The Evolution of Money
Page 6
One way to think of a virtual money transfer is as a transaction that has the same effect as if cash had physically changed hands, except the cash doesn’t exist. In ancient Mesopotamia, a payment in shekels was registered only as a credit for one party and a debit for the other, but it represented a weight of virtual silver. The transfer might take place in the imagination, but the effects are real enough, which is why ownership of virtual currency still evokes a powerful, physical sense of possession—we will fight for ownership over our “money points” as much as for any desirable object. The virtual and the real are bound together by money.
An exception of sorts to this need for a physical connection is the currencies used to buy imaginary goods in online games: a pretend sword to kill a pretend dragon. As economist Edward Castronova writes, these can be used to purchase “a bewildering cloud of things, all of which are definite, distinctly identifiable things as such, and some of which have clear economic value. Yet none of them has a physical manifestation. The physical traces these things leave—and they’re only traces—are electrical signatures on memory chips.”11 While the situation “would have thrilled Plato,” such currencies are of wider interest only when they become tradable for nonimaginary things outside the gaming environment (as many of them do) and thus establish a link with the real world.
The Power of Number
By assigning an exact number to value, money offers a kind of clarity. As the Victorian scientist Lord Kelvin put it, “When you can measure what you are speaking about, and express it in numbers, you know what you mean; but when you cannot measure and express it in numbers, your knowledge is of a meagre and unsatisfactory kind.”12 In Principles of Economics, Alfred Marshall wrote, “Just as the chemist’s fine balance has made chemistry more exact than most other physical sciences; so this economist’s balance, rough and imperfect as it is, has made economics more exact than any other branch of social science.”13 However, this apparent exactness is often an illusion—after all, just because we or the markets can assign a precise figure to something, say $103.58 for a barrel of West Texas Intermediate crude oil, doesn’t mean it is some uniquely correct or stable price (the price has varied by more than a factor of 4 just during the writing of this book). Value is an inherently fuzzy concept that, according to the Indian philosopher K. R. Srinivasiengar, “finds its locus in the interrelation between subjective need and objective quality” and therefore depends on many vague, changeable, and socially negotiated factors.14
When you buy a house or a car, the official price is just a starting point in a negotiation. With something like fashionable clothes, it might be impossible to haggle over price, but you can wait a few weeks and maybe see the same item in the clearance rack. Gold is considered by many to be the ultimate store of wealth, but its value in dollars is highly unstable, as we will show in chapter 7. It is impossible to put an exact price on qualities such as natural beauty, but with a coin we know exactly what it is worth because it has a number on it.
The split between exactness and fuzziness mirrors the division of the human brain into two hemispheres. According to psychologist Roger Sperry, who pioneered this field of research in the 1960s, the left side of the brain (which controls the right side of the body; recall the Pythagorean concept of duality from box 2.1) is “highly verbal and mathematical, performing with analytic, symbolic, computerlike, sequential logic,” and the right side (which controls the left side of the body) specializes in tasks that are “nonmathematical and nonsequential in nature.”15 As psychiatrist Iain McGilchrist observes, the hemispheres are like two distinct personalities that complement each other but are also involved in a kind of struggle. In particular, “the left hemisphere is competitive, and its concern, its prime motivation, is power.”16 (Note this is distinct from the popular idea of a split between “creative” and “logical” personalities being based on hemishere function—barring physical damage, we all use both sides of the brain.) Money shapes our behavior in many ways, but the most obvious is that it encourages us to think analytically. The historical shift toward left-brained attributes such as numeracy and literacy in Western society coincided with the expanding use of money. McGilchrist describes money as a consequence rather than a prime mover of “deeper change in hemisphere balance.”17 However, this perhaps gives money too little credit. It is hard to imagine a more potent technology for mental programming than money, with its constant referral to abstract number.
Money may encourage analytical, computational thinking, but as discussed in more detail later, it also provokes strong emotional responses, leading to conflicted behavior. Point-scoring systems are a highly effective tool for providing motivation in everything from parenting to professional sports, and in Western society money is the ultimate way of keeping score, with other people and even with one’s self. “Nothing had an effect on people like money—not naked bodies, not corpses,” noted Stanford University neuroscientist Brian Knutson of his experiments. “It got people riled up. Like food provides motivation for dogs, money provides it for people.”18
Money favors certain kinds of exchange over others (gifts don’t really compute, unless they are vouchers). The affiliation between money and number also means that the use of money prioritizes things that can be accurately measured in terms of money, such as GDP. The concept of net worth as a measure of wealth is not about how much stuff a person owns but about a number and a rank: what that stuff can be exchanged for, in dollars or some other unit, and how it compares in magnitude with the wealth of other people. And when markets assign prices that are essentially arbitrary, as we will discuss later, to things such as precious resources or pollution, we act as if those numbers are real and meaningful. Like a weighted coin, money contains an inbuilt bias.
