(urth) Urth Digest, Vol 57, Issue 31

[Adam Thornton]

On May 19, 2009, at 7:17 PM, brunians at brunians.org wrote:
> Tell us about the money, Dan'l.
>
> Where does money come from again?

Hey, I'll take a crack at this one.  The short answer is, "Money comes  
from trust."

Money initially comes about because direct barter is *really damn  
inconvenient*, and things like cows aren't particularly fungible and  
tend to lose a lot of their value when divided.

The first thing to try is that you trade a big, heavy, hairy, smelly  
cow for a few ounces of something that is portable, doesn't spoil, and  
is in short supply, like gold.  Which is great, as long as someone  
else wants gold about as bad as you wanted gold for your cow.

But then you have the problem that unscrupulous bastards will start  
adulterating the rare, precious commodity with something more  
plentiful, so your two ounces of gold turn out to be gold mixed with  
some amount of lead or something.

Now, it's tough to detect debased currency.  Ways to assay it turn out  
to be inconvenient, expensive, and/or processes that require specific,  
skilled knowledge.  And obviously you can't just trust that the thing  
someone just handed you is in fact the proper amount of the precious  
commodity he says it is, because there's a huge incentive for him to  
cheat.

So then states get into the act.  They declare that they have a  
monopoly on money, and they make coinage, and they do so using tools  
that are fairly expensive and inconvenient to duplicate, and they do  
things like mill the edges so it's pretty evident if a coin has been  
shaved.  And then they back up their monopoly on the monetary supply  
with the threat of awful things happening to you if you try to  
compete, either by starting your own competing currency or  
adulterating their currency.  What do the people using the currency  
get out of this?  Why, they get the state's assurance that the money  
has however much precious material in it, and that it is therefore  
guaranteed to be good for something.

Of course, governments being what they are, THOSE fuckers debase the  
currency and cut it with nickel or whatever.  But the funny thing is,  
it turns out that if everyone just keeps on acting as if the money  
*were* worth what it's supposed to be worth, things continue running  
OK.  This is crucial.

So, after a while, there becomes a need for a couple more refinements:  
1) it's really tough to carry around six thousand pounds of gold coin-- 
if you could even find it--if you want to build a new castle, or put  
together an army, or something.  So then you get state-issued  
banknotes, which you CAN redeem for some amount of precious-metal (or  
agreed-upon-it's-just-as-good-as-silver-no-really) coin.  You also get  
merchants agreeing to extend each other credit, which doesn't cut into  
the state currency monopoly, because the credit isn't actually  
converted to coin until it's redeemed.

And things go on in this way for a while, until governments realize,  
"well, crap, there's practically nothing of value in this coinage  
anyway...let's just go off the gold standard, shall we?"  And at that  
point, money is money *BECAUSE THE GOVERNMENT SAYS SO*, and  
secondarily (but still importantly) because the government has the  
implicit threat of violence to back it up if you say, "no, that's not  
really 1/200th of a cow, that's just a piece of paper with some green  
ink on it."

And even this works OK for a while, until so much money has been made  
up in notional trades and the extension of notional credit that when  
someone tries to call in a debt everyone stands around looking  
embarrassed and then eventually admits that there isn't any real value  
underpinning anything.  And of course then no one trusts anyone  
anymore, money isn't worth anything, and those people who have fertile  
land and weapons to defend it look pretty smart.

And then you have:

http://www.dilbert.com/2009-05-10/

And that, boys and girls, is how we got here today.

More questions?

Adam