The Evolution of Money

by David Orrell

  As discussed further in chapter 7, the overall price level can be controlled to an extent by the money’s issuer. At its simplest level, a Roman soldier’s base pay of a denarius per day, coupled with the requirement for suppliers to pay fixed taxes, would imply certain approximate price bounds for food, shelter, and so on, and these prices would in turn propagate through to any goods that were traded. Markets and payment systems that accept a certain currency unit therefore act as an extension or appendage of that currency; they are what allows it to work on the world and have to be fostered and managed for money to be of use. Tapping a credit card in a store to send an electronic transfer is not much use if the card reader is broken.

  While markets assign prices to all kinds of things, money objects are unique in that their value is designed to be objectively fixed and stable: like subatomic particles, they are characterized by exact, unchanging, numerical quantities. The values of other goods are indeterminate until the moment those goods are exchanged for money (just as, according to quantum mechanics, the position or momentum of a particle is fundamentally undetermined until it is measured, at which point it “chooses” a value).31 You might think that your house is worth $728,000, but you don’t know until you sell it, and if the buyer tried to flip it, she could find that its value had changed again. The main difference in this respect between a commodity-based currency and a virtual currency is that the former assigns, or tries to assign, a price to one commodity in the market (which, as seen in chapter 4, tends to create an interesting dynamic around that commodity), so other goods and services have to find their own level; with the latter, everything has to find its level. Another difference is that with a commodity-based currency, there is a direct link between numerical price and the amount of the particular commodity (2 ounces of gold is worth twice as much as 1 ounce), so the connection between money and weight is more tangible, while in a virtual currency the numbers just relate to the currency itself.

  As another example, if you have a $20 bill, then its most basic property is that it will have the number 20 on it today and tomorrow and the day after tomorrow. Its dollar value is something you can bank on. If, however, you exchange it for some groceries, then their price will change with time—they will no longer be worth exactly $20. The difference is that money is designed to be permanent and does not have a best-by date. Inflation can erode the purchasing power of the note, but it cannot change the number that is written on the note (although, as discussed in chapter 3, some currencies are designed to simulate this effect). The equality between numerical price and value is actively, if not always perfectly, enforced by the issuing authority—a dollar is a dollar; a shekel, a shekel.

  This special status makes money objects desirable in themselves. They live partly detached from the world of space and time. It is often said that money is just a medium of exchange and therefore needs to have no value itself. But by attaching numbers to money objects, in a kind of alchemy, we make them golden. If a society decides that cattle must be used for payments, then cows suddenly become more valuable—one cause of overgrazing.32 Conversely, gold has long been favored as money, in part because its qualities of stability (it doesn’t rust), fungibility (1 ounce can be substituted for another), and divisibility make it rather like number.

  The central concept of money—the irreducible nut of the matter—is therefore that it is a means to attach exact, timeless, Pythagorean numbers to the fuzzy and transient concept of real-world value. The point of doing this is to facilitate certain transactions (e.g., tax payments, exchanges, settling of scores, rewards, motivating people) by shifting them to the mathematical space, with its addition, subtraction, and compound interest. A property of such transactions is that when a money object changes hands, the total amount of money stays the same—one person gains, and the other loses. This is obvious when the money object is a coin, but cybercurrencies such as Bitcoin must be carefully designed to avoid double spending, where a person tries to use the same bitcoin more than once. An exception occurs when money is freshly produced. Banks currently have a special license to create new funds, so their loans do not obey this conservation rule. Counterfeiting, of course, must be discouraged, which is one reason the first coins were made from precious metal rather than ordinary pebbles.

  While such a definition—money objects are things with a fixed monetary value—may appear obvious to the point of truism, the objects thus described have some remarkable properties that feed into the economy as a whole. In particular, money objects have one foot in the physical world and one foot in the world of number. The dualistic, two-sided nature of money means that, as already discussed, it frequently shows paradoxical behavior and can seem both real and unreal at the same time (it is fitting that many early Roman coins featured the two-faced god Janus). In the early 2000s, the cheap availability of credit in the United States meant that even low-income people could afford their own homes. Some became rich by selling their houses at the top of the market, and for them the money had real, tangible effects. But after the credit crunch of 2007/2008, most of the new money disappeared into the ether, as if it had never existed.

  As one of the authors, Orrell, who has studied and taught quantum mechanics, argued in his previous book Truth or Beauty, much of our difficulty in understanding topics such as money relates to our failure to absorb, or dismiss as flaky, the equally paradoxical teachings of quantum physics.33 We remain rooted in our philosophical tradition of hard, yes/no reasoning, and the idea, as Aristotle wrote in Metaphysics, that “it is impossible for anyone to suppose that the same thing is and is not.” The dislike of duality can be traced to the Pythagoreans, who saw the number 2, or dyad, as representing the initial division of the universe, and a symbol of discord and dissent. However, this type of logic breaks down at the quantum level—as Niels Bohr argued in his theory of complementarity, neither the wave nor the particle description of matter is complete by itself; instead, together they represent two sides of the same phenomenon. Fuzzy logic, in which statements can be partly true and partly false at the same time, is now routinely used in areas such as computing science (not to mention our own thought processes). In the same way, money has a dual nature, with complementary aspects that seem to confound traditional logic. It is credit and debit, mind and matter, virtual and real, all at the same time.

