The Hierarchy of Money
gregorygundersen.com
gregorygundersen.com
For most of history, peasants were sustenance farmers, meaning they grew their own food and if the harvest was bad, they could starve. For them, there was no such thing as insurance and they really needed ways to reduce risk. For example, they'd feast their neighbors so that when times were hard, the neighbors would hopefully help them out in turn. Investing in close-knit relationships isn't like barter - it's more like informal credit. Kinship networks still work something like this today.
And this meant they didn't really need money. Social obligations were everything.
But how do people who aren't peasants themselves get food? By extracting rents and taxes, in return for protection and certain services, perhaps plowing fields. Local "big men" might take payment in kind, but for a more organized government, they'd collect taxes using money, which gave the peasants incentives to grow and sell food for money.
So villages would monetize or demonetize depending on the state of nearby governments. A monetized society allows people who aren't farmers to buy food. It allows cities to exist. Therefore, civilization was built on military force, taxes, and rent extracted from peasants, who were the basis of a mostly agricultural economy.
Be glad our civilization isn't built on sustenance farming anymore.
Here's a simple counter factual: how do people who are peasants get anything other than food in your model? If they sell the food to get money, your civilization is already not built on sustenance farming and has a working currency. If they don't have money, they will barter which doesn't seem to exist in your model.
Also yes, kinship is basically informal insurance where a community collectively takes care of each other. Its not what barter is.
The comment specifically mentions people who are not peasants so in that model, there are people who do not grow food but do other things. If we already have a system like that, why will the farmer grow food and also spin clothes when they can just let someone else spin clothes and give them a bit of their food in exchange for that?
How do you think trade guilds started?
As I said, the comment had parts of truth but overall it simplies economics to an extent of a children's book.
I would welcome correction.
A large part of this was legal ability. If only the "big man" could own a plow there was no point in trying to save up for one. This ability to have your own increased the farms productivity, in turn allowing the family to buy more (but often they would split the farm so two kids could inherit) While you could grind your own grain, often "the big man" wouldn't allow it.
However for 95-99% of the per-indstrial population you are a peasant farmer. You don't need money because you can grow everything you need. (this doesn't mean you do, only that you can)
For the other 1-5% though things are different. The closer you get to 5% the more money everybody (including the peasants!) needs to support your way of life. At 1% you only have peasants and a few "big men". At 5% there are a lot of non-nobility who the farmers are supporting anyway. That is only possible if the farms specialize into whatever grows best for them. In turn that means the farmers need to import the other food items they might want meaning they need money to buy it.
The farmers also need to trust that if they have a crop failure they will still be able to eat. As soon as farmers don't trust they will be able to eat even in case of crop failure they will diversify - the farm will produce less food overall, but no one crop failure will make them starve to death! Either works fine for the farmer but all those city folks starve to death in the second case since the farmer is self sufficient on much less food production than it could produce.
At the risk of sounding incredibly pithy, the primary purpose of money over barter is to aid the tracking and collection of taxes.
Why use the term extract rather than trade? Protection was quite valuable. Those peasants could have tried their luck planting a field in the middle of nowhere, far from any village. There was plenty of unused land.
They didn't because the peasant and their family would not last long.
This idea that civilization is somehow oppressive rather than a great achievement just doesn't make sense. Force is the natural way of things. Alone those peasants would likely have 100% of the harvest taken by force, whether it be by wild animals, roving bandits, even locusts. It's a far better deal to have some percentage of it taken in return for having it protected.
In nature, protection is the thing that matters.
The idea of the old farmer-peasants as single-task specialists in the same vein as us city-dwellers is an anachronism.
That's a very modern concept. In the natural world they belong to whatever entity is able to take them.
Life has always been about grabbing as many macronutrients as you can by whatever means possible.
Except not really. Peasants were considered the property of their lords. If they decided to go and “try their luck” at a neutral location and that was reported to their lord, armed men on horseback would be very likely to show up not long after, to return them back to the lord’s land, but not without a solid beating and/or maiming first.
