The Invention of Money
newyorker.com
newyorker.com
A Hungarian math professor by the name of Antal Fekete offers a much more convincing explanation of the journey from gold to paper money: http://professorfekete.com/articles/AEFMonEcon101Lecture5.pd...
In essence, the Bill of Exchange was required for gold to work as money by it acting as a means of payment between producers. If one producer in the line of production of steel, say the producer who digs up iron ore, requires payment in gold when delivering iron ore to the steel producer, the gold standard does not scale as the division of labor increases, as more gold would be required (for payment of semi-finished goods) for each additional step added. The Bill of Exchange solves this by acting as a means of payment between producers of increasingly finished consumer goods.
It should be noted that the reasons we borrow money today is different than why it was done in the past.
In the past, the "average" person was usually a farmer, and if they needed to borrow money, it was probably because their crops had failed and they needed to money to buy food to feed themselves. It was unseemly to lend money to someone who, without it, would die.
Borrowing money nowadays is usually for mortgages and consumer spending. Very different situations, with different moral contexts.
Of course some people do still need money to survive, which is where payday loans tend to come in, and I think a lot of people find them distasteful--and the fact that people in our society may need to use them also a sad reflection on our society.
So "usury" was/is considered morally wrong not because of the charging of interest, but of the moral context under which it used to be done. There are of course 'usury laws', but they reflect the idea that charging more than x% interest unseemly because there should be no need for it (to produce a reasonable ROI).
"Medical debt is a uniquely American phenomenon, a burden that would be unfathomable in many other developed countries."
"Nearly 60 percent of people who have filed for bankruptcy said a medical expense 'very much' or 'somewhat' contributed to their bankruptcy."
https://www.theatlantic.com/health/archive/2019/03/hospital-...
Not sure that changes the relevance of the usury discussion, even if you personally are insulated from medical bankruptcy.
So the question should be - can we as a society afford decent late 20th-Century-standard care to every person? The answer is yes, we can, but we don't.
Some events are extremely rare and extremely expensive. We shouldn't expect every individual to have enough savings to pay for every eventuality.
Sharing that risk allows nearly everyone to live better.
The question here is whether that insurance should be provided by a profit-making corporation or a government agency.
Though the US system of private insurance is badly broken, evidence from other countries shows that both approaches can work.
Payday loans:
> In fact, U.S. consumers borrow almost $90 billion every year in short-term, small-dollar loans that typically range from $300 to $5,000, according to a 2018 report from the Office of the Comptroller of the Currency (OCC). [1]
> “Right now, 80 percent of payday loans are taken out within two weeks of a previous payday loan.” [1]
Much smaller by comparison, but yeah, the moral context is still there and it's egregious.
[0] https://www.magnifymoney.com/blog/mortgage/u-s-mortgage-mark...
[1] https://www.bloomberg.com/news/articles/2019-02-14/expensive...
(edit: not in the UK, which is rapidly sailing away).
This is proved untrue with minimal searching online. Here's one example: https://www.msn.com/en-gb/money/other/just-when-you-thought-...
Also search "payday loan $EU_COUNTRY" to see some pretty insane rates (>1000%).
So yes, it was 'unfair' to farmers to charge interest because it's pretty much required, but also farmers had a vested business interest in getting money lent for low interest rates.
Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other’s garages.
Reading around, it seems like the rest of the book is similarly accurate.
I've been trying to think of a more compact/dense incorrect sentence for a bit now, and I can't really think of an alternative. (Although some of the political screeds from the election of 1800 might have been close, and I have yet to go mine twitter for examples)
> For those who don't know how the Fed works: technically, there are a series of stages. Generally the Treasury puts out bonds to the public, and the Fed buys them back. The Fed then loans the money thus created to other banks at a special low rate of interest ('the prime rate')...
Also from "Debt, The First 5000 Years".
Just before the Apple Computers example, Graeber writes "The greater the need to improvise, the more democratic the cooperation tends to become. Inventors have always understood this, start-up capitalists frequently figure it out, and computer engineers have recently rediscovered the principle: not only with things like freeware, which everyone talks about, but even in the organization of their businesses."
