Money
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"Money never made a man happy yet, nor will it. The more a man has, the more he wants.
Instead of filling a vacuum, it makes one."
- Benjamin Franklin.
What is money?
The Greek polymath, Aristotle, offered one of the earliest explanations for money. He surmised money came into existence at the point that people started to depend on one another for survival, keeping what they needed and saving the surplus, which others might find valuable. There needed to be a way to measure the surpluses, a way to quantitatively compare the values of different goods and services so that people could exchange them in a fair manner.
Aristotle defined four main characteristics that made something "good money" (1). First, durability - it had to survive the test of time during exposure to daily life and the elements, and would not fade or corrode over time. Second, portability - it had to be easily transportable from one place to another. Third, divisibility - it had to be easy to separate and re-combine such that breaking it would not affect its value, and all components of a similar weight and size would be equal in value. Fourth, intrinsic value - its value had to be derived from a material that held some kind of value in of itself. |
In Aristotle's time, gold was "good money" (1). |
The fourth point, intrinsic value, is debatable as to its exact meaning. Although Aristotle was probably thinking about materials of intrinsic value (such as precious metals), at a deeper level the intrinsic value of something is based on its scarcity. For example, air and water, being compulsory for life, have more intrinsic value than virtually anything else that comes to mind, but since both are so widely available, they lack scarcity and would not be good as money.
Using this definition, good money has three main functions (2). First, it must act as a medium of exchange that is widely accepted for myriad goods and services. Second, it must act as a unit of account by attaching a quantifiable value to those goods and services. Third, it must act as a store of value by retaining its purchasing power well into the future. If the chosen form of money does not fulfill all three of these functions, it is not good money.
So, good money must be durable, portable, divisible, and scarce so that it can function as a medium of exchange, a unit of account, and a store of value.
Comparing Money
Currently, there are three main forms of money - fiat money, commodity money, and cryptocurrency. Let's discuss each of them.
Fiat money consists of objects (usually paper) that lack intrinsic value, with the money deemed valuable by government decree (the term fiat means "let it be done," in the sense of a decree). Fiat money is centralized, issued by a single government body - for example, the US dollar is issued by the Federal Reserve, which itself is controlled by a small group of bankers. Fiat money is also private, in that all transactions are recorded in a computer database owned and operated by a bank. Since fiat money is centralized and private, it is easily controlled by a relatively small group of individuals. |
Fiat money - example, the US Dollar. |
Commodity money consists of objects with intrinsic value. It is usually based on precious metals such as gold and silver, but has also historically been based on products like salt, tea, and silk (3). A related form of monetary system is representative money, in which objects lacking in intrinsic value (paper again) are used to represent a commodity with value (such as gold) - an example is the gold standard, which most nations abandoned in the 20th century. Commodities are more difficult for governments to centralize and privatize, but they still can - under a gold standard, the government can devalue or confiscate everyone's gold (4). |
Commodity money - example, gold. |
Cryptocurrencies are digital assets in which ownership records are stored in a database acting as a public ledger, with strong cryptography used to control the creation of additional money, secure transaction records, and verify who owns what (5). Cryptocurrencies are decentralized, in that no single group or entity produces or owns the currency - for example, Bitcoin is a cryptocurrency that exists on a blockchain, a distributed ledger that exists across many different computer systems, in which the records are linked by cryptography. Bitcoin is also public, with all transactions displayed on the ledger. |
Cryptocurrencies - example, Bitcoin. |
As we can see, although each of these forms of money aim at the same purpose, they are quite different.
The Best Money
Now, let's compare whether fiat money, commodity money, or cryptocurrencies make the "best money" with respect to Aristotle's four characteristics, the three main functions of money, and the degree to which they can be centralized and privatized (6).
Fiat money, such as the US dollar, excels in only one of Aristotle's categories - the US dollar is highly portable, but only moderately durable (paper and coins wear down over time), moderately divisible (it's not always easy to find smaller or larger notes), and not at all scarce (the issuing government can print more paper at will). The US dollar functions well as a good medium of exhange and unit of account, but since it is produced by the Federal Reserve (and more importantly, the fractional reserve banking system, which allows banks to conjure money out of thin air), it can be inflated and is therefore not a great store of value (7). Moreover, the US dollar is very susceptible to centralization and privatization.
Commodity money, such as gold, also excels in only one category - gold is highly durable, but only moderately portable (it can be difficult to transport gold, especially internationally), moderately divisible (it's not always easy to break down a gold bar into smaller pieces), and moderately scarce (governments can open more mines and also control the supply). Gold does function well as a medium of exchange, unit of account, and store of value. However, although gold is more difficult for governments to centralize and privatize, there are still various methods by which this can be done.
A cryptocurrency, such as Bitcoin, excels in all four categories - Bitcoin is highly portable (a click of a button can move any quantity anywhere else on the planet), highly durable (existing in cyber-space, they do not fade with time), highly divisible (a click of a button can divide or re-combine any quantity), and scarce (the production is fixed to a certain number of coins - in the case of Bitcoin, 21 million coins, after which no more can be produced). Significantly, Bitcoin meets all three functions of money and is virtually impossible to centralize or privatize.
A comparison of the US dollar, gold, and Bitcoin (6).
Right now, these three forms of money are in a struggle for dominance . I used to believe gold would emerge victorious, and that cryptocurrencies, such as Bitcoin, were nothing but an entertaining diversion. Yet in time, I have come to think differently - it seems likely that cryptocurrencies have the edge as sound money.
Regardless of which one wins, it's prudent to consider that fiat, gold, and crypto are not of value themselves. They simply represent different ways for anyone who has met their essential needs to save the surplus, which may provide value for others in the future.
Means to an end, not ends in themselves.
Solace.
References
(1) Aristotle's Good Money. https://www.bullionvault.com/gold-news/money_aristotle_050120092.
(2) https://en.wikipedia.org/wiki/Money.
(3) https://en.wikipedia.org/wiki/.
(4) https://theconversation.com/how-the-us-government-seized-all-citizens-gold-in-1930s-138467.
(5) https://www.wanderingsolace.com/blockchain-february-2018.html.
(6) https://www.forallcrypto.com/bitcoin-versus-the-current-financial-system/.
(7) https://www.wanderingsolace.com/value-december-2017.html.
