<div class="bbWrapper">Copying from an email from Wednesday and worth a read for you all:<br />
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Written by Allison Reichel<br />
The Enigma of Modern Money<br />
Happy Wednesday everyone!<br />
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You might notice that the rest of this week’s newsletters are a little different.<br />
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I’m headed to Paris to speak at ETH-cc on “Crypto-nomics and the Potential for a New ‘Digital Gold’ Standard,” and as I’m preparing for my talk, I thought it would be helpful to make this week’s newsletters relevant, for both myself and for those unfamiliar with the foundations of money.<br />
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After this next week and a half, you can expect to go back to semi-normal content (but I’m an economist so is anything really normal?)<br />
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My goal is to focus on some underlying themes governing how money came to be and explore common misconceptions in terms of crypto and monetary regimes, working from the origins of money to the world we live in now.<br />
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Today, I want to focus on the origin of money - both in the literal sense and in terms of Karl Menger’s famous 1892 paper On the Origin of Money.<br />
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Money As A Phenomenon <br />
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Karl Menger called the evolution of money the “enigmatic phenomenon of money,” due to the uncoordinated nature of its existence. <br />
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But jargon aside, what does that even mean?<br />
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Money did not come to be through any rule. No one person was responsible for the creation or implementation of money.<br />
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The mere concept of money emerged from uncoordinated actions of individuals. <br />
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Exchange has been around since the dawn of time. Individuals wished to trade because specialization meant that they couldn’t be the sole producer of all of their needs, and so barter was born.<br />
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But specialization meant barter was tough, too. Individuals needed something more universal that they could exchange for a wide variety of goods and services.<br />
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And thus, barter was replaced by commodities. <br />
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Tangible items with a relatively universal value that could be exchanged for a variety of goods and services with more ease than individual goods being traded against each other.<br />
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For later discussions of the role of cryptocurrency, what’s important to remember here is that money emerged out of people. Not one person or one entity, but society as a whole. <br />
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Government simply built regulation around this phenomenon - it did not create it. Government simply formalized it.<br />
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So if money emerged from people, then what economic rules govern it?<br />
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The “Rules” of Money<br />
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There’s no formal rule book for the creation of money. Money did not come from law, it came from uncoordinated actors<br />
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Nonetheless, Menger and economists today have a set of guiding parameters by which the usefulness of a particular commodity or money can be assessed. <br />
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While Menger commented directly on commodities, these parameters are often attributed to money, and can be broken down into three categories:<br />
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The transactional ability of money,<br />
The transportability of money, and<br />
The time constraints of money.<br />
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The transactional ability of money essentially measures the market forces that impact the commodity. A money with high transactional ability has governance in place that makes it easily accessible, but still valuable for the consumer.<br />
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The market forces that impact transactability include demand, supply, purchasing power, divisibility, regulatory constraints, and the size of the market.<br />
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The transportability of money assesses the ability of money to move through the economy both physically and with respect to regulation posed by the government. <br />
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Transportability can be assessed through looking at money’s divisibility, cost of transportation and storage, development of transportation, the organization of markets, and restrictions or regulations affecting trade. <br />
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And lastly, the time constraints of money measure the longevity of money, and the ability of individuals to trust that their money <br />
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This requires need-permanence (knowing money today will be wanted tomorrow), physical durability, and assessing the cost of storage, the rate of interest (or depreciation), the cyclical nature of the market, the measurement of time preferences and any political or social restrictions.<br />
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In addition, over time these assessment parameters have been broken down and grouped together into what are known as the seven characteristics of money: durability, portability, divisibility, uniformity, limited supply, and acceptability.<br />
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Money Today<br />
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It’s clear to see how the USD is governed by each of these principles. As the global reserve currency it satisfies the requirements of demand, and with the Federal Reserve and federal government’s ability to generate it, maintains its supply.<br />
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Dollars are durable to a reasonable degree and can be used many times before replacement, they are easily portable, can be divided into smaller units, uniform in value within the same time horizon, “limited” in supply by the government, and are accepted in the United States as legal tender, and easily convertible at foreign exchanges. <br />
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Simply put, money today is centralized.<br />
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But all money originally came to be by uncoordinated efforts. <br />
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Interestingly, given this relatively commonly accepted economic origin, it’s easy to see how cryptocurrency could evolve into something more representative of money.<br />
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So far, this sounds simple. But on just why the economic man would be willing to accept such a standard of money, Menger probes deeper:<br />
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“But that every economic unit in a nation should be ready to exchange his goods for little metal disks apparently useless as such, or for documents representing the latter, is a procedure so opposed to the ordinary course of things, that we cannot well wonder if even a distinguished thinker like Savigny finds it downright ‘mysterious.’”<br />
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The exchange of goods is almost a natural instinct. <br />
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Putting trust in some other medium of exchange that holds no value on its own is the opposite of a natural instinct. <br />
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Yet we live in a world governed by money and paper currencies that hold value only because we give said papers and currencies value. <br />
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Contrary to what it may seem, the origin of money is social, it is not made or born of any state-institution.<br />
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There is value in our currencies because we trust in each other, not because we trust in some government or institution.<br />
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We trust that our money has value because we trust that the farmer who distributes his crop to the grocery store will continue to produce our food more efficiently than we could ourselves, and we trust that the barber will continue to cut our hair better than we could, and that the money we use today will be accepted by all of these moving individuals, and allow us to seamlessly facilitate exchange. <br />
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The misconception is that our money has value because the government says so or because we trust in the government. Money emerged because of society, and because we trust each<br />
other, so it has value.<br />
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Where the government does have an impact on our money is in terms of regulatory constraints and monetary intervention. <br />
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Regulation that facilitates exchange in the modern day includes governments deeming a currency a legal tender, and centralizing the production of physical dollars. <br />
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This allows for us to trust that our dollars are real and that they will be widely accepted, so that we can trust each other in producing goods and services.<br />
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We don’t trust that our government gives our currency value, we trust that it doesn't take value from it.<br />
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When the government begins to show a pattern of devaluation, it is natural for society to look elsewhere. <br />
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As Menger said:<br />
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“... Still we are confronted by this phenomenon, still we have to explain why it is that the economic man is ready to accept a certain kind of commodity, even if he does not need it, or if his need of it is already supplied…”<br />
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Interestingly, we are facing those very same issues today. <br />
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The difference is that the answer to why the economic man is ready to accept a certain kind of commodity or currency if one is already supplied is because the one that is supplied is proving to have vast inefficiencies.<br />
Happy Wednesday!<br />
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– Allison Reichel</div>
