A common form of money was cowries— highly durable shells that have found use as a currency in many parts of the world—but a variety of credit instruments, such as knotted strings or notched pieces of bamboo, were also used. The first metallic coins to appear in China were imitations in bronze and copper of cowrie shells, and the Chinese character for money is said to be based on the shape of a cowrie shell. Many of the examples used by Smith and later by Jevons were based on then-current ideas about tribal societies such as the Native Americans of North America.
But when anthropologists actually investigated those cultures, they found that while barter certainly took place, it was a somewhat specialized form of transaction, usually involving parties who were borderline hostile and had little trust of each other. Barter is also common in places where people are used to using money but are short of cash, such as jails.
More on this later. New inventions often result from a collision between existing technologies and cultural practices. The personal computer arose from the union of West Coast, hippie-ish, electronic hobbyists and tinkerers—who came up with the radical ideas—with the mostly East Coast, mainstream computer industry—which provided the applications and organization.
They were made by placing a blank round of metal on top of a die and hammering it down with a punch. According to myth, King Midas—he who was cursed to turn whatever he touched, including his own daughter, into gold—was instructed by Dionysius to bathe in the river Pactolus to rid himself of the power. The gold flowed into the river bank, which was said to be the source of the naturally occurring electrum.
Actual coins had a lower gold content and were probably from a man-made version of the alloy. Lydian merchants dealt in a variety of commodities such as grains, oil, beer, as well as in goods such as ceramics and cosmetics, and they also had the first known brothels and gambling houses. It is not known how much coins were used for external trade, but it is clear that the idea of coinage quickly spread, first to the Greek cities of coastal Asia Minor, and from there to the mainland and surrounding islands.
The need to exchange between these coins, as well as make deposits and loans, meant that basic money-changing and banking services grew alongside their use. As Jevons and colleagues pointed out, these new coins combined the advantages of commodity money with those of tokens. The stamp was also a reassurance that the coins would be accepted as currency within a certain region.
Coins therefore always traded there for a value that was more than the cost of their content, since if this were not the case they would have been melted down. There was a constant tension between these two aspects of coin money, with the worth of a coin tending toward its stamp value within a city and toward its lower metal value when traded to foreigners. Coins served as a device for payment but also as a tool to both motivate the troops and control the general public.
Long before gold and silver were being used as money, they were being used as jewelry and hoarded as treasure; and one of the positive spin-offs from military campaigns was that they usually involved plunder. What easier way to pay soldiers, and share the profits, than by giving each a small portion of the loot?
Also, soldiers and mercenaries needed money that could be transported easily and used in other countries. We were reminded of this in when the International Monetary Fund estimated that the former Libyan dictator Muammar Gaddafi had stockpiled about tons of gold. If you look back, gold is the ultimate means of payment, the ultimate form of exchange in crisis. Coins were ideal for use in this type of transaction, because they had a well-defined value that was enforced, guaranteed, and, of course, accepted by the state.
Mints were located in temples, which were the traditional storehouses for captured wealth. The coins were distributed to soldiers and their suppliers, but also to the public at large through payments for service or the occasional handout.
Because taxes and fees were paid by coin, people had to get their hands on money. This made them dependent on the state and motivated them to help provision the troops. Coinage was therefore spread around the area through war, conquest, and the distribution of the proceeds.
When in b. During his conquest of the Persian Empire, salaries for his army of more than , soldiers amounted to about half a ton of silver per day. These had an image of the supreme god Zeus on the back and Hercules on the front the image of a man who became a god after performing twelve superhuman tasks must have appealed to Alexander. Alexander would go on to invade the Babylonian Empire in Mesopotamia. He wiped out the existing credit system and insisted that taxes be paid in his own coins.
Rather than emerging naturally from barter, as mainstream economists like to imagine, the money system was imposed at the sharp end of a sword. However, even if its main function was for paying the army and collecting taxes, it certainly had a revolutionary effect on the structure of society. Money created its own markets and institutions, such as currency changers and banks, as well as its own demand.
It promoted new kinds of social ties and connections by making it easier for people from different social circles or regions to carry out transactions. Its use turned computation into an essential skill and changed the way people thought and interacted. And it was a wonderful way of coordinating and controlling activity, because suddenly the rules were clear: everyone was on the same page. And these are the foundations upon which humanity still subsists today.
Box 1. The coin sported an image of the goddess Athena on one side and an owl the symbol of the wise Athenian people on the other. The silver for the coin was extracted from mines such as the ones in Laurium, whose pits, which were up to feet deep, are estimated to have employed or rather, not employed some 20, slaves.
Each coin contained around 15 to 20 grams of silver, depending on the mint, and would have paid about two weeks of unskilled labor. Versions were in wide circulation from to 25 b. Greek silver tetradrachm of Athens Attica , — b. Obverse shows the helmeted head of Athena; reverse side shows an owl with olive-sprig and moon crescent.
From H. Cardiff: University of Wales Press, , He founded some twenty cities in his own name; one of them, Alexandria in Egypt, became the major repository of Greek knowledge, including the teachings of his tutor Aristotle.
His coins continued to be minted for another years, but were eventually replaced by those belonging to another, even larger empire, that of the Romans. The Roman monetary system ran on similar principles to those of the Greeks, only on a more industrial scale.
In the second century b. One side would typically be adorned by the visage of the reigning emperor, while the other would feature a propagandist image, such as that of Romulus and Remus, the legendary founders of Rome. Coins were, of course, less useful for very large transactions, such as the purchase of property. In a letter, the politician Cicero wrote that he bought a house for 3.
Perhaps you will ask whether I can raise these three millions without difficulty. Well, nearly all my capital is invested in land, but I have some money out at interest and I can borrow without any trouble. The center for financial dealing was the Forum. Moneylenders, who took deposits, arranged loans, and changed money, tended to congregate around a vaulted passageway known as the Exchange; the names of debtors who defaulted on their loans were inscribed on a column called the Columna Maenia.
The Romans therefore had access to a range of financial services, including a primitive credit-rating system. This was accomplished through private companies known as publicani, which were responsible for tax collection in the provinces.
To send money from Rome to some outpost in Spain or North Africa, you could deposit some silver or a nomina in the Rome branch, and some of the taxes would be made available for pickup at the other end. Hundreds of millions of coins were struck, at a pace not matched until modern times; in the mid-second century c.
As discussed in chapter 3, people were still figuring debts and accounts in terms of Roman money centuries after the coins themselves were history. The fall of the Roman Empire has been blamed on many factors, but the economy was certainly one of them. In the third century, the lack of new foreign conquests meant the supply of precious metals decreased. Since Rome produced very little itself, money was continuously draining away to foreign lands. The process accelerated as Romans consumed increasing quantities of exotic goods from India and China.
During a spell of just one year — c. The course of this inflation can be traced in the silver content of the denarius, the most common Roman coin, which was the equivalent of the Greek drachma. The name lives on as the word for money in a number of languages, including Italian denaro , Spanish dinero , and Portuguese dinheiro , and as the dinar currency in several mostly Islamic countries.
When the small coin, with a diameter of about 2 centimeters, was first minted around b. The silver content slowly reduced to about 50 percent by the middle of the third century c. In its final stages, around c. Just as the straight lines of Roman roads still mark many countries in Europe, so the straight lines set by their legal codes continue to inform our understanding of things like property rights. The Romans had enormous respect for property, especially land and slaves which were the two most economically important kinds , and much of their legal system was devoted to defining and protecting ownership.
Economists have long emphasized the economic role of free markets, but market economies as we know them today could not exist without elaborate systems of property rights, which are legal inventions. A quirk of the Roman code—which has long caused confusion for struggling law students around the world—is that property is defined as a relationship between a person and a thing, which gives the person absolute power over the thing. A plausible answer to this conundrum, according to sociologist Orlando Patterson, is that Roman property law is based on the ownership of slaves.
Its great attraction, according to historian C. Hard Money To summarize the story so far: credit systems such as that of ancient Mesopotamia far predated the use of coins. When coin money did emerge, it was not a natural and spontaneous process, as recited in mainstream economics, but was instead the result of government policy. The Greek and Roman Empires were both built on a military—financial complex that obtained bullion and slaves from conquered lands, paid soldiers using the minted coins, and collected taxes in said coins.
Money was therefore a tool to transfer resources from the general population to the well-armed state. Once established, money created its own dynamic, as the use of money created a need for money. Its role was enforced not just through military conquest, but also by laws. The idea of value is inherently fuzzy and hard to quantify, but legal systems such as that of the Romans required clarity, straight boundaries, and exact calculations.
Everything had to be convertible into money. The standard story from Economics therefore has it the wrong way round. Coin money did not supersede barter; rather it was predated by state-backed systems of credit. This changes the way we see money. One reason is that in order for economics to present itself as an objective discipline, it must cast the modern economy as being the logical endpoint of a historical process in which alternative types of exchange or interaction are seen as just imperfect approximations of the real thing.