Sometimes, certain forms of civilization just are oppressive, rather than collaborative. They tend to be out-competed by forms that are less oppressive, true, but it’s not guaranteed and not always fast and not always permanent.
But often the land belonged to the lords or at least they could take it within their region at their pleasing. There were not that much "neutral locations". That wilderness was common land or hunting grounds belonging to someone.
But it's not exactly irrelevant, either, right? It does add to the confusion to leave it out, so, my bad.
As far as the black plague, what gave even serfs so much leverage was the fact that there were so few people in all categories around anymore. Fewer peasants to work the land, so the prices of the free peasants went up commensurately. But even serfs who wants to run far away and set themselves up as free peasants elsewhere could frequently get away with it because a) fewer men on horseback to spare to chase them down, and b) the other lord they went and rented land from didn't have enough peasants to work his land either, and had a real vested interest in making sure they weren't caught and brought back to their original lord.
Source: Inventing the Renaissance by Ada Palmer
> The irony of all of this extraction is that while it is often nasty and predatory, it can have some positive long-term effects, because the extra food that the farmers are being effectively forced to produce moves through either state-redistribution or market mechanisms to an increasing population of specialist non-farmers who in turn provide benefits for the broader society, sometimes including the farmers.
> Metal tools, improved plows, large mills and bakeries would all be impossible without specialist smiths, wood-workers, architects, millers and bakers, for instance. And those merchants, moving food around from where it is common to where it is scarce can – if there are enough of them and trade is sufficiently unrestricted by things like wars – serve a valuable stabilizing role on the otherwise wildly destructive volatility of prices for things like food and other essentials. Moreover, specialization and trade encouraged distance travel, which might bring foreign disease, but might also bring new agricultural technologies.
https://acoup.blog/2020/08/21/collections-bread-how-did-they...
I do think there are also great achievements to admire, but it’s also true that a main lesson of reading history is that most of human history was terrible for most people.
And we haven’t even talked about what happened during wars and the slavery.
This decree is by you and what army?
That said, I would not find a full Graeber-ization helpful. It wouldn't change the structure of the post, and I don't think Graeber's framework is useful for understanding much of the content, such as the Fed funds rate, the intra-bank clearinghouse, or correspondent banking.
Oh sure, but that doesn't mean we have to accept as normal governments where leeches enriching themselves and their fat friends manage to create public debt of more than 100% of the GDP and make the money printer go brrrrrr everytime there is problem (which is another gigantic problem in itself).
A country like France is officially 57% of the GDP in public spending for terribly bad services in return. Poor education, hospitals in terribly bad shapes, no doctors in villages, insane taxation (France has 400 different taxes, more than six times the number of taxes Germany has, for example) and an insane number of useless public servants working on collecting those unnecessary taxes.
It's too easy of a mental shortcut to say: "We don't live in caves anymore, with the men hunting and the women feeding the kids, so everything we did was obviously perfect".
BTW we had universities, roads, ships, etc. at a time where the effective tax rate on farmers was something like 2% yearly.
And Greece and Rome were advanced civilizations.
"By extracting rents and taxes" makes a lot of heavy lifting: there's quite a difference between something like a reasonable yearly tax rate on income/production and a planned economy.
And, of course, that the top level of trust is a bit arbitrary, and that "black money", of course the US Dollar, isn't worth more than trust in the US government.
To be fair, cannibals don’t eat people for no reason either.
But I'm curious: given your reading of "Debt", what ordering would you change in my post besides the myth of barter? My sense is that people are reacting to the first couple sentences and missing the entire rest of the post. I don't really see how Graeber is related to the Fed funds rate or currency pegs, e.g. Of course money is political, and I could have framed everything in terms of state violence and control, but that's essentially a different blog post. I don't think that adds a lot of clarity for what mechanically happens at Jackson Hole. Happy to hear how I'm wrong.
