In this issue:

We spend a lot of our lives working for money but not very much of it actually thinking about it. This issue of Something Interesting is a deep dive into what money is, why we use it and what makes some kinds of money better (or worse) than others.

Money is the collective memory of cooperation

Humans are a uniquely cooperative species. In the wild cooperation between animals outside of their own kin group is very rare and tenuous. But among humans it is second nature - our whole society is a complicated fabric of cooperation. You are almost certainly reading this essay on a device assembled by a global web of people you have never met, many of whom do not have a language in common. In some sense an economy is just an enormous Rube Goldberg machine of people trading favors with each other.

Trading favors is (relatively) easy when we both want something from each other of the same value at the same time - but that's not usually the case. We mostly want different things from each other at different times - so we usually practice delayed favors. I do something for you in the anticipation that you (or perhaps someone else) will at some point do a different but equally valuable favor for me.

There are two ways to exchange favors across time - one is debt, where I trust you to repay me tomorrow for favors that I do for you today. The other is money.

Money is anything that we are willing to trade for not because we want it but because we believe we can trade it again at some point for whatever it is we really want. Money can be a commodity that has other uses (like gold or salt) or it can be something that is used for exclusively for exchange value (like USD or Bitcoin).

Money is the medium that lets us to trade favors without knowing or trusting each other. We perform favors and store the favors we receive in return as money. Later we spend money to summon our owed favors to the time and place where we need them.

In short, money is a technology for transporting value across time and space.

Money is a technology, not a delusion

Once you start to think of money as a technology some of the mystery starts to fall away. You sometimes hear people describe money as a kind of collective delusion or as something arbitrary that was decreed by the state - but that is silly. Money is much older than governments. It emerges naturally in any market from cigarettes and ramen in prison to jellyfish among zoos and aquariums to Choco Pies in North Korea.

If you ask a group of children to start trading Halloween candy and come back an hour later you will find they are pricing their trades in Starbursts or Tootsie Rolls. Nobody needs taxes to invent money and not everything works as money equally well. Money is a practical tool for solving a real problem (moving value across time and space) and different kinds of money are objectively better or worse at it.

Water doesn’t make good money even though literally everyone needs it because it is too easy to get more water. Money has to be harder to produce than the value it represents, or people will just make or gather more of it instead of producing value.

Bananas don’t make very good money even though they are delicious and take a lot of effort to produce because they spoil (which is bad for transporting value through time) and they are heavy and large (which is expensive to transport through space). Good money should be easy to store and move to where and when you need it.

Precious gems don’t make good money even though they are very small and durable and hard to produce because each gem is unique. So precious gems do allow us to send value across time and space, but they don’t simplify the pricing problem at all. In fact it actually makes it harder - now you have to estimate the value of the gems on top of whatever else you were originally planning to trade.

Gold is a much better money than all three of those examples. It is scarcer than water so it can hold much more value by weight or volume. It doesn’t tarnish or spoil like bananas, so it can hold value over time. Unlike gems gold is divisible and perfectly interchangeable, so it can easily be scaled up or down to any size purchase.

Gold has its own limitations and is not a perfect money - but in a universe where you could choose between water, bananas, gemstones and gold, gold would be the objectively best choice and the one the market would eventually settle on. The fact that gold was widely used as money throughout history is neither a coincidence nor the command of kings.

The market chose to use gold because gold was the best tool for the job.

What makes the best money?

Good money is …

• Hard to produce (or counterfeit): Good money needs to be harder to produce than the value it represents, or people will spend their energy making money instead of earning it. It is easy to gather dirt so it would take a lot of dirt to hold meaningful value. It is much more difficult to gather gold, so a smaller amount of gold can represent a larger amount of value.

• Easy to store/secure: Money is meant to transport value over time - so good money needs to be able to keep that value safe from loss, spoilage and theft.

• Easy to transport: Money is meant to transport value over space - so good money needs to be able to travel physical distance cheaply.

• Easy to scale: Money is meant to bridge arbitrary transactions, so good money needs to be easy to split up or recombine into arbitrary amounts of value.

What is money not?

• Money is not the root of all evil. It is the root of all trustless cooperation.

• Money is not a side-effect of taxes. It is much older than taxes.

• Money is not a social construct. It is the best available tool for storing and delivering value.

• Money is not debt. Debt requires trust. Money does not.

• Money is not backed by anything. Money is the thing that backs.

What is the best money?

Gold is hard to produce and scales well to any price but is also expensive and difficult to store or spend. Dollars are easy to spend and store and easy to divide as needed - but they are also easy to for the government to produce more of (and it often does). Bitcoin is perfectly divisible, perfectly durable, has no physical presence so it is arbitrarily easy to send and store, and it is impossible to create (or counterfeit) more of them.

On the other hand gold is definitely the shiniest.