Could you please suggest good books about economic history. I'm looking to expand my knowledge in that domain.
https://www.amazon.com/Ascent-Money-Financial-History-World/...
https://www.amazon.com/Splendid-Exchange-Trade-Shaped-World/...
https://www.amazon.com/Cash-Nexus-Money-Modern-1700-2000/dp/...
https://www.amazon.com/Devil-Take-Hindmost-Financial-Specula...
Academic but readable:
https://www.amazon.com/Manias-Panics-Crashes-History-Financi...
https://www.amazon.com/Rise-Financial-Capitalism-Internation...
A few takeaways I have from that book: 1) In rural/traditional societies, debt (measured and stored in people's heads) and other reciprocal social obligations were enough to run an economy. Simple example: you give your neighbor some grain when the harvest comes, and you neighbor repairs your tools the whole year long. The classic economy-textbook idea that we invented currency so we don't have to barter with the goods we produce has never been observed in history. 2) Governments induce the creation of currency. Any government can change the currency by requiring the repayment of taxes in that new currency. Often this is for the purposes of paying armies. 3) Traveling merchants need to use currency because they can't rely on social obligations at each place along where they travel. Money allows anonymity.
http://icm.clsbe.lisboa.ucp.pt/docentes/url/jcn/ie2/0POWCamp...
Cigarettes were the numeraire for all transactions for the sake of efficiency.
Maybe I suppose.
I read the book, though I was pretty familiar with the material already. To me it seemed immediately he adopted a hectoring, moralizing tone that was quite unnecessary and distracting. From the outset, he seemed unable to see past the framework of political power structures, and because of that basically missed the point of modern financial capitalism.
And it mentions also the invention of Money.
I'm surprised the New Yorker would use him as a reference.
https://books.google.com/books?id=iN9Tdfdap5MC&lpg=PP1&pg=PA...
It would seem there is no consensus. Clearly some scholars think he went there.
paper titles by themselves are quite old. the real innovation is to split them in smaller, standardized denominations to be composed into the desired amount, which came with the first travel cheques. the only jump from there to bills is that one come from and it's backed by private entities and the other come backed by a state, but in the case of the argentarii and mensiarii the line is blurred since those were state sanctioned.
The Economist | Curveball https://www.economist.com/node/21767839
Gold is not "the only real money", though. There is no such thing as "real money":
> Law thought that the important thing about money wasn’t its inherent value; he didn’t believe it had any. “Money is not the value for which goods are exchanged, but the value by which they are exchanged,” he wrote.
> Probably considered Simmel's greatest work, Simmel saw money as a structuring agent that helps us understand the totality of life.
What Nick Szabo would call reciprocity, or the delay thereof.
You know what they say: Inverted yield curves have predicted 10 of the last 7 recessions.
I think it's a mistake to attribute the stability of the post-war world economy to the Bretton Woods system alone; there are numerous factors that coincided. Bretton Woods probably helped to some extent insofar as it allowed the US to rapidly exert a lot of influence, but we in the US still do that now without the Bretton Woods system.
Why would it make sense for the people/countries that China is buying gold from to sell it, if it's "real money"?
The current gold rally tells us that there is a lot of global political and economical uncertainty. Think of the Brexit, the Iran troubles and the global trade war. All these issues could cost big money for governments so it makes their bonds less attractive.
If bonds are unattractive, why are yields at near-all-time lows?
Gold is appealing when real rates of interest are low, as it maintains purchasing power over time.
Here is a hint why this happening: not all government bonds have such low yields: only some European countries and Japan have, the USA bond yield for instance is quite a bit higher.
The reason is that there is currently a huge buyer for European government bonds: the ECB. The ECB's "quantitative easening" that has been going on for the last years is artificially keeping the yields low.
And government-issued currency.
> gold is the only real money
No. But gold is one of the better ways to, in essence, short fiat currency.
To me debt is far superior. Debt means you have a commitment from a human (directly or indirectly, if the debt is owed by an organization). Gold has no inherent value at all apart from some minor uses of relatively small amounts in the economy. Except by agreement, which debt also has.