The concept of money, like the Chinese yin–yang symbol, therefore holds together two contrasting aspects—virtual number and concrete reality, quantity and quality—in a single package, as a marriage of opposites. The two poles can never be separated, any more than the north and south ends of a magnet (monopoles have never been observed in nature) or the two sides of a coin. But as with the good/evil Pythagorean list of opposites, money has a polarity, a direction; the lines of force run from the world toward number. When we consider the value of a personal possession, say a treasured heirloom, and its price, we have to hold two fundamentally incompatible ideas in our mind at the same time; the result is a cognitive dissonance that we have learned to mostly ignore. When it comes to seeing and interpreting the world, number is our dominant eye.
The inherent tension between these poles, which never reaches equilibrium, may explain why money has remained so mysterious and protean, constantly shape-shifting and taking on new forms and appearances as the balance between its two sides realigns and adjusts. As discussed in chapter 1, standard economic definitions of money concentrate on its roles as a “medium of exchange,” a “store of value,” and a “unit of account.”19 Economists such as Paul Samuelson have focused in particular on the first, defining money as “anything that serves as a commonly accepted medium of exchange” (his emphasis, as if to squash further discussion).20 Or from a book by the nineteenth-century publisher Effingham Wilson (you can guess the title), money is “the something that serves to get something else for somebody from some one else.”21 Our interest in this chapter, though, is the inherent nature of this “something” called money: What properties does it contain that make it acceptable for fulfilling those roles? What, in other words, is money?
The Money Thing
Throughout history, answers to these questions have tended to fall into one of three camps.22 The first, known as metallism or bullionism (from the Latin bullire [to bubble or boil]), holds that only the metal in a coin is real money. So money should either consist of scarce, precious metal or at least be backed by it. Fiat money of the sort cranked out by the U.S. Federal Reserve and other central banks is a dangerous kind of play money that is destined to eventually blow up. This viewpoint was on
ce orthodox (see chapter 4 on the gold standard) and still has its support, especially among economists from the hard-money Austrian school and conservatives who are suspicious of government’s role in finance. To bullionists, the cuneiform system of Mesopotamia was only a form of proto-money.
The second camp is chartalism (from the Latin charta [record]), which holds that only the stamp is real.23 Coins and other money objects are just tokens that society collectively agrees to accept as currency. As Georg Friedrich Knapp wrote in The State Theory of Money (1905), “Money always signifies a Chartal means of payment. … The State as guardian of the law declares that the property of being the means of payment should be inherent in certain stamped pieces as such, and not in the material of the pieces.”24 In this view, the government is extremely important, because it issues the money and requires it back for payment of taxes, which is what keeps money spinning around. Independent schemes such as Bitcoin need not apply. Chartalism tends to find support among liberals, who think the state should have an active role in the money system.
Finally, there is the dominant, hands-off school of thought, with which most mainstream economists would agree, which says that money has no unique or special qualities but instead is defined by its roles—for example, as a medium of exchange. It could be gold; it could be a dollar bill, who really cares? What matters is not money, but exchange. Bullionists (tails) and chartalists (heads) therefore emphasize a different side of money, while most economists treat it as an inert chip. But strangely, none of them have much, if anything, to say about the most glaringly obvious aspect of money—that it is based on number. In bullionism, the role of number is subsumed into the weighing of metal; in chartalism, it appears as a unit of value; in mainstream economics, it is summarized by the idea of a unit of account—but the idea that we can attach numbers to value in the first place is taken for granted.
Consider, for example, a U.S. dollar bill. Sure, there is the portrait of George Washington on the front, and the weird iconography on the back with an eye on top of a pyramid, and something going on with an eagle, and various stamps and signatures and statements about trusting in God, legal tender, and so on. But the most important thing—at least if number is a guide—is the number. The first function of a currency is to establish the meaning of one unit, and here it is drummed in by repetition. The back of a dollar bill has the word “ONE” and the number 1 in each corner. In addition, “ONE DOLLAR” is written along the bottom, and there is a large “ONE” in the middle, for a total of ten ones on that side. There are also four 1’s and two “ONE”s on the front, giving a total of sixteen ones. The designers are being very insistent about the fact that this note is a one. The number on the money is more than a convenience; it’s the entire point.
So to address the question “What is money?,” maybe we should start with number. Our own answer to this question is that money is a technology that does for value what the Pythagoreans did for music (and the universe): it converts value to number. Money is transmitted by money objects such as coins, notes, or electronic transfers, which have both a physical aspect and a virtual number aspect. A useful way to understand money is to analyze the properties of these objects. The magic quality in money does not reside in its heads or its tails or neither, but in both, working in dynamic opposition.