IMO part of why myth-of-barter has persisted is because it has worked for helping folks understand our modern finance system (among other reasons, b/c many folks building that system grew up on it as well). So it makes sense to use in an explainer.
With that said, it doesn't feel to me like it detracts from anything to start with obligation before currency. Markers of past favors seems like as easy a place to start as trading stones.
It didn’t necessarily come from banter (see rai stones from yap island). Debt didn’t always come from currency (See Inca system of Reciprocity and Redistribution where there was no currency). Private Banks don’t always precede Central Banks (see Sumerian Temples).
I do agree with the argument that money is backed by trust. But I don’t think it’s inherently hierarchical. I think if anything, money and its diverse manifestations in currency are a complex graph where of course there are regions that exhibit hierarchical behavior (eg. Chilean bank backed by Chilean Central Bank that issues bonds and buys or sells US dollars). But for example I believe Crypto/Cigarrets in Prison/Silver/Gold/etc aren’t part of that hierarchical region.
Many early chinese kingdoms had coins as money and they were based on the rarity of the metal. And they began turning to shit when they started creating coins out of thin air, with hardly any rare metal in them: some kingdoms literally lost it all once they began hyper-inflating their currency by creating way too many coins (and at times there were so many worthless coins they couldn't even store them anymore).
I think coins made of metal are definitely part of the hierarchy of money.
And arguably Nixon "temporarily" ending the dollar's convertibility to gold in the early 1970s is an experiment for which we'll soon see the eventual result:
There might be a point in there, but it might also just be paragraphs of text with little structure joined together.
What's the narrative? What does this want to tell me? And why?
Something like an opening header block with 2-5 sentences would go a long way.
Also, you can often derive the what if you know the why and just follow the thread and map it out.
In any case, reading summaries (and occasionally following up by reading the full article) is more enjoyable and you learn more per unit of time. Most articles are mostly garbage. And even insightful and informative articles can often be compressed with minimal loss of conveyed insight and information. Typical example is some of Paul Graham essays (I say some because only some are worth reading).
You can't describe how various forms of monetary value work in the modern monetary system as if it were a rural village with physical items, because it is fundamentally different.
Re: why, I don’t think most people understand the very basics of the global economy in mechanical terms, and this was my attempt to explain those mechanics. I wanted the various pieces of the system to be motivated by understandable problems, hence the fable-like story.
I now see some folks were triggered by this stylized approach. Which is a pity. I think the simple setup is worth the payoff. My explanation of money creation, for example, matches the Bank of England’s whitepaper, and I am especially pleased with how the idea of a reserve currency both develops naturally and rhymes with earlier ideas lower in the hierarchy.
What if economists don't really intend to make a factual historical claim? What if it's more like the principle of virtual work, if you take the analogy? What if it's saying, look, here are two possible configurations of the world: one with barter and one with monetary exchange. One of these configurations is "more stable" than the other. That's a reasonable explanation for "why" we use money, if you read "why" in a non-causal way.
Or maybe economists are straightforwardly careless historians. I don't know!
Money is about trust, not about the problems of bartering
Not to attack you, but it reads like a sudden unexpected glossary section. For which there is a place in the world, but only if it is expected (hence the opener).
If the goal was to have an explainer for people about stuff that most get wrong, then I think an opener alone would not be enough, though. For that, it's probably far too densely written. It could also use some illustrations for that (albeit that's optional. Engaging textbooks also do well without).
Truth be told, it does to me read more like an intellectual achievement you're proud of and not like a piece to in any way serve an audience.
Then again, if that was to be the goal, I agree that the fundamentals would be there; just waiting to be shuffled around a bit and be embedded into a context that pulls the reader's brain along the path you want them to follow.
The risk of having your time wasted is an inherent part of consuming creative works; it makes things more enjoyable when the gamble pays off (dopamine is triggered via reward prediction error). A life where you only consume media with accurately predicted positive utility would be devoid of joy.
So I'd say if you want to know the narrative, what it wants to tell you, and why, simply read it. Take the gamble that it may suck, you'll enjoy it more if it doesn't.