If money has emerged naturally from commerce rather than been imposed by government, then economics can be seen as a kind of natural science, divorced from its social and political context. Exchange therefore has to be immediate, in the form of goods or some form of money. An IOU would be right out of the question, even if it were wrapped in an envelope made of clay and stamped with a seal. Economics can therefore ignore the complex web of human relationships in which the economy is embedded.
What counts is the properties of objects at the time when they are used as money, not when they are offstage. Kocherlakota of the Federal Reserve Bank of Minneapolis. Obviously money could therefore never lead to irrational responses or have a destabilizing effect on the economy, because it is nothing more than a memory crutch, a convenient reminder system.
This idea of money as something that is inert, sterile, and boring is consistent with the mainstream economics view of the economy as a stable, self-regulating, logical machine in which money plays no special role, other than as a metric for economic activity. The central, founding myth about the origins of money is one of the reasons why economists still, despite the countless number of books written on the subject, seem to be in denial about its true nature.
And it shows that, far from representing the perfection of a logical process, our current version of money is only one of the possibilities. In chapter 3, we will discuss the emergence of private virtual currencies that used strings of information instead of precious metal to convey value—in the Middle Ages.
Before that, we first take a brief philosophical diversion, as we ask what magical property it is that makes money, money. And with death as his greatest source of anxiety. Some people will argue that the only real money is gold; others, that all money is a collective illusion with no reality of its own.
Some believe that the production of money is the prerogative of government; others, that we need government to get out of the way of private currencies. Money is the root of all evil, or George Bernard Shaw lack of money is the root of all evil. But everyone will agree that money holds a magnetic appeal.
In this chapter, we adopt an approach inspired by modern, non-Newtonian physics to investigate the basic properties of money and show how such an apparently simple thing can evoke such strong and varied responses, while remaining in many respects our central point of reference: our true north. This role as an economic weigh scale is reflected by the association between units of money and units of weight. Libra also appears in Italian as the lira. In the same way that we can translate between imperial pounds and metric kilograms without any loss of accuracy, we can translate between units of currency by using an accepted exchange rate—so why have more than one?
As we will see, keeping two currencies on the go at the same time—such as silver and gold under a bimetallist regime—adds flexibility to the money supply but can be confusing and unstable, because market prices tend to shift for one metal relative to the other, raising the question of which is the proper unit of account.
Furthermore, the power of a currency depends on its range of acceptance. The greater the number of people who recognize a single currency, the more useful it becomes for trade. Finally, governments prefer to have monopoly power over currencies.
In b. While this did accomplish the aim of providing more money for circulation, it also led to some unwelcome competition. A modern example of this trend was the establishment of the euro, which is the monetary equivalent of the metric system. At the same time, though, the adoption of a single currency exacerbated the differences between its member states. Critics described it as a top-down project imposed by bureaucrats who were detached from economic and social realities.
In and then again in most likely not for the last time is the consensus at the time of writing , this tension came to a head when Greece, unable to pay its debt without massive aid from its neighbors, came perilously close to exiting the common currency. The story of the euro is just one example of how money is driven by two conflicting impulses. On the one hand, it wants to unify messy reality; but on the other, it seems that it can achieve this only by separating itself from the real world.
To understand the sources and nature of this conflict, we need to go back once again to the ancient Greeks, particularly the schools of philosophy that took root at the same time that coins were invented. Unity The first Greek city to produce its own coins in the sixth century b. However, Miletus is most renowned in history for its minting of not coins but great minds. It would be no exaggeration to view the city as the birthplace of Greek philosophy. Just as its money provided a way to unify the world of material transactions, Milesian philosophy provided a way to unify the universe.
He is supposed to have predicted an eclipse of the sun in b. And he also proposed the original and often copied theory of everything. Today, many physicists think that everything is made from infinitesimally small strings vibrating in a ten-dimensional space. According to Thales, everything was made of water. The earth, which was made of one form of water, floated on an infinite ocean.
Earthquakes were caused when the earth sloshed around in this pool. But other Milesian thinkers soon chipped in with their own versions. His student Anaximenes, in turn, argued that there was no need to invent some new, invisible substance. Everything in the universe was made of air. After all, when water is heated it evaporates, which seemed proof that it turned into air; and when air is cooled, water condenses out of it.
The idea, known today as material monism, that matter was made of one primordial substance was later picked up by Heraclitus who thought it was fire and Xenophanes earth. Eventually the Greeks settled on a kind of compromise, championed by Aristotle, which was that matter was made up of the four elements of earth, water, air, and fire, with the fifth element, the ether, being reserved for the heavens. The idea that all things—including land, clean water, fresh air, and energy—are measured by money, though, never went away.
According to his biographer Iamblichus, as a young man Pythagoras visited Miletus, where he met with Thales who was by then an old man and Anaximander. If you fret a string halfway up, then it produces a note that is an octave higher. Fretting two-thirds of the way up produces a musical fifth; threequarters of the way up a fourth; and so on.
This discovery led Pythagoras to develop his own theory of everything— based this time not on a specific material, such as water or air, but on the abstract concept of number. Music, after all, was considered the most subtle and mysterious of art forms, so if it could be reduced to number, then—so it seemed—could anything else. According to the Pythagorean version of the big bang theory, the universe began in a state of unity, which then divided into two opposite components, the Limited peiron and the Unlimited apeiron.
These mixed together to form numbers, which made up the structure of the cosmos. The Pythagorean enthusiasm for number was undoubtedly influenced by the development of money. His followers believed that Pythagoras was a demigod descended from the god Apollo, but he was also the son of a gem engraver, and according to classicist W.
The Pythagorean, number-based theory of everything was powerful because it promised a way to understand and control the world. The use of mathematics, which it championed, advanced hand in hand with the use of money, since both are ways of thinking about the world in terms of number and computation.
The Pythagoreans may not have been the first economists, but they certainly helped to prepare the ground. And their belief in the mystical power of number is reflected today when we obsess over figures such as gross domestic product GDP. Mind Versus Body As shown in box 2. They also had a preferred side that defined a kind of aesthetic; for example, limited was better than unlimited, linearity was better than nonlinearity, stability was better than change, and symmetry was preferable to asymmetry the most perfect and beautiful shape was the sphere.
The number 1 stood for the initial, unified state of the universe. Two represented the polarization of unity into duality and was associated with mutability and the feminine. Three signified all things that have a beginning, a middle, and an end.
Four represented completion, as in the four seasons that make up a year. The greatest and most perfect of all numbers was 10, the sum of the first four numbers, which symbolized the universe. In line with their belief that 10 was a very important number, the Pythagoreans also produced a list of ten opposites that represented the organizing principles of the universe.
These were: Limited Odd One Right Male At rest Straight Light Square Good Unlimited Even Plurality Left Female In motion Crooked Darkness Oblong Evil The list is somewhat similar to the Chinese yin—yang system of opposites, with the left column yang-like and right column yin-like; but rather than seeing these as part of a whole, the Pythagoreans explicitly associated the left side with good and the right side with evil. Pythagorean thought has been highly influential for generations of philosophers and scientists, from Aristotle to Newton to modern physicists, so it is not surprising that its legacy is also apparent in mainstream economics—with its emphasis on things like scarcity Limited , stability At rest , linearity Straight , symmetry Square , and rationality the Light of reason.
For example, there is only one way to draw a straight line between two points, and it is easily described by a mathematical equation. The former was associated in Greek culture with the male principle, and the latter with the female principle. Plato took this split to its logical conclusion with his theory of forms.
According to Plato, any real-world object, say a chair, is an imperfect version of a form, in this case the Chair form, which exists in some higher plane of reality. Such forms can be known only through the intellect, because our poor plodding bodies are seated in the real world—on chairs, not Chairs. Forms are static and unchanging, while real things move and decay. Mathematical equations live in the world of forms—as does the virtual aspect of money, which obeys mathematical rules and exists outside time and space.
Perhaps unsurprisingly, given the time and place of its emergence, money is a lot like Greek philosophy: it begins with the idea of unifying the world, like the euro, but this leads to a kind of schism between ideas and reality, because the only way it can achieve unification is by imposing abstract rules.
The production of coins by stamping a metal blank can be seen as the physical manifestation of this conflict. It is the Greek philosophical divide, in your pocket. Money is frequently described as a symbol, but it is more accurate to say that money objects such as coins incorporate a specific type of symbol. The stamp on a coin typically consists of two parts that merge the ideas of power and number. However, coins in Lydia were originally stamped on only one side, and for metaphorical convenience we can associate the stamp with heads and the physical matter with tails.
In the case of a coin, the link appears more direct because the metal has a physical worth that is always a positive amount. The U. More serious forms of physical money, such as weighted gold, grant the holder a kind of independent, anonymous power. As a physical object, money can also be damaged, lost, stolen, hoarded, and liked or not for its aesthetic properties, and the material from which it is made can become plentiful or scarce.