An example for debt-based I once read somewhere was a kid writing an IOU for garden work. As long as the debt is not paid - i.e. the kid does the work and the IOU is destroyed - that piece of paper circulates through the neighborhood. It has real value (actual work). This example also illustrates what's wrong with calling for all debts to be repaid, which makes sense for the individual but not for the economy (like so many or maybe even most suggestions around money and power, where things that work very well for someone make no sense if applied to everybody, the difference between "works for anyone" and "works for everyone").
And personal attacks are against HN guidelines.
I've never understood this argument that gold has no inherent value or no use in economy.
First, lets acknowledge you couldn't even make your comment/post from any computer/smart phone on the market that doesn't use gold. That is gold is a great conductor of electricity, maybe not the best conductor, but when combine with its anti-corrosive properties it is the industry standard. Every single computer/smart phones is manufactured with gold, anyway you cut it, that isn't a small part of the economy.
In addition to being a good conductor gold has anti-microbial and anti-bacterial, and anti-corrosive properties. This gives gold inherent value, especially in antiquity, put your food/wine in a amphora made of gold and made of pottery and see which expires first. Finally, gold isn't made through natural processes on Earth, that we know of, it is made in Stars and so what we have on Earth is what we got, that limited supply, makes it inherently valuable as a medium of exchange. Sure we can also go back to using seashells as a medium of exchange, but the Earth will continue printing money. finally, the anti-corrosive and ease of smelting/crafting Gold also gives it a certain value.
But commodity standards in general are not preferred by governments. You could even make an argument that forgoing fiat currency is a national security risk. Countries which use fiat money can conduct warfare more efficiently. And in peacetime they can conduct counter-cyclical monetary policy.
These key advantages make fiat the obvious choice for governments.
But it is not. Gold is finite which is important for a currency. Gold is one of the easier metals to work with/coin, which is important, at least historically. And Gold is non-corrosive, which again is important in coinage.
Sure these unique characteristics may not seem important now that most fiat is digital, but we are talking about a system of money going back thousands of years. It has withstood the test of time, not because its arbitrary, but because gold will last thousands of years, something no digital or paper/cotton based bank note can claim. Plus you can counterfeit all paper/cotton based bank notes, to date no one has successfully reproduced Gold.
Jewellery. 2200 tons last year. Was popular 3000 years ago (https://en.wikipedia.org/wiki/Mask_of_Tutankhamun) and will probably be in 3000 more. Try getting the wife a plastic wedding ring if you think it has no value.
I daresay that's different from saying it's any good as money.
Unlike plastics and most other metals, Gold is easy to work with (i.e. non-brittle, low melting point, easy to mold/cast, it is conductive so its easy to plate other metals) and it is non-corrosive. Therefore, gold jewelry is historically a finer end product that can be made with less skill and the result lasts longer.
To a lesser degree of importance for jewelry, but still a prized property for wearable items, gold is antibacterial and anti-fungal.
Sure people may collectively decide the market price of gold, but people never collectively decided the properties of gold were valuable, those properties are inherently valued by people and Gold happens to have them.
Silver has these same qualities, hence why both Silver and Gold are historically used for jewelry in the first place. People didn't start making jewelry out of Gold and Silver because Gold and Silver was "valuable", rather Gold and Silver were used to make jewelry because of their ideal properties for jewelry, and its the properties of these metals that make gold/silver valuable.
You're assuming that the debt is backed by labor and involves a commitment to perform some specific service. Such promises are generally considered unenforceable as the capacity for future labor is inalienable, at least in societies which don't permit slavery or indentured servitude. At best you may be able to claim some property in compensation if the service is not performed. How is an indirect claim on someone else's gold or other property "far superior" to actually possessing it yourself? Sure you save a bit on the cost of storage, but in exchange you add the potential for non-payment.
> An example for debt-based I once read somewhere was a kid writing an IOU for garden work. As long as the debt is not paid - i.e. the kid does the work and the IOU is destroyed - that piece of paper circulates through the neighborhood. It has real value (actual work).
And if the kid proves unable or unwilling to do the work, what becomes of the value of the IOU? Repayment is not the only event that can take an IOU out of circulation. Better to have a claim on, or better yet possession of, a valued and marketable commodity than a mere promise of future services from a specific human being who could die, become disabled, or simply choose to dispute or repudiate the terms of the IOU.
