Money is a Mirage

I love money. Not in the sense of I want more of it (although I would not mind) but I love money because it is a most wonderful invention. Money is a mirage and a miracle. It is nothing and everything. It has no worth on its own but almost the whole world is measured in it. Let me tell you why money is so fascinating.

caffe latte
Caffé Latte (2009)
Canon EOS 20D + Canon EF 28-135mm IS@F8 1/400s ISO100
Made possible by money

Paper Money – The easy way

When I was in college I had an economics professor who one day explained money to us. He took a piece of paper and wrote a number and the word “money” on it. For good measure he signed the paper at the back. He loudly declared this piece of paper money. Fiat money to be precise. He spoke to one of the students telling her how much he liked her backpack and if she would be willing to sell it to him. He would pay with the newly created money. We all laughed and the student refused the generous offer.

Shiny Stuff – Money of the ancients

Humans used certain objects as a medium of exchange since forever. Those objects were often but not always valuable like gold, silver or gems. They were not valuable because of their usefulness. Who in Ancient Greece would really need gold to survive? They were valuable because they were rare and sought after due to their beautiful properties. And because of that people quickly saw that it was “valuable” to keep these objects around.

People were always willing to give something up to own gold, silver or gems. If you made pottery you could exchange it for silver pieces and those you could exchange for bread or wine. Or you could store surplus silver for later to buy a new tool or materials for a house. So these objects had not only value in themselves but also due to their usefulness as mediums of exchange or as a store of value.

Paper – Because Italian merchants were lazy

For long periods of time people traded with valuable objects and they standardized them into coins. But coins are heavy, impractical and vulnerable to theft. So people gave out paper with a promise to pay in coins later. This was practical because paper is easy to carry around, paper can be made out to a specific party and is so worthless to a thief and paper could be exchanged for coins at different places now called banks. These banks would honor each other’s papers and settle the actual coins later.

This was technically credit but those papers were used almost like money today. Up until after the Second World War this developed into a system were no one ever used gold or silver coins but papers backed with the gold and silver held safely by banks. In theory people could reclaim their shiny metals but it was rarely done. The paper was good enough as it was not only backed by the banks gold reserve but also by the governments promise to back the paper with actual valuables. This paper was almost like modern money.

Modern Money – Not even worth a Coffee

This system of gold-backed money broke down for various reasons. In fact for a long time the amount of paper circulating was never matched by the gold held in reserve anyway. So today people are no longer exchanging paper made promises for gold but just paper. And paper is pretty much worthless. I can get 500 sheets of shiny white paper for the price of two cups of coffee.

Today’s money is not backed by anything tangible. It is a piece of high-tech paper but nothing more. It is guaranteed by the government but what does that mean? It only means that the government allows you to pay your taxes with it and it mandates that we all have to accept it in exchange for goods, services and labor. But we could still use gold coins or different papers. This still happens in some countries like Venezuela or Zimbabwe.

Modern Money – The world revolves around it

But here comes the beauty of modern money. It has no tangible worth in gold or silver any more because it is backed by something better. Namely all the goods and services other people offer for it. And this requires a lot of trust. In contrast to gold no one wants to own money for itself but for the things it can buy.

And the more we trust each with these pieces of paper the more people are willing to work for it and in fact for you. To incur costs and labor so they can ultimately sell it for money later knowing that they themselves can acquire the goods they want. Money lubricates our society. It makes our modern and free society possible in the first place.

Weirdly enough money has a bad reputation. There a lot of people who think that one day we might not even need money but for now it is a necessary evil. I always wonder how these Utopians imagine a moneyless society? We either go back to hunter-gatherer bands or we have Star Trek style replicators that can just conjure up things out of thin air.

Modern Money – Three important roles

Currently resources are scarce. Obviously right? So when things or time are scarce we need to put a value to them so we can decide how to best use our resources. That is modern money’s first role: A way to measure value.

But then we all value things differently and would like to exchange them. Like I made these nice artisanal candles but I’d rather have a bacon sandwich because I am hungry. I value the sandwich more than my candles, the butcher values scented candles more than his bacon. Money allows us to make these comparisons and exchanges with ease. That is the second role for modern money: A medium of exchange.

Sometimes we produce more than we need and with money we can store this surplus in a very flexible way. And when we need more goods and services than we currently produce ourselves we can either draw down from our money store or even borrow it from others. That is the role of money. A store of value for the future.

Money – A mirage but also a miracle

I find it endlessly fascinating that money itself is just a piece of paper with a number on it (or today a few bits and bytes on a computer). It is worth nothing. But here is the miracle. We simply believe and trust that this number on a piece of paper can give us the goods and services we want. And because we all believe and trust in this paper it becomes very real. So in a sense the actual value of paper money is backed no longer by gold, silver or gems but by trust between humans who for the most part do not even know each other. I think this is wonderful and I hope this post makes you appreciate the miracle that is modern money.


Read more about money and education here:

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