Above all, it can be valued. In contrast, the stamp is a symbol of abstract debt, which represents not real wealth but a contract between two parties, the creditor and the debtor. Numbers such as prices or net worth are additive, can be compared on a numerical scale, and obey unyielding mathematical laws; for example, compound interest means that abstract debts can grow without bounds, while real objects tend not to. Along with conquest by more conventional means, this particular feature of debt has historically been a major cause of people falling into slavery or peonage.
Most state currencies today are fiat currencies that represent government debt the word is from the book of Genesis: fiat lux, [let there be light] ; cybercurrencies exist only in electronic form, but even they retain a link to physical worth in two senses. First, any kind of money object is a valuable thing to be physically possessed—even if only in electronic form.
Numbers do not become scarce, but money objects can, because there are rules surrounding their production. Second, even virtual currencies retain a link to physical worth through the markets they create. A dollar is no longer officially redeemable for a set quantity of gold, but the use of dollars has led to an institution called the London Gold Fixing, wherein the current price is set literally fixed, as it turned out, by corrupt bankers in dollars.
Anyone with the right skills can invent a new cybercurrency, but it has no worth until markets emerge that make it tradable for other things or a significant number of people believe it will happen. In ancient Mesopotamia, a payment in shekels was registered only as a credit for one party and a debit for the other, but it represented a weight of virtual silver. The virtual and the real are bound together by money. An exception of sorts to this need for a physical connection is the currencies used to buy imaginary goods in online games: a pretend sword to kill a pretend dragon.
Yet none of them has a physical manifestation. Value is an inherently fuzzy concept that, according to the Indian philosopher K. With something like fashionable clothes, it might be impossible to haggle over price, but you can wait a few weeks and maybe see the same item in the clearance rack.
Gold is considered by many to be the ultimate store of wealth, but its value in dollars is highly unstable, as we will show in chapter 7. It is impossible to put an exact price on qualities such as natural beauty, but with a coin we know exactly what it is worth because it has a number on it. The split between exactness and fuzziness mirrors the division of the human brain into two hemispheres.
According to psychologist Roger Sperry, who pioneered this field of research in the s, the left side of the brain which controls the right side of the body; recall the Pythagorean concept of duality from box 2. Money shapes our behavior in many ways, but the most obvious is that it encourages us to think analytically. The historical shift toward leftbrained attributes such as numeracy and literacy in Western society coincided with the expanding use of money. It is hard to imagine a more potent technology for mental programming than money, with its constant referral to abstract number.
Money may encourage analytical, computational thinking, but as discussed in more detail later, it also provokes strong emotional responses, leading to conflicted behavior. Like food provides motivation for dogs, money provides it for people. The affiliation between money and number also means that the use of money prioritizes things that can be accurately measured in terms of money, such as GDP. The concept of net worth as a measure of wealth is not about how much stuff a person owns but about a number and a rank: what that stuff can be exchanged for, in dollars or some other unit, and how it compares in magnitude with the wealth of other people.
And when markets assign prices that are essentially arbitrary, as we will discuss later, to things such as precious resources or pollution, we act as if those numbers are real and meaningful. Like a weighted coin, money contains an inbuilt bias. The concept of money, like the Chinese yin—yang symbol, therefore holds together two contrasting aspects—virtual number and concrete reality, quantity and quality—in a single package, as a marriage of opposites.
The two poles can never be separated, any more than the north and south ends of a magnet monopoles have never been observed in nature or the two sides of a coin. When we consider the value of a personal possession, say a treasured heirloom, and its price, we have to hold two fundamentally 42 THE MONEY MAGNET incompatible ideas in our mind at the same time; the result is a cognitive dissonance that we have learned to mostly ignore. When it comes to seeing and interpreting the world, number is our dominant eye.
The inherent tension between these poles, which never reaches equilibrium, may explain why money has remained so mysterious and protean, constantly shape-shifting and taking on new forms and appearances as the balance between its two sides realigns and adjusts. What, in other words, is money? The Money Thing Throughout history, answers to these questions have tended to fall into one of three camps.
So money should either consist of scarce, precious metal or at least be backed by it. Fiat money of the sort cranked out by the U. Federal Reserve and other central banks is a dangerous kind of play money that is destined to eventually blow up. To bullionists, the cuneiform system of Mesopotamia was only a form of proto-money. The second camp is chartalism from the Latin charta [record] , which holds that only the stamp is real.
Independent schemes such as Bitcoin need not apply. Chartalism tends to find support among liberals, who think the state should have an active role in the money system. Finally, there is the dominant, hands-off school of thought, with which most mainstream economists would agree, which says that money has no unique or special qualities but instead is defined by its roles—for example, as a medium of exchange.
It could be gold; it could be a dollar bill, who really cares? What matters is not money, but exchange. Bullionists tails and chartalists heads therefore emphasize a different side of money, while most economists treat it as an inert chip. But strangely, none of them have much, if anything, to say about the most glaringly obvious aspect of money—that it is based on number.
In bullionism, the role of number is subsumed into the weighing of metal; in chartalism, it appears as a unit of value; in mainstream economics, it is summarized by the idea of a unit of account—but the idea that we can attach numbers to value in the first place is taken for granted. Consider, for example, a U. Sure, there is the portrait of George Washington on the front, and the weird iconography on the back with an eye on top of a pyramid, and something going on with an eagle, and various stamps and signatures and statements about trusting in God, legal tender, and so on.
But the most important thing—at least if number is a guide—is the number. The first function of a currency is to establish the meaning of one unit, and here it is drummed in by repetition. The designers are being very insistent about the fact that this note is a one. Our own answer to this question is that money is a technology that does for value what the Pythagoreans did for music and the universe : it converts value to number.
Money is transmitted by money objects such as coins, notes, or electronic transfers, which have both a physical aspect and a virtual number aspect. A useful way to understand money is to analyze the properties of these objects. The reality is exactly the opposite. In fact, this partitioning between the mental system and the physical object, between ideas and things, can be an obstacle to comprehension.
We first need to distinguish between money and its units. What they really mean is that monetary units, such as dollars, serve as units of account, which is not the same thing as money itself. You cannot pay someone with a unit. After all, when we say that electrons have a fixed electrical charge whose value is approximately 1. In the same way, we can treat money as a fundamental quantity. However, it is informative, as Marshall McLuhan noted, to think of money, or more accurately the money system, as a kind of social medium, a means of communication.
This bottom-up perspective is in a sense dual to the top-down, systems-level perspective. Now an amount of virtual money being transferred electronically may not resemble the Newtonian, mechanistic picture of a thing—that is, a selfcontained lump of matter—but then neither does matter when viewed from the perspective of modern physics. For example, according to quantum theory, subatomic entities such as electrons behave in some ways like a particle and in others like a wave.
The electromagnetic force, for example, is transmitted by massless virtual photons whose ghostly presence is nonetheless sufficient to hold atoms together. In quantum physics, the distinction between real and virtual becomes blurred, and so it is with money. Saying that money is not a thing is like saying that light is not a thing, which sounded sensible until physicists discovered they could count the photons in a beam of light see box 9.
Quantum Coin In this quantum spirit, we define money objects as transferable entities, created by a trusted or simply obeyed authority, that have the special property of a defined monetary value, specified by a number and a currency unit. Money is a fundamental quantity from the Latin quantum [as much as].
The authority the author of the piece might be a sovereign, a government, a company, a designed system, or just the collective will of a network of users, but it has the ability, through law or coercion or general consent, to create the objects and define their worth in the specified units.
These money objects are the carriers of the money force, in the same way that photons are the carriers of the electromagnetic force. The first time a Sumerian accountant scratched some numbers specifying a payment into a clay tablet, he was creating a technology whose puzzling behavior— and potential power, for both creation and destruction—mirrored that of the dualistic forces that control the subatomic world.
In other words, market prices are ultimately attained from the use of money objects; this is how money spreads its numbers around. Market prices are therefore an emergent property of the system, in the sense that they emerge from the use of money objects. Rather than money being backed by something of monetary value, such as gold or labor, it is the other way round—market value comes from the use of money.
Markets and payment systems that accept a certain currency unit therefore act as an extension or appendage of that currency; they are what allows it to work on the world and have to be fostered and managed for money to be of use. Tapping a credit card in a store to send an electronic transfer is not much use if the card reader is broken.
While markets assign prices to all kinds of things, money objects are unique in that their value is designed to be objectively fixed and stable: like subatomic particles, they are characterized by exact, unchanging, numerical quantities. The main difference in this respect between a commodity-based currency and a virtual currency is that the former assigns, or tries to assign, a price to one commodity in the market which, as seen in chapter 4, tends to create an interesting dynamic around that commodity , so other goods and services have to find their own level; with the latter, everything has to find its level.
