In case you missed it, we are re-running Neil Haran's piece on the nature of money first published on decentralize.today in July 2019
Money is something that we all use every day, without giving it a second thought. Like many other basic technologies invented by our ancestors, it has become such a fixture that we take it for granted. Let's roll the clock back a bit, so that we can understand what this seemingly universal medium of exchange really is at its core.
A Short History of Money
Tens of thousands of years ago, there was no such thing as money. There were economies, and products, and labor—but money was conspicuously absent.
The small tribes of humans that were slowly spreading across the Earth 50,000 years ago had little use for a currency. Economic activity rarely extended beyond the immediate social group, and there was little need to store or exchange wealth in a hunter-gatherer society. "Wealth" to an ancient human was avoiding starvation. Life was lived in the moment, as it is with any other animal. People used bartering systems and gift economies to allocate what few resources they had.
In fact, bartering and gifting are ancient practices that probably predate even humankind itself. Chimpanzees are known to engage in simple transactional behaviors like these to help strengthen social ties, and early communities of humans probably functioned on similar principles. "I help you, so you help me." It was a simple policy, the core of which still lives on to this day.
Gifting has its limits, though. The most obvious of course is the inability to immediately welcome outsiders into an economy based so completely on personal trust. How would you trade with someone you've never met? A gift economy is also limited in scope and size. If there are too many people in your community, how do you keep track of who owes who? How will newcomers to the community understand who is a major contributor? More importantly, how do you store value over the long term?
These became new problems as pockets of humans transitioned to agrarian societies 10,000 years ago, or possibly earlier. The firsts of these kinds of people lived in the Fertile Crescent, and this development had a significant impact on their way of life—and the history of the world. Suddenly, people were no longer living in the moment, avoiding starvation on a day-to-day basis. Suddenly, planning for "the future" had a practical meaning.
Because of this huge leap that allowed the roots of civilization to take hold, the people of Mesopotamia were some of the firsts to invent technologies like permanent housing, writing, and money.
Plants and animals were bred to retain desirable traits through artificial selection. People who were able to stay put in one location produced goods more consistently. Domesticated animals—cattle in particular—became a common means of exchange. In fact, the English word "capital" has its origins as a reference to trading heads of cattle.
As human communities expanded from tribes, to villages, to cities, they needed to develop new forms of exchange. Accounting was born somewhere down the line, possibly before true writing itself. Tally sticks worked as ancient IOU's and were some of the first forms of credit.
While some civilizations, like the Incas, did manage to thrive without money, in other places around the world, primitive forms of money began to arise thousands of years ago. In ancient Mesopotamia, precious metals became commodities that could be stored or exchanged. In China, cowrie shells served a similar purpose more than 3000 years ago. Farming tools and knives were also a popular form of money, considering their universal utility, and so were the metals used to build them. Slowly they gave way to small metal coins, arising independently in South Asia and Ancient Greece.
For thousands of years, people traded bronze, silver, and gold coins. Bank notes came later, their origins also in ancient China. Paper was naturally easier to carry around than heavy coinage, so Asian and Middle Eastern merchants were some of the firsts to issue receipts that served as stores of value.
Eventually, as communications technology advanced, so did the way we store money. Nowadays, in industrialized countries, people tend to pay with credit cards or smart phone apps, instead of physical representations of value. Money has become a series of bits stored in some server that belongs to your bank. As we look towards the future, cryptocurrencies are starting to arise in the marketplace, with complex methods for minting and storing money.
So What Is Money, in a Universal Sense?
There are many definitions for "money," but we'll stick to the basics. Money has long been a practical technology that achieves one or more of these three critical tasks:
It Establishes a Standard Unit of Exchange
Bartering alone can be really impractical, especially when you're dealing with an economy that extends beyond your neighborhood. How do you know for sure that 23 chickens are worth exactly one cow—and if so, how many sheep can you get for that?
Being able to measure the "value" of something through some unit makes things instantly less complicated, even if the concept of a currency is an abstract illusion in many respects. Just as it's easier to measure distance in meters or yards, measuring value in US dollars or Japanese yen is convenient, if seemingly arbitrary on the surface.
It Allows Users to Store Value
Let's say that you're a farmer and you produced 100 barrels of avocados this season. This is way more than even the most ardent avocado fan could consume. Let's also say that you don't need anything in return at the moment, so bartering would be inefficient.
You also can't store the fruit indefinitely, or it will go bad. If you could somehow sell your goods to every guacamole lover for an IOU, then you could store this IOU as value that could be redeemed at a later time. Money basically serves as an IOU that society gives you for your service, and it doesn't expire as long as the community accepts it.
In this sense, money is debt.It's a debt that society owes you for your contributions.
It Provides a Way to Make Payments
Money allows people to conveniently repay their debts and make everyday purchases. One of its most important uses is in fact to pay taxes. In recent English history, tally sticks were a form of currency that was originally used precisely for this.
How is money able to provide these kinds of services? Well, it requires a seemingly miraculous alignment of interests. People have to cooperate for any of this to work. A given currency is only able to do these three things because many people simultaneously agree to accept it as a medium of exchange. Whether they accept it because some central government issues it, or they accept it because of its inherent usefulness, or they accept it because they believe in a given blockchain, a certain critical number of people must agree on its value.
It comes down to trust. For a currency to be even basically usable, a group of people must collectively trust the integrity of the system. In the same way that language—both spoken and written—is a technology that relies heavily on a core user base, a currency survives on the network effect. The moment that people no longer trust in their currency or no longer use it, it is essentially worthless.
Currency can arise naturally in this way, through commodities or other objects that a human ecosystem collectively agrees to use, but it can also be minted by a government. In fact, since ancient times, this has a been a popular way of creating currency, one that still lives on in most civilizations today.
There is an increasing challenge to this traditional model, however, as economies continue to evolve. Cryptocurrencies are in their infancy, but they have the potential to completely revolutionize the way payments are made, and they may very well represent the next chapter in the history of money as a whole.