Money is among humanity’s greatest inventions. While money may be a physical object, it is an idea, a great subtle and still changing idea. No one today knows the inventor or inventors. As the idea has changed over centuries it must have had many inventors.
When my physicist colleagues study an idea or theory, chewing on it until it is digestible, they pronounce it simple. Indeed, it is remarkable that when complex, subtle, deep, and broad ideas enter our minds and we feel that we really grasp them, they often appear simple and beautiful. Physicists refer to Einstein’s Theory of General Relativity in this way.
Economists study money, but they never say that money is simple. They know something about money, but students of money do not feel the grasp of the concept that would lead them to describe it as simple and beautiful. Indeed, it is the sign of an economic crackpot that he (naturally) believes that he understands money, the gold standard, 100% reserve banking or the like.
Every economics textbook will say that money is a store of value, a medium of exchange, and a unit of account.
Consider the stone money of the Yap islands. Yap is a collection of small islands in the Caroline group of the western Pacific. Photographs of these stones look like large “coins,” with doughnut holes. The quartzite or limestone is not found on the Yap atolls, and the islanders must travel, usually to Palau, to quarry the stones after negotiating or fighting with the locals.
Those stones are a store of value, and the Yap people agree among themselves as to the value of each stone. An interesting and difficult history increases the value of a stone. Indeed, a large stone floated from Palau on a raft towed behind a multi-man ocean-going canoe is worth more than a similar stone brought by a European in a large craft.
They are also a medium of exchange, but, as you might well imagine, the people don’t lug the big ones around often. When they do, they slide a large log through the hole and several or a dozen men lift and carry them. Rather than transferring the “coin” to complete a transaction, the Yap people keep track of which of them owns which of the “coins,” and the value of those coins. Thus there is a mental, public list of coins and their transactional history.
Those of you who are familiar with the bitcoin system will recognize this mental public distributed transactional history as the blockchain.
I confess that I do not know everything yet, so I don’t know just how these stones act as a unit of account. Apparently the Yapese use US dollars for many transactions. Economists who know what they are talking about agree that these stones are genuine money.
Money does not require a physical correlate or object, contrary to the views of gold bugs and gold standard aficionados. Money may have a physical presence, but that physical representation may not, itself, have any value. The piece of paper with ink that forms a US$ 100 bill is not, itself, worth $100. Indeed, the same piece of paper with the ink arranged differently may be worth $10 or $1000. This is what I mean by asserting that money is an idea. Its value exists only in human minds.
In modern advanced economies, governments issue money by fiat, as they say. A fiat currency. These days currency, the pieces of paper and coin, forms a fraction of the money that circulates in our economy. Most our money exists as bits and bytes in computer memories, and transactions involve a program or person directing that bytes in this account be reduced and bytes in that account increased by the same amount.
Governments that issue fiat currencies establish their value by requiring citizens and businesses to use that currency to pay tax bills. All of us must get the government’s currency to pay our taxes (or go to jail). We get that currency, in the first place, when the government buys something from us or hires us for a job and pays us with its currency. Naturally, once we have some currency, but really just computer data, we use it for our own purposes too.
Governments that issue fiat currencies can always meet any obligation or pay any bill or repay any debt in their own currencies. The supply is unlimited and does not exist someplace, say the basement of the Treasury Department in Washington, DC.
Everyone else, state and local governments, businesses, and residents must get the money they use from someplace. In what will be a topic for future essays, the nations of the Eurozone are analogous to US states because the Eurozone nations gave up their national currencies and use the Euro, which for them is a foreign currency that the European Central bank issues.
The ideas about money and fiat currencies that I’ve described here are in basic economic textbooks, and also are a part of Modern Monetary Theory. You can read about Modern Monetary Theory here.
Contributed by Bernard Leikind, PhD.
Bernard Leikind is a physicist, and an amateur student of economics, political economy, and history. He is a current affairs junkie. He lives in Tampa, Florida, with his wife Linnea.