Another difference is that with a commodity-based currency, there is a direct link between numerical price and the amount of the particular commodity 2 ounces of gold is worth twice as much as 1 ounce , so the connection between money and weight is more tangible, while in a virtual currency the numbers just relate to the currency itself. Its dollar value is something you can bank on. The difference is that money is designed to be permanent and does not have a best-by date.
Inflation can erode the purchasing power of the note, but it cannot change the number that is written on the note although, as discussed in chapter 3, some currencies are designed to simulate this effect. The equality between numerical price and value is actively, if not always perfectly, enforced by the issuing authority— a dollar is a dollar; a shekel, a shekel.
This special status makes money objects desirable in themselves. They live partly detached from the world of space and time. It is often said that money is just a medium of exchange and therefore needs to have no value itself. But by attaching numbers to money objects, in a kind of alchemy, we make them golden. If a society decides that cattle must be used for payments, then cows suddenly become more valuable—one cause of overgrazing.
The central concept of money—the irreducible nut of the matter—is therefore that it is a means to attach exact, timeless, Pythagorean numbers to the fuzzy and transient concept of real-world value. The point of doing this is to facilitate certain transactions e. This is obvious when the money object is a coin, but cybercurrencies such as Bitcoin must be carefully designed to avoid double spending, where a person tries to use the same bitcoin more than once.
An exception occurs when money is freshly produced. Banks currently have a special license to create new funds, so their loans do not obey this conservation rule. Counterfeiting, of course, must be discouraged, which is one reason the first coins were made from precious metal rather than ordinary pebbles. While such a definition—money objects are things with a fixed monetary value—may appear obvious to the point of truism, the objects thus described have some remarkable properties that feed into the economy as a whole.
In particular, money objects have one foot in the physical world and one foot in the world of number. The dualistic, two-sided nature of money means that, as already discussed, it frequently shows paradoxical behavior and can seem both real and unreal at the same time it is fitting that many early Roman coins featured the two-faced god Janus. In the early s, the cheap availability of credit in the United States meant that even lowincome people could afford their own homes. Some became rich by selling their houses at the top of the market, and for them the money had real, tangible effects.
As one of the authors, Orrell, who has studied and taught quantum mechanics, argued in his previous book Truth or Beauty, much of our difficulty in understanding topics such as money relates to our failure to absorb, or dismiss as flaky, the equally paradoxical teachings of quantum physics. However, this type of logic breaks down at the quantum level—as Niels Bohr argued in his theory of complementarity, neither the wave nor the particle description of matter is complete by itself; instead, together they represent two sides of the same phenomenon.
Fuzzy logic, in which statements can be partly true and partly false at the same time, is now routinely used in areas such as computing science not to mention our own thought processes. In the same way, money has a dual nature, with complementary aspects that seem to confound traditional logic.
It is credit and debit, mind and matter, virtual and real, all at the same time. For example, a check is an instruction to debit one account and credit another with a certain amount, but its value may be in the eye of the beholder. However, if the check is endorsed and is itself exchanged between people and accepted as payment, then it becomes a kind of quasimoney object in its own right, with the difference that it is backed less by the state than by the credit of the writer, with the spread between these reflected in a possible discount rate.
As shown later, banknotes got started in a similar way, but they fully became money only when they were guaranteed by a central bank. Financial instruments such as stocks, bonds, and options sometimes look like money, because they are valued in currency units and are tradable, but they are better described as assets whose price is variable. In general, this will depend on the authority of the issuer, which varies both geographically and with time.
An example is the case in which the value of a coin equals its stamp value in the region where it is issued but elsewhere reflects its metal content, or the case in which a substandard coin trades for less than its face value. This price equivalence also depends on the existence of markets that will accept the object as payment. Private moneys, such as the medieval bills of exchange discussed in chapter 3, are limited not by region but to a circle of users who accept them in exchange. Currencies based on credit sharing, discussed in chapter 8, rely less on a central authority than on the mutual trust of a network.
Bitcoin transactions are kept honest by constant, automated network surveillance. Money could in principle emerge naturally without top-down design or intervention, but the evidence shows that it is better described as a planned social technology, and statements to the contrary are usually based on dogma rather than facts.
Instead of money emerging from markets, it is historically more accurate to say that money-based commercial markets emerged from money, after some pump priming from the state. Governments in ancient Greece and Rome issued coins, used them to pay soldiers and other people, and demanded the coins back in the form of taxes; the development of sophisticated markets that fully exploited those coins came later.
The fact that number and real-world value have different and complementary properties—one is exact and enduring, the other fuzzy and changeable— makes the union complex, dynamic, anxiety inducing, inherently fragile, sometimes volatile, often rewarding, and always interesting.
It comes presuffused in rich overtones of power, gender, and mind—body duality. Its structure resonates with the deepest properties of brain function, with profound consequences for human behavior. It is inherently political and reliant on a kind of faith, and as a result its workings are usually shrouded and obscured in layers of pomp, intrigue, duplicity, secrecy, deception, deliberate vagueness, and blandly recited misinformation.
Like a glamorous and desirable character in a good story, money is alive with energy, contradictions, and a backstory of its own—which is why treating it as a passive placeholder, as in mainstream economics, is so dangerous.
For example, the right to create and Box 2. A house gets old, but the debt owed on it endures. Weights and measures, on the other hand, are linear, which explains the affinity, made explicit in commodity currencies, between money and weight. This point was illustrated in by the American lawyer John Whipple, who did the math and calculated that five English pennies, invested at 5 percent compound interest since 0 c. That is not possible for most things in the real world though we often try, for example, by measuring intelligence with IQ tests.
Concepts or judgments such as worth or value are fuzzy, like the wave aspect of matter. Rather than defining money in terms of its roles as a means of exchange, a store of wealth, an accounting device, a signifier of debt, a measure of labor or utility, a symbol for something else, a memory substitute, a kind of social interaction, or a vector of human desire even though it is all these things and more , or insisting that it can be made only from metal bullionism or through government edict chartalism or is not fundamentally different from other goods and is really nothing special mainstream economics , it makes more sense to see money as a quantity in its own right whose roles emerge, deliberately or not, from its use in society.
Money is useful for accounting, because it is based on number and has well-defined units. Its roles as store of value and means of exchange are conflated: it is a store of value because money objects are designed to be exchangeable for other things in the economy; it is exchangeable because it is seen as a store of value. We often think of value as being an inherent quality of an object— for example, the metal content of a gold bar—but it can also be socially assigned.
With money, the value is assigned by the stamp real or digital. The question of real-world value is highly subjective, but the numerical value of money is precisely defined, and this is both the central dichotomy at its heart and the delicate balancing act that keeps it aloft. To say that money is a highly charged subject would be an understatement. The only things to come close are sex and power, and, of course, the topics are related.
The equally torrid relationship between money and power is explored in chapter 6. It is fitting that the first coins were made from electrum, named after the Greek word electron for amber, a material that also holds static electricity. By attaching numbers to our idea of value in order to quantify it, the money system binds together two very different things, and it is this fusion that gives rise to its complex behavior.
Money objects are our contribution to the quantum universe; and as with quantum physics, the problems in interpretation seem to appear when we try to reduce a system to exact numbers. Money objects are unique in that they have a forced equivalence between number and value. For anything else, confusing the numbers with reality can be a huge mistake, in economics or in life. Of course, the comparison of economics with physics should not be taken too far, and our aim here is by no means to further mathematicize the subject or produce a quantum mechanics of the economy—but at least if we are going to draw on physics, we should draw on the right kind of physics.
The wave—particle duality of subatomic particles is mirrored in the mind—body, heads—tails duality of money objects, where it leads to confounding effects. Economists have traditionally handled money by assuming that market prices and value are the same thing, which is equivalent to collapsing the two aspects of money to a single point. But as discussed further in chapter 7, this Newtonian, mechanistic approach fails in economics in much the same way that it breaks down in physics.
Particles are not just self-contained billiard ball—like objects, and neither is money; both embody dual properties that need to be taken into account. In particular, our failure to recognize the charged, two-sided, dynamic nature of money contributed both to the financial crisis and the ensuing eurozone crisis by blinding us to the importance of debt.
But another way to see it is that this behavior of money is a direct reflection of its inherently dualistic nature, and in particular the unstable relationship between number and value. During a virtual phase, money is seen primarily as mathematical debt—a score in a ledger—while in a physical phase, money is seen primarily as material wealth. However, the two sides cannot be separated, so money always retains the essential characteristics of each.
These reversals are written like strata in the historical record, and each layer shows money in a different aspect. As we have seen, early agrarian empires were dominated by virtual credit, where the value of a clay tablet lay in the inscription and not so much in the clay although silver was there too, out of sight. So in our scheme, that era was primarily heads. The Axial Age b. And we will see in the next chapter, the Middle Ages, which lasted for almost the next thousand years, saw a swing back toward negative, virtual credit heads.