  The Emergent Economy

  Because concepts such as value and authority are socially negotiated, it is not always clear-cut whether something should be considered a money object or not. For example, a check is an instruction to debit one account and credit another with a certain amount, but its value may be in the eye of the beholder. As one bank writes: “The reason we have a hold funds policy is that a cheque is not the same as cash—it is a promise to pay by one party to another party. If the first party doesn’t have sufficient funds in their account at another financial institution, or if the cheque is fraudulent, that other financial institution can refuse to pay the item and return it unpaid to us.”34 In this case, we would define the money object to be the amount that is actually transferred virtually through the banking system when the check is cashed. However, if the check is endorsed and is itself exchanged between people and accepted as payment, then it becomes a kind of quasi-money object in its own right, with the difference that it is backed less by the state than by the credit of the writer, with the spread between these reflected in a possible discount rate. As shown later, banknotes got started in a similar way, but they fully became money only when they were guaranteed by a central bank. Financial instruments such as stocks, bonds, and options sometimes look like money, because they are valued in currency units and are tradable, but they are better described as assets whose price is variable. A bond, for example, can be viewed as an instruction to make certain money payments in the future in return for an initial investment, but it isn’t money itself, and its market price at any time will depend on factors such as prevailing interest rates.

  Perhaps the best way to me
asure the “moneyness” of an object—its ability to hold money—is to ask how well its market price corresponds to its designated numerical value and how well equivalence is maintained. In general, this will depend on the authority of the issuer, which varies both geographically and with time. An example is the case in which the value of a coin equals its stamp value in the region where it is issued but elsewhere reflects its metal content, or the case in which a substandard coin trades for less than its face value. This price equivalence also depends on the existence of markets that will accept the object as payment. Private moneys, such as the medieval bills of exchange discussed in chapter 3, are limited not by region but to a circle of users who accept them in exchange. Air Miles are a kind of money backed by airlines, which accept them for flights, but you can’t use them to pay taxes. Fiat banknotes don’t usually get discounted for being substandard, but they are worthless if the state stops supporting the currency. (It is no coincidence that today the world’s reserve currency is backed by the world’s largest military.) Currencies based on credit sharing, discussed in chapter 8, rely less on a central authority than on the mutual trust of a network. Bitcoin transactions are kept honest by constant, automated network surveillance.

  Money could in principle emerge naturally without top-down design or intervention, but the evidence shows that it is better described as a planned social technology, and statements to the contrary are usually based on dogma rather than facts. Instead of money emerging from markets, it is historically more accurate to say that money-based commercial markets emerged from money, after some pump priming from the state. Governments in ancient Greece and Rome issued coins, used them to pay soldiers and other people, and demanded the coins back in the form of taxes; the development of sophisticated markets that fully exploited those coins came later. Money’s behavior depends on its design and its context and is shaped and controlled by a variety of forces, such as social customs, power structures, financial institutions, market regulations, physical and intellectual property rights, and so on, but its distinguishing if rarely mentioned feature is its connection to number (box 2.2).

  Box 2.2

  Number Versus Reality

  The mysterious and oft-paradoxical properties of money arise from its dual nature, and in particular the incompatibility between numbers and the real world:

  • Numbers are stable and unchanging—the number 3 was the same in ancient Greece as it is today—however, physical things change and decay. A house gets old, but the debt owed on it endures.

  • Numbers are linear and additive (2 + 2 = 4), but the world is often nonlinear—working twice as many shifts may not give twice the results, having twice as much money (as seen in chapter 7) does not give twice as much pleasure. Weights and measures, on the other hand, are linear, which explains the affinity, made explicit in commodity currencies, between money and weight.

  • Numbers can grow without limits, while natural processes tend to be subject to bounds. This point was illustrated in 1850 by the American lawyer John Whipple, who did the math and calculated that five English pennies, invested at 5 percent compound interest since 0 C.E., would have accumulated to 32 billion spheres of pure gold, each equal in size to the earth.*

  • You can’t own numbers or stop others from using them, but you can own things.

  • Numbers can be negative, as in debts, but you can’t have a negative number of objects.

  • Numbers are not intrinsically small or large—everything is relative—but can be arranged on a linear scale and ranked in order. That is not possible for most things in the real world (though we often try, for example, by measuring intelligence with IQ tests).

  • Numbers are universal and exact (even where they represent exact probabilities), while qualities such as perceived value depend on the person and the context.