But also, to avoid being a jerk: it's a piece that attempts to explain the modern global economic system (and the implications of USD being the global reserve currency specifically) from first principles using simple prose, where each "chapter" introduces a new layer of complexity.
Nah, you've missed my point and replaced it with some other gripe you have with the current world.
These attention deficit previews are something else entirely from what I said.
OP wrote an article that jumps in with a list, but it should've jumped in with "In the following paragraphs, I will explain this for that reason, because I think that XYZ". (Edit: Which, the LLM just reminded me, is simply an abstract)
It simply lacks an opener. (And in addition, it lacks flow between these individual sections, but that could be okay if the opener handles that problem)
Edit: typo
I think this "paper" would precede the use of stones. When the villagers are tired of bartering, they are not going to magically settle on the use of these stones as value. Because even before that, when the "dairy farmer wants to buy corn, even when he does not have milk to trade" the corn farmer is going to give corn in exchange of a declaration (IOU) from dairy farmer that anyone who is in possession of that IOU is entitled to 5 liters of milk (or what ever the corn was worth to the dairy farmer at that point) from him.
New money has entered the system at that point. Because now the corn farmer can use that IOU to barter stuff, either giving corn (produced by himself) or by giving this IOU from dairy farmer (if the other person is interested in accepting milk)
I think this would be a much natural evolution of things...
And then they would face the problem of counterfiet IOUs, and if they had crypto and signing, they would have used signed IoUs. But then they would need a way to reconcile with the fact that the death or incapacitation of the IoU writers. For example, the IOU written by the dairy farmer becomes worthless if the dairy farmer dies.
Then some central body (aka) would enter the picture, as an entity that will never die or disappear, and is the only entity allowed to write IoUs. Solving both the above problems in one fell swoop, by requiring taxes to be paid in its IoUs.
https://www.researchgate.net/publication/242706930_The_Rovin...
While there are some necessary simplifications, I couldn't find a single mistake on a first pass.
Anyone who wants to understand current monetary systems should read it.
Substituting "stones" for gold is a brilliant stroke of the pen. It will surely be helpful to any readers who are hung up on gold.
Thank you for writing this and sharing it on HN.
Come on… It's been known for more than a century that bartering has never been the default mean of exchange among humans, can we kill this myth eventually?!
Unless of course one thinks that smooth gray stones from a riverbed two miles away reflects some historically significant point in money’s evolution.
In another thread you talk about how the internet really is a series of tubes. We all know that "tubes" can be a useful analogy for understanding certain things about circuits and things built upon them. But we also don't think that tubes are more than a very basic analogy. Tubes don't really do packet switching.
The problem that was actually being solved when money was invented was how to get recently conquered villagers to support the soldiers that recently conquered them. (Demand taxes in the coinage that you pay your solders with, then they can live off the local economy and you don't have to feed them directly, which might be hard if they're very far away--tax collectors can take years to show up, but the demand for the new currency is instant, so your soldiers get fed right away).
The system of interpersonal debt that predated money likely outperformed money in a variety of ways from the perspective of the users. It was only for the conquerors that the invention of money solved any problem at all. It's hard to keep reading the article when it starts with the story that is used to distract from this.
For starters, debt records came before money basically everywhere we have evidence for the invention of money.
i would very strongly suggest reading David Graeber. It completely revolutionized my understanding of how human social and economic institutions emerge and evolve in actual fact vs imagined myth.
We can just tell the real story, it's far more interesting and useful than the myth.
In your other comment you use wording along the lines of "still useful to show what problem each technology solved" but the part you're missing is the explanations are largely wrong, not just in the sense of not telling actual history but you will come alway with mistaken conclusions because the imagined/example history is fundamentally wrong.
So, consider if you're getting this from multiple people, perhaps you're missing something on the topic.
For an item to become currency in a society, it must already be something people value independently of its use as money, and people must expect others to accept it as well. Say the villagers live near the sea and find some beautiful shiny stones that everyone wants. Those stones can then become currency.