The reason was not because gold and silver went out of fashion but because there was just not enough to go round. Money alone is the absolutely good thing because it meets not merely one need in concreto, but needs generally in abstracto. More on this later. New inventions often result from a collision between existing technologies and cultural practices. The personal computer arose from the union of West Coast, hippie-ish, electronic hobbyists and tinkerers—who came up with the radical ideas—with the mostly East Coast, mainstream computer industry—which provided the applications and organization.
They were made by placing a blank round of metal on top of a die and hammering it down with a punch. According to myth, King Midas—he who was cursed to turn whatever he touched, including his own daughter, into gold—was instructed by Dionysius to bathe in the river Pactolus to rid himself of the power. The gold flowed into the river bank, which was said to be the source of the naturally occurring electrum.
Actual coins had a lower gold content and were probably from a man-made version of the alloy. Lydian merchants dealt in a variety of commodities such as grains, oil, beer, as well as in goods such as ceramics and cosmetics, and they also had the first known brothels and gambling houses. It is not known how much coins were used for external trade, but it is clear that the idea of coinage quickly spread, first to the Greek cities of coastal Asia Minor, and from there to the mainland and surrounding islands.
The need to exchange between these coins, as well as make deposits and loans, meant that basic money-changing and banking services grew alongside their use. As Jevons and colleagues pointed out, these new coins combined the advantages of commodity money with those of tokens. The stamp was also a reassurance that the coins would be accepted as currency within a certain region. Coins therefore always traded there for a value that was more than the cost of their content, since if this were not the case they would have been melted down.
There was a constant tension between these two aspects of coin money, with the worth of a coin tending toward its stamp value within a city and toward its lower metal value when traded to foreigners. Coins served as a device for payment but also as a tool to both motivate the troops and control the general public. Long before gold and silver were being used as money, they were being used as jewelry and hoarded as treasure; and one of the positive spin-offs from military campaigns was that they usually involved plunder.
What easier way to pay soldiers, and share the profits, than by giving each a small portion of the loot? Also, soldiers and mercenaries needed money that could be transported easily and used in other countries. We were reminded of this in when the International Monetary Fund estimated that the former Libyan dictator Muammar Gaddafi had stockpiled about tons of gold.
If you look back, gold is the ultimate means of payment, the ultimate form of exchange in crisis. Coins were ideal for use in this type of transaction, because they had a well-defined value that was enforced, guaranteed, and, of course, accepted by the state. Mints were located in temples, which were the traditional storehouses for captured wealth.
The coins were distributed to soldiers and their suppliers, but also to the public at large through payments for service or the occasional handout. Because taxes and fees were paid by coin, people had to get their hands on money. This made them dependent on the state and motivated them to help provision the troops. Coinage was therefore spread around the area through war, conquest, and the distribution of the proceeds.
When in b. During his conquest of the Persian Empire, salaries for his army of more than , soldiers amounted to about half a ton of silver per day. These had an image of the supreme god Zeus on the back and Hercules on the front the image of a man who became a god after performing twelve superhuman tasks must have appealed to Alexander. Alexander would go on to invade the Babylonian Empire in Mesopotamia.
He wiped out the existing credit system and insisted that taxes be paid in his own coins. Rather than emerging naturally from barter, as mainstream economists like to imagine, the money system was imposed at the sharp end of a sword. However, even if its main function was for paying the army and collecting taxes, it certainly had a revolutionary effect on the structure of society. Money created its own markets and institutions, such as currency changers and banks, as well as its own demand.
It promoted new kinds of social ties and connections by making it easier for people from different social circles or regions to carry out transactions. Its use turned computation into an essential skill and changed the way people thought and interacted. And it was a wonderful way of coordinating and controlling activity, because suddenly the rules were clear: everyone was on the same page.
And these are the foundations upon which humanity still subsists today. Box 1. The coin sported an image of the goddess Athena on one side and an owl the symbol of the wise Athenian people on the other. The silver for the coin was extracted from mines such as the ones in Laurium, whose pits, which were up to feet deep, are estimated to have employed or rather, not employed some 20, slaves.
Each coin contained around 15 to 20 grams of silver, depending on the mint, and would have paid about two weeks of unskilled labor. Versions were in wide circulation from to 25 b. Greek silver tetradrachm of Athens Attica , — b. Obverse shows the helmeted head of Athena; reverse side shows an owl with olive-sprig and moon crescent. From H. Cardiff: University of Wales Press, , He founded some twenty cities in his own name; one of them, Alexandria in Egypt, became the major repository of Greek knowledge, including the teachings of his tutor Aristotle.
His coins continued to be minted for another years, but were eventually replaced by those belonging to another, even larger empire, that of the Romans. The Roman monetary system ran on similar principles to those of the Greeks, only on a more industrial scale. In the second century b. One side would typically be adorned by the visage of the reigning emperor, while the other would feature a propagandist image, such as that of Romulus and Remus, the legendary founders of Rome.
Coins were, of course, less useful for very large transactions, such as the purchase of property. In a letter, the politician Cicero wrote that he bought a house for 3. Perhaps you will ask whether I can raise these three millions without difficulty.
Well, nearly all my capital is invested in land, but I have some money out at interest and I can borrow without any trouble. The center for financial dealing was the Forum. Moneylenders, who took deposits, arranged loans, and changed money, tended to congregate around a vaulted passageway known as the Exchange; the names of debtors who defaulted on their loans were inscribed on a column called the Columna Maenia.
The Romans therefore had access to a range of financial services, including a primitive credit-rating system. This was accomplished through private companies known as publicani, which were responsible for tax collection in the provinces. To send money from Rome to some outpost in Spain or North Africa, you could deposit some silver or a nomina in the Rome branch, and some of the taxes would be made available for pickup at the other end.
Hundreds of millions of coins were struck, at a pace not matched until modern times; in the mid-second century c. As discussed in chapter 3, people were still figuring debts and accounts in terms of Roman money centuries after the coins themselves were history. The fall of the Roman Empire has been blamed on many factors, but the economy was certainly one of them.
In the third century, the lack of new foreign conquests meant the supply of precious metals decreased. Since Rome produced very little itself, money was continuously draining away to foreign lands. The process accelerated as Romans consumed increasing quantities of exotic goods from India and China. During a spell of just one year — c. The course of this inflation can be traced in the silver content of the denarius, the most common Roman coin, which was the equivalent of the Greek drachma.
The name lives on as the word for money in a number of languages, including Italian denaro , Spanish dinero , and Portuguese dinheiro , and as the dinar currency in several mostly Islamic countries. When the small coin, with a diameter of about 2 centimeters, was first minted around b. The silver content slowly reduced to about 50 percent by the middle of the third century c.
In its final stages, around c. Just as the straight lines of Roman roads still mark many countries in Europe, so the straight lines set by their legal codes continue to inform our understanding of things like property rights.
The Romans had enormous respect for property, especially land and slaves which were the two most economically important kinds , and much of their legal system was devoted to defining and protecting ownership. Economists have long emphasized the economic role of free markets, but market economies as we know them today could not exist without elaborate systems of property rights, which are legal inventions.
A quirk of the Roman code—which has long caused confusion for struggling law students around the world—is that property is defined as a relationship between a person and a thing, which gives the person absolute power over the thing. A plausible answer to this conundrum, according to sociologist Orlando Patterson, is that Roman property law is based on the ownership of slaves. Its great attraction, according to historian C.
Hard Money To summarize the story so far: credit systems such as that of ancient Mesopotamia far predated the use of coins. When coin money did emerge, it was not a natural and spontaneous process, as recited in mainstream economics, but was instead the result of government policy.
The Greek and Roman Empires were both built on a military—financial complex that obtained bullion and slaves from conquered lands, paid soldiers using the minted coins, and collected taxes in said coins. Money was therefore a tool to transfer resources from the general population to the well-armed state.
Once established, money created its own dynamic, as the use of money created a need for money. Its role was enforced not just through military conquest, but also by laws. The idea of value is inherently fuzzy and hard to quantify, but legal systems such as that of the Romans required clarity, straight boundaries, and exact calculations.
Everything had to be convertible into money. The standard story from Economics therefore has it the wrong way round. Coin money did not supersede barter; rather it was predated by state-backed systems of credit. This changes the way we see money. One reason is that in order for economics to present itself as an objective discipline, it must cast the modern economy as being the logical endpoint of a historical process in which alternative types of exchange or interaction are seen as just imperfect approximations of the real thing.
If money has emerged naturally from commerce rather than been imposed by government, then economics can be seen as a kind of natural science, divorced from its social and political context. Exchange therefore has to be immediate, in the form of goods or some form of money. An IOU would be right out of the question, even if it were wrapped in an envelope made of clay and stamped with a seal. Economics can therefore ignore the complex web of human relationships in which the economy is embedded.