Now it is often pointed out, especially by those sympathetic to the chartalist school, that money is not actually a “thing” but a kind of abstract credit system, a form of debt management, and that it is a distraction to focus on material objects such as coins or notes. Alfred Mitchell-Innes pointed out in 1914 that “the eye has never seen, nor the hand touched a dollar,” in the same way that it hasn’t touched a square inch.25 According to the economist Felix Martin, “The great temptation has always been to think that coins and other currency, being tangible and durable, are money—on top of which the magical, incorporeal apparatus of credit and debt is constructed. The reality is exactly the opposite.”26 Anthropologist David Graeber: “What we call ‘money’ isn’t a ‘thing’ at all.”27 Economist Bernard Lietaer: “We should now dissipate a key illusion in the magic about money: money is not a thing.”28 However, while such comments capture the rather nonphysical and ethereal properties of money, we would argue that it is actually both weirder than that and more corporeal. In fact, this partitioning between the mental system and the physical object, between ideas and things, can be an obstacle to comprehension.
We first need to distinguish between money and its units. For example, while economics textbooks may routinely state that money serves as “a unit of account,” this is like saying that length serves as a unit of measurement. What they really mean is that monetary units, such as dollars, serve as units of account, which is not the same thing as money itself. The concept of an “ounce” does not have physical presence, but the thing it describes—the mass of an object—does. In the same way, the concept of a “dollar” may live in the world of Forms, but any monetary transaction does have a physical dimension, because it involves a transfer from one party to the other (even if that transfer is over a phone). You cannot pay someone with a unit.
So the question then becomes “What are these units measuring?”29 As discussed further in chapter 7, economists have usually answered this, when pressed, by saying that it measures some ill-defined quantity such as “utility” or “intrinsic value.” But another approach is to say that it measures—money. After all, when we say that electrons have a fixed electrical charge whose value is approximately 1.60217657 × 10–19 coulombs, we don’t necessarily try to parse “electrical charge” down to some finer description. In the same way, we can treat money as a fundamental quantity. Monetary value is a measure of money in currency units, where here we use “value” in its quantitative sense, as in a value provided by an instrument reading.
Money, it is true, is therefore not really a thing but is better described as a conserved, transferable stuff, or quantity, like electric charge. However, it is informative, as Marshall McLuhan noted, to think of money, or more accurately the money system, as a kind of social medium, a means of communication.30 And just as in physics it is sometimes easier to understand the concept of electric current in terms of electrons or light in terms of photons, so we can analyze currency in terms of the actual things exchanged in transactions—such as coins or notes or money transfers of any kind. This bottom-up perspective is in a sense dual to the top-down, systems-level perspective. When people treat money as if it were a kind of stuff they can accumulate, it isn’t because they are confused about the true nature of money.
Now an amount of virtual money being transferred electronically may not resemble the Newtonian, mechanistic picture of a thing—that is, a self-contained lump of matter—but then neither does matter when viewed from the perspective of modern physics. For example, according to quantum theory, subatomic entities such as electrons behave in some ways like a particle and in others like a wave. They exert forces on each other by the exchange of “virtual particles” that flash into existence from the ether before being annihilated almost immediately. The electromagnetic force, for example, is transmitted by massless virtual photons whose ghostly presence is nonetheless sufficient to hold atoms together. In quantum physics, the distinction between real and virtual becomes blurred, and so it is with money. Saying that money is not a thing is like saying that light is not a thing, which sounded sensible until physicists discovered they could count the photons in a beam of light (see box 9.2).
Quantum Coin
In this quantum spirit, we define money objects as transferable entities, created by a trusted (or simply obeyed) authority, that have the special property of a defined monetary value, specified by a number and a currency unit. They can be a coin or a mark on a ledger, a piece of paper or a piece of electronic information, $1.23 counted out by hand or 0.00784581 bitcoins sent from a computer. Money is a fundamental quantity (from the Latin quantum [as much as]). Its unit specifies the currency framework, wh
ich involves political and legal factors such as the range of acceptance and other rules, and its smallest quantum amount, such as a penny ($0.01) or a satoshi (0.00000001 bitcoin). The authority (the author of the piece) might be a sovereign, a government, a company, a designed system, or just the collective will of a network of users, but it has the ability, through law or coercion or general consent, to create the objects and define their worth in the specified units.
These money objects are the carriers of the money force, in the same way that photons are the carriers of the electromagnetic force. The first time a Sumerian accountant scratched some numbers specifying a payment into a clay tablet, he was creating a technology whose puzzling behavior—and potential power, for both creation and destruction—mirrored that of the dualistic forces that control the subatomic world. The trade of money objects for goods or labor in a market means that those things attain a numerical value (in the money’s units) as well—the price—by contagion, just as the atoms in iron spontaneously align in a magnetic field. In other words, market prices are ultimately attained from the use of money objects; this is how money spreads its numbers around. Market prices are therefore an emergent property of the system, in the sense that they emerge from the use of money objects. Rather than money being backed by something of monetary value, such as gold or labor, it is the other way round—market value comes from the use of money.