You are assuming absolutes. The universe does not have any guarantees.
I'm being relative. In relative terms debt-based currency is more than you get from something far more arbitrary, like gold. Of course, here the argument depends on how fixed and static you see the basis of the mass-psychology based "value" of gold.
If humans stop cooperating, the very basis of human society, you've got bigger issues than a currency standard. If they only stop valuing gold there is no problem at all really, except of course for those who relied on it somehow magically remaining "valuable" (based purely on psychological reasons).
Gold could lose all value if everyone, including the owner, stopped demanding it, including for industrial use and jewelry. There is no precedent for such an event but it is indeed a possibility. A promise of labor, on the other hand, can lose all value if just one particular person chooses to renege on the agreement or is rendered unable to fulfill the IOU. That sort of thing happens all the time.
Crashes are a manic-depressive devotional cycle. Collective optimism becomes stretched to delusional levels. Then it snaps, pessimism and debt paranoia take over, the central government has to make reassuring noises which reassure the right people, and the hype cycle can begin again.
Gold is a faith-token - valued because it's heavy and shiny and because there's a long tradition of valuing it when investors become pessimistic about more evanescent asset classes, not because of its relatively limited practical utility.
Fiat money is just faith-token money without a tangible base. The process by which it gains/loses trust is the same.
The tangible items that aren't primarily faith-based are land and housing, so they do well as reliable investments. But even they're not faith-free, because they will still lose value in an area if no one believes it has a future.
Why are you ignoring commodities? Wheat, iron, oil etc. are all commodities that are much more useful as a monetary base than land and housing because they are orders of magnitude more liquid (meaning you can acquire it and subsequently sell it while incurring a smaller loss).
The commodities you mentioned work better as a "currency" than "stored value" for an individual. For a physical object to work as a stored value, especially over longer periods, it's got to be durable and convenient to store and protect. Real estate/land satisfies all those as long as the surrounding political situation remains stable.
If the state turns rogue or falls apart then you are better off hoarding (or running away) with gold.
They depend on faith even more in that "owning" property only works when everyone agrees with the system of private property that granted you this ownership in the first place. This is usually backed by a government with some kind of armed police to maintain property rights by force if necessary. Without such a faith-based system -- or some other way of defending it by force -- your claim to any acres of land is not worth much.
There is, however, a massive qualitative difference between gold and fiat: fiat has an adverse selection problem. The government that issues it can print as much of it as it wants, and it's more likely to do so precisely at the times when the country is in trouble.
Gold depends on faith, but failure of faith in gold isn't as correlated with failure in the rest of the economy.
> Fiat money is just faith-token money without a tangible base.
There is no physical basis for the faith, but a persons interactions with society is a basis for faith in fiat money. If all our neighbors and family and leaders express faith in fiat money through daily actions, then that's a powerful reason to share the faith. Even more so when you realize that faith is the only thing needed to make the system work.
As a result, faith in money becomes tied to faith in the government's ability to keep functioning, and this can be thought of as a base.
Credit => credo => 'I believe'
People need a place to park the vast sums of capital around the world, especially so with long-term government bonds paying nothing (or even having negative rates).
Would you rather stick $10,000 in gold paying nothing, or a Greek 10-year bond paying sub-2%?
And came to pretty similar conclusions, in particular, that modern fiat money is quite worthless!
This is super interesting. Does anyone familiar with the subject matter have an idea why?
>The wars waged by Louis XIV left the country completely wasted, both economically and financially. The resultant shortage of precious metals led to a shortage of coins in circulation, which in turn limited the production of new coins.
So there may have been a short supply of money especially the metal variety. Someone selling say grain may have taken paper money representing not much silver because there were no alternative buyers with bags of silver available.
Bitcoin also trades for a lot despite not having much value because some people want them and there aren't many available.
Even with perfect information and perfect short term utility, we are not mentally equipped to sense, evaluate and act on long term effects of our choices. Although this shortcoming has little impact in the ‘linear’ regime where we are a trivial component of the ecology, at current size and growth rate, humanity significantly destabilizes capitalism’s ability to succeed.