What counts is the properties of objects at the time when they are used as money, not when they are offstage. Kocherlakota of the Federal Reserve Bank of Minneapolis. Obviously money could therefore never lead to irrational responses or have a destabilizing effect on the economy, because it is nothing more than a memory crutch, a convenient reminder system.
This idea of money as something that is inert, sterile, and boring is consistent with the mainstream economics view of the economy as a stable, self-regulating, logical machine in which money plays no special role, other than as a metric for economic activity.
The central, founding myth about the origins of money is one of the reasons why economists still, despite the countless number of books written on the subject, seem to be in denial about its true nature. And it shows that, far from representing the perfection of a logical process, our current version of money is only one of the possibilities. In chapter 3, we will discuss the emergence of private virtual currencies that used strings of information instead of precious metal to convey value—in the Middle Ages.
Before that, we first take a brief philosophical diversion, as we ask what magical property it is that makes money, money. And with death as his greatest source of anxiety. Some people will argue that the only real money is gold; others, that all money is a collective illusion with no reality of its own.
Some believe that the production of money is the prerogative of government; others, that we need government to get out of the way of private currencies. Money is the root of all evil, or George Bernard Shaw lack of money is the root of all evil. But everyone will agree that money holds a magnetic appeal. In this chapter, we adopt an approach inspired by modern, non-Newtonian physics to investigate the basic properties of money and show how such an apparently simple thing can evoke such strong and varied responses, while remaining in many respects our central point of reference: our true north.
This role as an economic weigh scale is reflected by the association between units of money and units of weight. Libra also appears in Italian as the lira. In the same way that we can translate between imperial pounds and metric kilograms without any loss of accuracy, we can translate between units of currency by using an accepted exchange rate—so why have more than one?
As we will see, keeping two currencies on the go at the same time—such as silver and gold under a bimetallist regime—adds flexibility to the money supply but can be confusing and unstable, because market prices tend to shift for one metal relative to the other, raising the question of which is the proper unit of account. Furthermore, the power of a currency depends on its range of acceptance.
The greater the number of people who recognize a single currency, the more useful it becomes for trade. Finally, governments prefer to have monopoly power over currencies. In b. While this did accomplish the aim of providing more money for circulation, it also led to some unwelcome competition. A modern example of this trend was the establishment of the euro, which is the monetary equivalent of the metric system. At the same time, though, the adoption of a single currency exacerbated the differences between its member states.
Critics described it as a top-down project imposed by bureaucrats who were detached from economic and social realities. In and then again in most likely not for the last time is the consensus at the time of writing , this tension came to a head when Greece, unable to pay its debt without massive aid from its neighbors, came perilously close to exiting the common currency. The story of the euro is just one example of how money is driven by two conflicting impulses.
On the one hand, it wants to unify messy reality; but on the other, it seems that it can achieve this only by separating itself from the real world. To understand the sources and nature of this conflict, we need to go back once again to the ancient Greeks, particularly the schools of philosophy that took root at the same time that coins were invented.
Unity The first Greek city to produce its own coins in the sixth century b. However, Miletus is most renowned in history for its minting of not coins but great minds. It would be no exaggeration to view the city as the birthplace of Greek philosophy.
Just as its money provided a way to unify the world of material transactions, Milesian philosophy provided a way to unify the universe. He is supposed to have predicted an eclipse of the sun in b. And he also proposed the original and often copied theory of everything. Today, many physicists think that everything is made from infinitesimally small strings vibrating in a ten-dimensional space. According to Thales, everything was made of water. The earth, which was made of one form of water, floated on an infinite ocean.
Earthquakes were caused when the earth sloshed around in this pool. But other Milesian thinkers soon chipped in with their own versions. His student Anaximenes, in turn, argued that there was no need to invent some new, invisible substance. Everything in the universe was made of air. After all, when water is heated it evaporates, which seemed proof that it turned into air; and when air is cooled, water condenses out of it. The idea, known today as material monism, that matter was made of one primordial substance was later picked up by Heraclitus who thought it was fire and Xenophanes earth.
Eventually the Greeks settled on a kind of compromise, championed by Aristotle, which was that matter was made up of the four elements of earth, water, air, and fire, with the fifth element, the ether, being reserved for the heavens. The idea that all things—including land, clean water, fresh air, and energy—are measured by money, though, never went away.
According to his biographer Iamblichus, as a young man Pythagoras visited Miletus, where he met with Thales who was by then an old man and Anaximander. If you fret a string halfway up, then it produces a note that is an octave higher. Fretting two-thirds of the way up produces a musical fifth; threequarters of the way up a fourth; and so on.
This discovery led Pythagoras to develop his own theory of everything— based this time not on a specific material, such as water or air, but on the abstract concept of number. Music, after all, was considered the most subtle and mysterious of art forms, so if it could be reduced to number, then—so it seemed—could anything else.
According to the Pythagorean version of the big bang theory, the universe began in a state of unity, which then divided into two opposite components, the Limited peiron and the Unlimited apeiron. These mixed together to form numbers, which made up the structure of the cosmos. The Pythagorean enthusiasm for number was undoubtedly influenced by the development of money. His followers believed that Pythagoras was a demigod descended from the god Apollo, but he was also the son of a gem engraver, and according to classicist W.
The Pythagorean, number-based theory of everything was powerful because it promised a way to understand and control the world. The use of mathematics, which it championed, advanced hand in hand with the use of money, since both are ways of thinking about the world in terms of number and computation. The Pythagoreans may not have been the first economists, but they certainly helped to prepare the ground.
And their belief in the mystical power of number is reflected today when we obsess over figures such as gross domestic product GDP. Mind Versus Body As shown in box 2. They also had a preferred side that defined a kind of aesthetic; for example, limited was better than unlimited, linearity was better than nonlinearity, stability was better than change, and symmetry was preferable to asymmetry the most perfect and beautiful shape was the sphere.
The number 1 stood for the initial, unified state of the universe. Two represented the polarization of unity into duality and was associated with mutability and the feminine. Three signified all things that have a beginning, a middle, and an end. Four represented completion, as in the four seasons that make up a year. The greatest and most perfect of all numbers was 10, the sum of the first four numbers, which symbolized the universe. In line with their belief that 10 was a very important number, the Pythagoreans also produced a list of ten opposites that represented the organizing principles of the universe.
These were: Limited Odd One Right Male At rest Straight Light Square Good Unlimited Even Plurality Left Female In motion Crooked Darkness Oblong Evil The list is somewhat similar to the Chinese yin—yang system of opposites, with the left column yang-like and right column yin-like; but rather than seeing these as part of a whole, the Pythagoreans explicitly associated the left side with good and the right side with evil. Pythagorean thought has been highly influential for generations of philosophers and scientists, from Aristotle to Newton to modern physicists, so it is not surprising that its legacy is also apparent in mainstream economics—with its emphasis on things like scarcity Limited , stability At rest , linearity Straight , symmetry Square , and rationality the Light of reason.
For example, there is only one way to draw a straight line between two points, and it is easily described by a mathematical equation. The former was associated in Greek culture with the male principle, and the latter with the female principle. Plato took this split to its logical conclusion with his theory of forms.
According to Plato, any real-world object, say a chair, is an imperfect version of a form, in this case the Chair form, which exists in some higher plane of reality. Such forms can be known only through the intellect, because our poor plodding bodies are seated in the real world—on chairs, not Chairs. Forms are static and unchanging, while real things move and decay.
Mathematical equations live in the world of forms—as does the virtual aspect of money, which obeys mathematical rules and exists outside time and space. Perhaps unsurprisingly, given the time and place of its emergence, money is a lot like Greek philosophy: it begins with the idea of unifying the world, like the euro, but this leads to a kind of schism between ideas and reality, because the only way it can achieve unification is by imposing abstract rules.
The production of coins by stamping a metal blank can be seen as the physical manifestation of this conflict. It is the Greek philosophical divide, in your pocket. Money is frequently described as a symbol, but it is more accurate to say that money objects such as coins incorporate a specific type of symbol. The stamp on a coin typically consists of two parts that merge the ideas of power and number.
However, coins in Lydia were originally stamped on only one side, and for metaphorical convenience we can associate the stamp with heads and the physical matter with tails. In the case of a coin, the link appears more direct because the metal has a physical worth that is always a positive amount. The U.
More serious forms of physical money, such as weighted gold, grant the holder a kind of independent, anonymous power. As a physical object, money can also be damaged, lost, stolen, hoarded, and liked or not for its aesthetic properties, and the material from which it is made can become plentiful or scarce. Above all, it can be valued. In contrast, the stamp is a symbol of abstract debt, which represents not real wealth but a contract between two parties, the creditor and the debtor.
Numbers such as prices or net worth are additive, can be compared on a numerical scale, and obey unyielding mathematical laws; for example, compound interest means that abstract debts can grow without bounds, while real objects tend not to.