A good example of this is tobacco in colonial America. It came to be used as currency because it was already widely traded and valued.
The point of GP is that while the myth says “in the beginning there was barter, and barter is inefficient so we created money to allow trading more efficiently” the reality is more “In the beginning there was trade, and some traded goods became money because they had the correct properties”.
Who can create money, who can access it, who can change the rules, who can freeze or censor transactions or even weaponize whole financial system?
What I dislike about fiat is that inflation is treated as a (wanted) feature while it is a cost paid by plebs via Cantillon effect.
All Govs keep rolling debt burden being paid with more debt.
Paper backed by paper and/or trust into goverments only. History and significant part of the world shows that this trust is being failed too often.
How sustainable current system is?
And there is little hierarchy required if a bunch of people are tasked with stripping you of your assets and your liberty unless a specific type of token is delivered at a particular time.
Nit: Cows don't lay eggs
Even Hanlon's Razor "Never attribute to malice that which is adequately explained by stupidity" also fell apart when I came across Grey's Law "Sufficiently advanced incompetence is indistinguishable from malice."
The complexity is extreme and more intricate than any person could have designed. Clearly, it evolved over long periods of time to get to this point. It's worse than a "conspiracy" because a conspiracy requires collaborative intent and a shared understanding. With this system, participants have convergent intent but very little to no shared understanding (as essentially none is required).
In terms of outcomes, the system functions in much the same way as a conspiracy, but without any of the self-restraint mechanisms which might otherwise limit the group's actions (as would come naturally if each member had full awareness of what the group was doing)... Which in this case, disturbingly, spans the entire planet and all human affairs.
The first step to solving a problem is understanding that the problem exists. This makes this problem particularly difficult to solve because it has power over the collective human minds which created and uphold it. It can replace any dissident with a compatible 'attention head' within its neural net.
Money is a beautiful instrument for trading and free markets, the only way for two entities to peacefully exchange goods. Inflate that money supply and you are silently stealing from the pockets of those who trust that instrument
Counterfeiting enters the chat.
Another historical example is hyperinflation in Spain caused by the huge influx of silver from their central and South American conquests.
We treat it as a proxy for consent, and it fails horribly at that job.
Given perfect information, I'd avoid feeding you if I knew your mining operation was poisoning my drinking water. Money hides that from me. I see one dollar the same as any other, accept yours in exchange for food, and go home to drink the poisoned water--an outcome I could've avoided if I mapped that dollar back to the event that created it: a loan in support of a venture that harms my community.
The banks that create money have no incentive to ensure broadly favorable outcomes result from their decisions. Profit is sufficient for them. It's a status quo that we should be furious about, since we bear the brunt of the negative outcomes.
The fact that it doesn't is by design. It deliberately obfuscates its origin to create fungibility.
But in a climate of rampant corruption its not a suitable design choice (and maybe it never was) because now it's starting to look like all dollars are equally illegitimate. Continuing to use them appears to be encouraging outcomes that will hurt me. That's totally contrary to the point of money. The baby is being thrown out with the bathwater.
The fix is to make it risky to hold currency that was issued in support of an antisocial endeavor. And the way to do that is to make the money carry extra information about the conditions of its issuance so that if the backed venture has harmful outcomes, holders of the associated dollars will have a hard time finding somebody to accept their money.
If we want it to be a proxy for consent, it has to actually provide enough information for that consent to be rational.
Take the UK. They only left the gold standard due to ww1. But they broadly stopped accepting anything but governmental currency in the 1400s for tax payment.
It turns out money is more useful than commodities even when it’s a 1:1 relationship and even with that 1:1 relationship governments want their currency to have official legitimacy.
Why not? Tho i suggest only within small communities which made up a larger share of human life at some point and trade beyond them over larger distances would more often be facilitated by certain nonperishable and not too bulky comodities. We have plenty of evidence for such bartering trade even when currency was already more common. (salt for pelts, etc)