“What is money?”

This question has led me on my journey down the #Bitcoin rabbit hole.

In this thread I’ll go through the lessons I’ve learned while exploring for the answer.

Money is the greatest story ever told by humans.

The evolution of money and the evolution of man go hand in hand.

Early humans found that by engaging in exchange they were able to facilitate better quality of life for themselves and their communities.

After all, at that point in history humans had to think about survival at all costs because they faced many problems from the natural world.

Here we come to an important conclusion:

Time is the scarcest resource in existence.

Time is irreproducible and the flow of time is the most objective experience that humans share.

Time is the bounding factor when it comes to any action that we take.

By choosing to spend your time acting in a certain way, you are necessarily denying to spend your time in any other way.

There is always a trade off when it comes to time.

As those early humans started to exchange amongst one another, their quality of life improved because they were able to slowly alleviate the scarcity of time.

By spreading ideas, communities became stronger as they combatted the immediate dangers their circumstances presented.

In other words, innovation is the key for humanity to fight back against the “tyrant of time scarcity.”

Innovation is the process of creating things based on an idea or ideas as to generate time savings.

A simple example of innovation would be an early human crafting a fishing rod to more effectively catch fish in less time.

With the time savings that innovation brings, we can choose to do a few things. We can:

- Do more in the same amount of time
- Do the same in less time
- Innovate further

Now that that person had to spend less time catching fish, he could focus his time and energy on other pursuits to aid in his survival.

Maybe catch more fish in the time he’d normally fish, catch the same amount in less time, or craft superior tools to fish even better.

The products of individuals’ innovations became the foundations of exchange.

Via voluntary exchange, people could make use of more innovations and generate even more time savings which led to a better quality of life for all.

However, the beginnings of exchange brought about some problems:

- What if the other person doesn’t want what I have to trade?
- How to we determine the right exchange ratio between things like say shoes and a house?

- What if I can’t trade right now but the goods I have are quickly perishable?

These problems and a multitude more were something that freely acting individuals were able to solve over a long period of time.

When engaging in voluntary exchange, individuals are acting in accordance with their subjective preferences whether they know it or not.

When trading the pair of shoes you crafted for someone’s apples, you show that you value those apples more than that pair of shoes.

In other words, this demonstration of subjective preferences is an exchange of value across space and time.

We communicate the subjective value we have when we exchange.

There is no such thing as intrinsic value. What is value without an individual present to ascribe value to that thing?

All value is subjective.

Every individual has a different perspective, so preferences/value will greatly differ amongst a population.

To clearly communicate to one another our subjective values, we need an objective measuring system that everyone can agree upon.

An analogous example is the units of measurement we use to communicate distances.

Engineers are able to effectively communicate because there is no disagreement to how long a foot or a meter is.

The rules are clearly defined for all.

How then can we create a universal measuring system for the exchange of value? This is what the free market solved over many years!

The technology used for moving value across space and time is called money.

Anything used to exchange value can be money, but shouldn’t certain things facilitate the movement of value across space and time better than others?

To most effectively move value across space and time a money must be:

- Divisible
- Durable
- Portable
- Recognizable

and probably most importantly

- Scarce

A money must be divisible so that in can be divided and recombined at any scale to facilitate transactions big and small.

A money must be durable so that it’s value persists across time. Apples don’t work too well as money because they have limited useable window of time.

A money must be portable so that it can be moved across space with ease.

A money must be recognizable. This means that you must be able to quickly and easily verify that the money is what the person giving it to you says it is. You want your money to be the real thing!

Finally, a money must be scarce.

As discussed earlier, time is the most scarce resource for any individual. The money that serves its purpose the best will be something that most closely reflects the absolute scarcity and irreproducibility of time.

Something that is scarce has attributes that make it difficult to replicate or produce.

A good term for these attributes is “unforgible costliness.”

What good would a money be that is very easy to produce?

Those who are able to easily produce the money would benefit at the expense of everyone else because they would have a direct incentive to make more of it since they can exchange it for anything.

(See Cantillon effect)

If you want to see historical examples of good money gone bad, research Yap Rai stones, slave beads in Africa, and Roman coin clipping among others.

To summarize and gloss over a lot of history, the world decided that gold was the best technology to move value across space and time. Thus, is became the prime money of the world.

Why?

Gold satisfied the characteristics of a good money.

It is fairly divisible and can be crafted into coins or bars.

It is extremely durable and can withstand destruction over very long time periods due to its elemental properties.

It was portable enough as coins and gold bars that could be moved around at necessary scales.

It is recognizable as a precious, shiny metal that had its own aura about it.

And above all, gold was the most scarce, naturally-occurring resource in the world.

It most closely reflected the utmost scarcity of time and therefore it best communicated subjective values.

Gold is quite difficult to mine from the earth.

Every unit of gold mined is a reflection of the time and energy necessary to produce it which is gold’s unforgible costliness.

Without this difficulty, gold would have less value because there would be a lack of skin in the game.

As the world became sufficiently inter-connected, it was clear that gold would best serve as money for a global society due to its superior monetary traits.

When the world operated on a gold standard in the late 1800s and early 1900s, society experienced declining prices and greater standards of living for all.

And this is true of any prolific era in history. When a society operated on a sound money standard, everyone benefited.

The opposite is true for a poor money standard.

Societies collapsed where the scarcity of money was comprised by nefarious actors.

So, what’s up with our money today?

Is gold money?

What happened to gold and how did US dollars come to be the prime tool for exchange?

That’s for another thread :)