Along with conquest by more conventional means, this particular feature of debt has historically been a major cause of people falling into slavery or peonage. Most state currencies today are fiat currencies that represent government debt the word is from the book of Genesis: fiat lux, [let there be light] ; cybercurrencies exist only in electronic form, but even they retain a link to physical worth in two senses. First, any kind of money object is a valuable thing to be physically possessed—even if only in electronic form.
Numbers do not become scarce, but money objects can, because there are rules surrounding their production. Second, even virtual currencies retain a link to physical worth through the markets they create. A dollar is no longer officially redeemable for a set quantity of gold, but the use of dollars has led to an institution called the London Gold Fixing, wherein the current price is set literally fixed, as it turned out, by corrupt bankers in dollars.
Anyone with the right skills can invent a new cybercurrency, but it has no worth until markets emerge that make it tradable for other things or a significant number of people believe it will happen. In ancient Mesopotamia, a payment in shekels was registered only as a credit for one party and a debit for the other, but it represented a weight of virtual silver.
The virtual and the real are bound together by money. An exception of sorts to this need for a physical connection is the currencies used to buy imaginary goods in online games: a pretend sword to kill a pretend dragon. Yet none of them has a physical manifestation. Value is an inherently fuzzy concept that, according to the Indian philosopher K.
With something like fashionable clothes, it might be impossible to haggle over price, but you can wait a few weeks and maybe see the same item in the clearance rack. Gold is considered by many to be the ultimate store of wealth, but its value in dollars is highly unstable, as we will show in chapter 7.
It is impossible to put an exact price on qualities such as natural beauty, but with a coin we know exactly what it is worth because it has a number on it. The split between exactness and fuzziness mirrors the division of the human brain into two hemispheres. According to psychologist Roger Sperry, who pioneered this field of research in the s, the left side of the brain which controls the right side of the body; recall the Pythagorean concept of duality from box 2.
Money shapes our behavior in many ways, but the most obvious is that it encourages us to think analytically. The historical shift toward leftbrained attributes such as numeracy and literacy in Western society coincided with the expanding use of money. It is hard to imagine a more potent technology for mental programming than money, with its constant referral to abstract number.
Money may encourage analytical, computational thinking, but as discussed in more detail later, it also provokes strong emotional responses, leading to conflicted behavior. Like food provides motivation for dogs, money provides it for people. The affiliation between money and number also means that the use of money prioritizes things that can be accurately measured in terms of money, such as GDP.
The concept of net worth as a measure of wealth is not about how much stuff a person owns but about a number and a rank: what that stuff can be exchanged for, in dollars or some other unit, and how it compares in magnitude with the wealth of other people. And when markets assign prices that are essentially arbitrary, as we will discuss later, to things such as precious resources or pollution, we act as if those numbers are real and meaningful.
Like a weighted coin, money contains an inbuilt bias. The concept of money, like the Chinese yin—yang symbol, therefore holds together two contrasting aspects—virtual number and concrete reality, quantity and quality—in a single package, as a marriage of opposites. The two poles can never be separated, any more than the north and south ends of a magnet monopoles have never been observed in nature or the two sides of a coin. When we consider the value of a personal possession, say a treasured heirloom, and its price, we have to hold two fundamentally 42 THE MONEY MAGNET incompatible ideas in our mind at the same time; the result is a cognitive dissonance that we have learned to mostly ignore.
When it comes to seeing and interpreting the world, number is our dominant eye. The inherent tension between these poles, which never reaches equilibrium, may explain why money has remained so mysterious and protean, constantly shape-shifting and taking on new forms and appearances as the balance between its two sides realigns and adjusts. What, in other words, is money? The Money Thing Throughout history, answers to these questions have tended to fall into one of three camps.
So money should either consist of scarce, precious metal or at least be backed by it. Fiat money of the sort cranked out by the U. Federal Reserve and other central banks is a dangerous kind of play money that is destined to eventually blow up.
To bullionists, the cuneiform system of Mesopotamia was only a form of proto-money. The second camp is chartalism from the Latin charta [record] , which holds that only the stamp is real. Independent schemes such as Bitcoin need not apply. Chartalism tends to find support among liberals, who think the state should have an active role in the money system.
Finally, there is the dominant, hands-off school of thought, with which most mainstream economists would agree, which says that money has no unique or special qualities but instead is defined by its roles—for example, as a medium of exchange.
It could be gold; it could be a dollar bill, who really cares? What matters is not money, but exchange. Bullionists tails and chartalists heads therefore emphasize a different side of money, while most economists treat it as an inert chip. But strangely, none of them have much, if anything, to say about the most glaringly obvious aspect of money—that it is based on number.
In bullionism, the role of number is subsumed into the weighing of metal; in chartalism, it appears as a unit of value; in mainstream economics, it is summarized by the idea of a unit of account—but the idea that we can attach numbers to value in the first place is taken for granted. Consider, for example, a U. Sure, there is the portrait of George Washington on the front, and the weird iconography on the back with an eye on top of a pyramid, and something going on with an eagle, and various stamps and signatures and statements about trusting in God, legal tender, and so on.
But the most important thing—at least if number is a guide—is the number. The first function of a currency is to establish the meaning of one unit, and here it is drummed in by repetition. The designers are being very insistent about the fact that this note is a one. Our own answer to this question is that money is a technology that does for value what the Pythagoreans did for music and the universe : it converts value to number.
Money is transmitted by money objects such as coins, notes, or electronic transfers, which have both a physical aspect and a virtual number aspect. A useful way to understand money is to analyze the properties of these objects. The reality is exactly the opposite. In fact, this partitioning between the mental system and the physical object, between ideas and things, can be an obstacle to comprehension.
We first need to distinguish between money and its units. What they really mean is that monetary units, such as dollars, serve as units of account, which is not the same thing as money itself. You cannot pay someone with a unit. After all, when we say that electrons have a fixed electrical charge whose value is approximately 1. In the same way, we can treat money as a fundamental quantity.
However, it is informative, as Marshall McLuhan noted, to think of money, or more accurately the money system, as a kind of social medium, a means of communication. This bottom-up perspective is in a sense dual to the top-down, systems-level perspective. Now an amount of virtual money being transferred electronically may not resemble the Newtonian, mechanistic picture of a thing—that is, a selfcontained lump of matter—but then neither does matter when viewed from the perspective of modern physics.
For example, according to quantum theory, subatomic entities such as electrons behave in some ways like a particle and in others like a wave. The electromagnetic force, for example, is transmitted by massless virtual photons whose ghostly presence is nonetheless sufficient to hold atoms together.
In quantum physics, the distinction between real and virtual becomes blurred, and so it is with money. Saying that money is not a thing is like saying that light is not a thing, which sounded sensible until physicists discovered they could count the photons in a beam of light see box 9. Quantum Coin In this quantum spirit, we define money objects as transferable entities, created by a trusted or simply obeyed authority, that have the special property of a defined monetary value, specified by a number and a currency unit.
Money is a fundamental quantity from the Latin quantum [as much as]. The authority the author of the piece might be a sovereign, a government, a company, a designed system, or just the collective will of a network of users, but it has the ability, through law or coercion or general consent, to create the objects and define their worth in the specified units.
These money objects are the carriers of the money force, in the same way that photons are the carriers of the electromagnetic force. The first time a Sumerian accountant scratched some numbers specifying a payment into a clay tablet, he was creating a technology whose puzzling behavior— and potential power, for both creation and destruction—mirrored that of the dualistic forces that control the subatomic world.
In other words, market prices are ultimately attained from the use of money objects; this is how money spreads its numbers around. Market prices are therefore an emergent property of the system, in the sense that they emerge from the use of money objects. Rather than money being backed by something of monetary value, such as gold or labor, it is the other way round—market value comes from the use of money.
Markets and payment systems that accept a certain currency unit therefore act as an extension or appendage of that currency; they are what allows it to work on the world and have to be fostered and managed for money to be of use.
Tapping a credit card in a store to send an electronic transfer is not much use if the card reader is broken. While markets assign prices to all kinds of things, money objects are unique in that their value is designed to be objectively fixed and stable: like subatomic particles, they are characterized by exact, unchanging, numerical quantities. The main difference in this respect between a commodity-based currency and a virtual currency is that the former assigns, or tries to assign, a price to one commodity in the market which, as seen in chapter 4, tends to create an interesting dynamic around that commodity , so other goods and services have to find their own level; with the latter, everything has to find its level.
Another difference is that with a commodity-based currency, there is a direct link between numerical price and the amount of the particular commodity 2 ounces of gold is worth twice as much as 1 ounce , so the connection between money and weight is more tangible, while in a virtual currency the numbers just relate to the currency itself.
Its dollar value is something you can bank on. The difference is that money is designed to be permanent and does not have a best-by date. Inflation can erode the purchasing power of the note, but it cannot change the number that is written on the note although, as discussed in chapter 3, some currencies are designed to simulate this effect. The equality between numerical price and value is actively, if not always perfectly, enforced by the issuing authority— a dollar is a dollar; a shekel, a shekel.
