gold. This led to the creation of a gold standard for currencies, enforced by the British Empire and the Bank of England. The collapse of the Bretton Woods agreement in 1971 marked the official end of the gold standard and the early stages of a major bifurcation toward what we call Money 5.0.

  The second part of the book (chapters 6–10) focuses on the current state of currencies and on new ideas for directing the torrent of money and the accumulation of wealth. If money has alternated between virtual and metal-backed forms, then it is now certainly in a virtual regime, where most money is created at the whim of private banks, simply by entering a number into a computer account. When the Bank of England released a paper admitting this fact in 2014, it created ripples of shock in the media, even though the practice is not new.5 The British pound and the U.S. dollar have more in common with alternative cybercurrencies than appearances suggest. We reveal the power relationships that hold the financial system aloft, show how its flaws and instabilities make alternatives particularly attractive, and explore the developments in both technology and economics that are changing the story and opening the door to new currency systems.

  In recent years—especially since the crisis—there has been an explosion of interest in forms of money that do not just extend the idea of money but radically rewrite it. These range from local time-share schemes, in which people exchange hours spent performing services, to globally traded digital currencies like Bitcoin that exploit technologies such as peer-to-peer computer networks. Their development has been enhanced by the ubiquity of mobile computing devices, which in some countries are taking the place of wallets. New platforms such as the aptly named Ethereum extend the computer architecture to an ecosystem of cybercurrencies and other forms of transactions and services, thus moving entire business models into the ether.

  Because money so strongly affects our society, and even our own personalities, the development of this new, fifth-generation money will have profound effects not just on business models for the financial sector but also on the way that we behave and interact. In fact, many of the new currencies, or alternatives to currencies, are explicitly designed to produce socially positive outcomes. These moneys should help provide an answer to some of the issues faced by an increasingly globalized and decentralized world.

  Money has always told us much about human society. Today the shape and structure of finance, money, and wealth is being questioned like never before. The Evolution of Money will act as a guide to the inherent properties and contradictions of our current system and will make predictions about how it is likely to evolve. In ten years’ time, what will be accepted as currency? How will we buy things? What kind of money will our purses, wallets, or mobile devices hold? And how will we measure our place in the economy?

  The authors are a Canadian mathematician and author (Orrell) and a Czech-Canadian financial journalist (Chlupatý). We met in England and collaborated on a couple of shorter books, including a three-way discussion (The Twilight of Economic Man) with the Czech economist and philosopher Tomáš Sedláček. One of the topics we discussed then was how money and economic growth have been fetishized by society. Money is considered to be hard and absolute and drives out other values such as aesthetics or ethics that are considered soft and somehow secondary.

  In this book, we argue that money can transcend its role of reducing everything to number and can become, like language, a more open and affirmative means of communication. For the world economy to be sustainable, capitalism needs to readjust. A first step is to rethink the function and purpose of money and the meaning of wealth. As they say, money talks—and soon it will be in a different voice.

  1

  Origins

  Money plays the largest part in determining the course of history.

  KARL MARX, THE COMMUNIST MANIFESTO

  As a rule political economists do not take the trouble to study the history of money; it is much easier to imagine it and to deduce the principles of this imaginary knowledge.

  ALEXANDER DEL MAR, HISTORY OF MONETARY SYSTEMS

  In economics, money has traditionally been defined to be anything that is generally accepted as a medium of exchange. Money also acts as a store of value and as a unit of account. But where did it come from in the first place? Since Aristotle, economists have said that coin money emerged as a replacement for barter. This chapter tracks the development of money from credit systems in ancient Mesopotamia, to early coins in ancient Greece and Rome. As we’ll see, its genesis was somewhat more interesting than is usually presented in standard economics—and so will be its future.

  Money has been one of mankind’s most successful inventions (it is no coincidence that to “coin” means to “invent”). Indeed, it is one of the things that best expresses our humanity. Other animals don’t exchange labor for tokens or carry wallets or set up elaborate banking systems. Money has aided and encouraged the human delight in trade and has shaped our social and economic development. It also has a shadow side—money may not be the root of all evil, but it can certainly play a supporting role. The quest for money drives enterprise and innovation, but also leads to social ills varyi
ng from lack of free time to environmental destruction. It may be a sign of humanity, but sometimes it is also a cause of behavior that we would call inhuman.

  Money today is perhaps more powerful and pervasive than at any time in history, but—ushered into existence seemingly from nothing at the command of banks—also seems little more than a kind of accounting trick. It is fitting that the creator of double-entry bookkeeping, Luca Pacioli, was a magician. What is its secret? Why does specie, as coinage used to be known, continue to have such a hold over the human species?

  One of the most fundamental characteristics of money is that it acts as an easily transportable store of value. The fruits of our labor can be held in a crystallized form—instead of exchanging work directly for goods, we exchange it for cash, which can then be spent at our convenience. Money therefore holds value the same way a battery holds energy, and makes it movable both in time and space (unlike some other stores of value, such as land). A paycheck in one’s pocket can be spent whenever and wherever one wants—providing, of course, that someone is willing to accept it. To be of use, money must be not just portable but also easily exchangeable.

  In the United States during the Great Depression, a popular form of money, especially in remote logging or mining camps, was company scrip. A portion of wages was paid in scrip that could be redeemed only at the camp’s store, rather like a modern gift certificate. Since the store was owned by the company, this increased the company’s control over its workers and made it easy to mark up prices. Scrip could be exchanged for cash, but only at a discount, which reflected its limited range of use.

  A similar arrangement known as the “truck system” was used during the Industrial Revolution in Britain (the word “truck” in this context is from the French troquer, which means “to trade or swap”). Again, a monetary drought during this period meant that factory workers were often paid with vouchers that were exchangeable in local stores, which were again often owned or controlled by the factory owner. However, such arrangements were eventually outlawed by a sequence of laws known as the Truck Acts. In the United States, President Franklin Delano Roosevelt banned scrips in 1933, as he struggled to get the faltering monetary system under control.