  • Numbers can be calculated using equations and are amenable to mathematical analysis, unlike many things of importance in the real world (there is no equation for romance, though again, people have tried).

  • Numbers are hard and fixed, like the particle aspect of matter. Concepts or judgments such as worth or value are fuzzy, like the wave aspect of matter.

  • Number is a human invention, and so is money—it is not a simple extension of the exchange processes seen in nature.

  *John Whipple, The Importance of Stringent Usury Laws: An Answer to Jeremy Bentham (Boston: Wentworth, 1857).

  As we’ll see, money objects—and the links they forge between mental heads and physical tails—can take myriad forms, from weights of precious metal, to pointers to precious metals like warehouse warrants or gold standard banknotes, to account transfers stored in an electronic wallet; but money’s essence is most graphically displayed by the physical action of minting a coin, where the abstract number is literally stamped into the metal. The fact that number and real-world value have different and complementary properties—one is exact and enduring, the other fuzzy and changeable—makes the union complex, dynamic, anxiety inducing, inherently fragile, sometimes volatile, often rewarding, and always interesting. It comes presuffused in rich overtones of power, gender, and mind–body duality. Its structure resonates with the deepest properties of brain function, with profound consequences for human behavior. It is inherently political and reliant on a kind of faith, and as a result its workings are usually shrouded and obscured in layers of pomp, intrigue, duplicity, secrecy, deception, deliberate vagueness, and blandly recited misinformation. Like a glamorous and desirable character in a good story, money is alive with energy, contradictions, and a backstory of its own—which is why treating it as a passive placeholder, as in mainstream economics, is so dangerous. For example, the right to create and control money, which is currently mostly held by private banks, is one of the greatest powers of all—but as discussed further in chapter 6, just try to find the section on power in a standard economics textbook.

  Rather than defining money in terms of its roles as a means of exchange, a store of wealth, an accounting device, a signifier of debt, a measure of labor or utility, a symbol for something else, a memory substitute, a kind of social interaction, or a vector of human desire (even though it is all these things and more), or insisting that it can be made only from metal (bullionism) or through government edict (chartalism) or is not fundamentally different from other goods and is really nothing special (mainstream economics), it makes more sense to see money as a quantity in its own right whose roles emerge, deliberately or not, from its use in society. Money is useful for accounting, because it is based on number and has well-defined units. Its roles as store of value and means of exchange are conflated: it is a store of value because money objects are designed to be exchangeable for other things in the economy; it is exchangeable because it is seen as a store of value. We often think of value as being an inherent quality of an object—for example, the metal content of a gold bar—but it can also be socially assigned. With money, the value is assigned by the stamp (real or digital). The question of real-world value is highly subjective, but the numerical value of money is precisely defined, and this is both the central dichotomy at its heart and the delicate balancing act that keeps it aloft.

  To say that money is a highly charged subject would be an understatement. The only things to come close are sex and power, and, of course, the topics are related. In Sumeria, temples served as a storehouse for wheat, and one of the shekel’s original uses may have been for payment for sacred sexual intercourse with priestesses at the temple of the goddess Inanna as part of a fertility ritual.35 Coin money, when it was invented in Lydia, was as suited for anonymous sex as it was for war. According to Herodotus, “It is a fact that in Lydia, all daughters of the common people work as prostitutes; they accumulate their dowries while they work in this profession until they get married.”36 The accuracy of such accounts might be disputed, but money and sex have clearly been seeking each other out for millennia. The equally torrid relationship between money and power is explored in chapter
6.

  Quantifying Value

  The word “quantum” has been applied to all kinds of thing outside physics and is often misused to evoke a vague sense of spooky, nonmechanistic behavior.37 However, we think the use of the term, and more generally the comparison with non-Newtonian physics, is constructive here for the following reasons:

  • Money is seen as a fundamental quantity (quantum), a word that captures both the numerical aspect of money and its existence as a kind of stuff.

  • Money objects contain a fixed amount of monetary value, in the same way that an electron contains a fixed amount of charge. It is fitting that the first coins were made from electrum, named after the Greek word electron (for amber, a material that also holds static electricity).

  • Money objects bind the virtual to the real, and abstract number to the fuzzy idea of value, paralleling the particle–wave duality in quantum physics.

  • Just as a substance’s properties emerge from the quantum interactions of molecules, so prices emerge from the use of money objects.

  • Money serves as a means to quantify value, in the sense of reducing it to a mathematical quantity—but as in quantum measurement, the process is approximate.

  • Finally, economics is often accused of physics envy—so why not go all the way!

  By attaching numbers to our idea of value in order to quantify it, the money system binds together two very different things, and it is this fusion that gives rise to its complex behavior. Money objects are our contribution to the quantum universe; and as with quantum physics, the problems in interpretation seem to appear when we try to reduce a system to exact numbers. Money objects are unique in that they have a forced equivalence between number and value. For anything else, confusing the numbers with reality can be a huge mistake, in economics or in life.