This special status makes money objects desirable in themselves. They live partly detached from the world of space and time. It is often said that money is just a medium of exchange and therefore needs to have no value itself. But by attaching numbers to money objects, in a kind of alchemy, we make them golden. If a society decides that cattle must be used for payments, then cows suddenly become more valuable—one cause of overgrazing. The central concept of money—the irreducible nut of the matter—is therefore that it is a means to attach exact, timeless, Pythagorean numbers to the fuzzy and transient concept of real-world value.
The point of doing this is to facilitate certain transactions e. This is obvious when the money object is a coin, but cybercurrencies such as Bitcoin must be carefully designed to avoid double spending, where a person tries to use the same bitcoin more than once. An exception occurs when money is freshly produced. Banks currently have a special license to create new funds, so their loans do not obey this conservation rule.
Counterfeiting, of course, must be discouraged, which is one reason the first coins were made from precious metal rather than ordinary pebbles. While such a definition—money objects are things with a fixed monetary value—may appear obvious to the point of truism, the objects thus described have some remarkable properties that feed into the economy as a whole.
In particular, money objects have one foot in the physical world and one foot in the world of number. The dualistic, two-sided nature of money means that, as already discussed, it frequently shows paradoxical behavior and can seem both real and unreal at the same time it is fitting that many early Roman coins featured the two-faced god Janus.
In the early s, the cheap availability of credit in the United States meant that even lowincome people could afford their own homes. Some became rich by selling their houses at the top of the market, and for them the money had real, tangible effects. As one of the authors, Orrell, who has studied and taught quantum mechanics, argued in his previous book Truth or Beauty, much of our difficulty in understanding topics such as money relates to our failure to absorb, or dismiss as flaky, the equally paradoxical teachings of quantum physics.
However, this type of logic breaks down at the quantum level—as Niels Bohr argued in his theory of complementarity, neither the wave nor the particle description of matter is complete by itself; instead, together they represent two sides of the same phenomenon.
Fuzzy logic, in which statements can be partly true and partly false at the same time, is now routinely used in areas such as computing science not to mention our own thought processes. In the same way, money has a dual nature, with complementary aspects that seem to confound traditional logic. It is credit and debit, mind and matter, virtual and real, all at the same time.
For example, a check is an instruction to debit one account and credit another with a certain amount, but its value may be in the eye of the beholder. However, if the check is endorsed and is itself exchanged between people and accepted as payment, then it becomes a kind of quasimoney object in its own right, with the difference that it is backed less by the state than by the credit of the writer, with the spread between these reflected in a possible discount rate.
As shown later, banknotes got started in a similar way, but they fully became money only when they were guaranteed by a central bank. Financial instruments such as stocks, bonds, and options sometimes look like money, because they are valued in currency units and are tradable, but they are better described as assets whose price is variable. In general, this will depend on the authority of the issuer, which varies both geographically and with time.
An example is the case in which the value of a coin equals its stamp value in the region where it is issued but elsewhere reflects its metal content, or the case in which a substandard coin trades for less than its face value. This price equivalence also depends on the existence of markets that will accept the object as payment. Private moneys, such as the medieval bills of exchange discussed in chapter 3, are limited not by region but to a circle of users who accept them in exchange.
Currencies based on credit sharing, discussed in chapter 8, rely less on a central authority than on the mutual trust of a network. Bitcoin transactions are kept honest by constant, automated network surveillance. Money could in principle emerge naturally without top-down design or intervention, but the evidence shows that it is better described as a planned social technology, and statements to the contrary are usually based on dogma rather than facts.
Instead of money emerging from markets, it is historically more accurate to say that money-based commercial markets emerged from money, after some pump priming from the state. Governments in ancient Greece and Rome issued coins, used them to pay soldiers and other people, and demanded the coins back in the form of taxes; the development of sophisticated markets that fully exploited those coins came later. The fact that number and real-world value have different and complementary properties—one is exact and enduring, the other fuzzy and changeable— makes the union complex, dynamic, anxiety inducing, inherently fragile, sometimes volatile, often rewarding, and always interesting.
It comes presuffused in rich overtones of power, gender, and mind—body duality. Its structure resonates with the deepest properties of brain function, with profound consequences for human behavior. It is inherently political and reliant on a kind of faith, and as a result its workings are usually shrouded and obscured in layers of pomp, intrigue, duplicity, secrecy, deception, deliberate vagueness, and blandly recited misinformation. Like a glamorous and desirable character in a good story, money is alive with energy, contradictions, and a backstory of its own—which is why treating it as a passive placeholder, as in mainstream economics, is so dangerous.
For example, the right to create and Box 2. A house gets old, but the debt owed on it endures. Weights and measures, on the other hand, are linear, which explains the affinity, made explicit in commodity currencies, between money and weight. This point was illustrated in by the American lawyer John Whipple, who did the math and calculated that five English pennies, invested at 5 percent compound interest since 0 c.
That is not possible for most things in the real world though we often try, for example, by measuring intelligence with IQ tests. Concepts or judgments such as worth or value are fuzzy, like the wave aspect of matter. Rather than defining money in terms of its roles as a means of exchange, a store of wealth, an accounting device, a signifier of debt, a measure of labor or utility, a symbol for something else, a memory substitute, a kind of social interaction, or a vector of human desire even though it is all these things and more , or insisting that it can be made only from metal bullionism or through government edict chartalism or is not fundamentally different from other goods and is really nothing special mainstream economics , it makes more sense to see money as a quantity in its own right whose roles emerge, deliberately or not, from its use in society.
Money is useful for accounting, because it is based on number and has well-defined units. Its roles as store of value and means of exchange are conflated: it is a store of value because money objects are designed to be exchangeable for other things in the economy; it is exchangeable because it is seen as a store of value. We often think of value as being an inherent quality of an object— for example, the metal content of a gold bar—but it can also be socially assigned.
With money, the value is assigned by the stamp real or digital. The question of real-world value is highly subjective, but the numerical value of money is precisely defined, and this is both the central dichotomy at its heart and the delicate balancing act that keeps it aloft. To say that money is a highly charged subject would be an understatement.
The only things to come close are sex and power, and, of course, the topics are related. The equally torrid relationship between money and power is explored in chapter 6. It is fitting that the first coins were made from electrum, named after the Greek word electron for amber, a material that also holds static electricity. By attaching numbers to our idea of value in order to quantify it, the money system binds together two very different things, and it is this fusion that gives rise to its complex behavior.
Money objects are our contribution to the quantum universe; and as with quantum physics, the problems in interpretation seem to appear when we try to reduce a system to exact numbers. Money objects are unique in that they have a forced equivalence between number and value. For anything else, confusing the numbers with reality can be a huge mistake, in economics or in life. Of course, the comparison of economics with physics should not be taken too far, and our aim here is by no means to further mathematicize the subject or produce a quantum mechanics of the economy—but at least if we are going to draw on physics, we should draw on the right kind of physics.
The wave—particle duality of subatomic particles is mirrored in the mind—body, heads—tails duality of money objects, where it leads to confounding effects. Economists have traditionally handled money by assuming that market prices and value are the same thing, which is equivalent to collapsing the two aspects of money to a single point. But as discussed further in chapter 7, this Newtonian, mechanistic approach fails in economics in much the same way that it breaks down in physics.
Particles are not just self-contained billiard ball—like objects, and neither is money; both embody dual properties that need to be taken into account. In particular, our failure to recognize the charged, two-sided, dynamic nature of money contributed both to the financial crisis and the ensuing eurozone crisis by blinding us to the importance of debt. But another way to see it is that this behavior of money is a direct reflection of its inherently dualistic nature, and in particular the unstable relationship between number and value.
During a virtual phase, money is seen primarily as mathematical debt—a score in a ledger—while in a physical phase, money is seen primarily as material wealth. However, the two sides cannot be separated, so money always retains the essential characteristics of each. These reversals are written like strata in the historical record, and each layer shows money in a different aspect. As we have seen, early agrarian empires were dominated by virtual credit, where the value of a clay tablet lay in the inscription and not so much in the clay although silver was there too, out of sight.
So in our scheme, that era was primarily heads. The Axial Age b. And we will see in the next chapter, the Middle Ages, which lasted for almost the next thousand years, saw a swing back toward negative, virtual credit heads.
The reason was not because gold and silver went out of fashion but because there was just not enough to go round. Money alone is the absolutely good thing because it meets not merely one need in concreto, but needs generally in abstracto. Credit and not gold or silver is the one property which all men seek, the acquisition of which is the aim and object of all commerce. A basic question of economics is how to manage the money supply.
Following the collapse of the Roman Empire, for example, gold and silver were suddenly in short supply. But money could still function as an accounting device—and an advantage of numbers is that they never run out. Money, as discussed in chapter 2, represents both debt and wealth at the same time.
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