CHAPTER ONEWhat Is Money?
Eight-ton limestone discs. Digital code. Wooden rectangles with pictures of pooping donkeys. What do these things have in common?
They’ve all been used as currency somewhere in the world at some point. A group of people decided that the stones, the code, and the pooping donkeys had value, and they would accept them in exchange for goods and services. All you need in order to have a currency is an object and a shared idea of what it should be worth. And, of course, you need people to use it.
Money and currency are related, but they’re not exactly the same thing. Money is the unit we use to measure value, and currency is the physical, touchable, “real” thing that we can spend. In the United States, we measure value in dollars (that’s our money), and we can spend dollar bills and twenty-five-cent coins (that’s our currency). Because it’s much more common to use the word “money” for both of those things, that’s what we’ll mostly do here.
But where did the idea of money come from? Money seems so normal in twenty-first-century America, it’s even kind of weird to ask what it is. It’s money! We spend it on stuff, and then we try to get more of it.
But it’s not really that simple. Physical money hasn’t always existed, not as coins or paper or even donkey pics. So, without money, how did people get the stuff they needed?
TRADE YOU?
Maybe you’ve heard that pre-industrial societies used bartering instead of money. Bartering is a direct trade of one thing for another. The story of bartering goes like this: Say that your cow made extra milk, so you made some cheese. You want to make a cheese omelet, but you don’t have any eggs. How do you get them? You barter: You find someone with eggs, and together you decide a fair trade of eggs and cheese.
The problem with bartering like this is that you have to find someone who has what you need and needs what you have at exactly the time that you need what they have. But what if no one wants your cheese? Do you push a huge wheel of cheese around your village, hoping someone will find it attractive? What if it goes bad before you find someone to trade with? If direct trade was the only way to get stuff, a lot of people would be out of luck.
So, the story says, the government steps in to fix the problem. It invents a system that substitutes a token of some kind, maybe metal or stone, so that no one has to carry cheese in their pockets when they go shopping. Everyone can trade tokens instead. Voilà, money!
The problem is that this story is most likely wrong.1 People did trade for things, but we don’t know of any society that used this type of one-thing-for-another exchange system to run an entire economy. Bartering did exist in the ancient world and still does in some places, but it was never the main way people did business, and it didn’t lead to the invention of money. In fact, bartering happened often in places where people already used money, but the currency itself was hard to get.
Many ancient records of business deals show that while people traded in goods, they usually thought of value in terms of something like money. For example, in Egypt, a seller would offer a copper pot at the marketplace, saying it was worth a certain amount of silver.2 The buyer might offer barley or cloth in exchange, but the seller only accepted the trade if it was worth the same amount of silver. The difference between this kind of trade and bartering is that bartering doesn’t compare goods to a measurement of value like silver or dollars.
In many societies, bartering was only used by groups that didn’t know each other. You wouldn’t regularly trade cheese for eggs with your neighbor because in small, close-knit communities, you didn’t need to trade directly to survive. Instead, other systems of sharing usually existed. In the Haudenosaunee Confederacy in what is now the northeastern United States, each household lived on what it could hunt, gather, or grow,3 but some goods were stored communally in longhouses and given out by the women’s council.4
IOU ONE!
If money didn’t come from bartering, where did it come from?
Big surprise: No one is absolutely sure. We do know that systems of debts (what you owe someone) and credits (what someone owes you) were everywhere in the ancient world before money existed. This might be where our modern idea of money began.5
When we talk about debt today, we usually mean things like credit cards and college loans. This is a little different from the kind of debt we’ll talk about next, which was a common system where everyone ended up owing small amounts to everyone else.
Imagine finding a 5,000-year-old IOU! In the temples of ancient Sumer (modern-day Iraq), clay tablets were used to write down people’s debts.6 In fact, this is the oldest type of writing anywhere in the world.
Before our world was so interconnected, many small societies had their own local economies that ran mainly on credit. English villagers, for example, measured value with pounds and pence, but they didn’t always use the coins themselves.
Instead, everyone ran up credit tabs at other businesses in the community: the grocer, the saddle maker, the local pub. Everyone owed their neighbors, and everyone was owed something by their neighbors. A couple of times a year, a village reckoning would be held, and all ordinary debts and credits would be canceled out. Anything that was too large to be canceled out would be paid in coins or an equivalent amount of goods.7
How did a system of debt and credit turn into a system of real, physical money? It probably went something like this: Your neighbor gives you an IOU for that giant cheese wheel. Later, when you want help fixing a hole in your roof, you pay a roofer with the same IOU. Instead of owing you, your neighbor now owes the roofer. An IOU could travel around a community, and as people began to accept that these notes had value, they became currency.
COLD, HARD CASH
The earliest record of this is in Szechuan Province, China, around 1000 AD,8 when people started trading IOUs in a similar way. Instead of spending the iron coins that were used as currency at the time, people stored the coins with a local merchant who gave them a paper receipt in return. The receipt could then be traded, just as the coins had been traded before.
Coins were used as currency long before paper money. Around 600 BC,9 in the area that we now call Turkey, jewelers hammered small pieces of metal flat and stamped them with their special mark. These are the oldest coins we know of.
The value of coins was usually based on the type of metal they were made of. Gold, silver, bronze, and iron all have different values based on how rare they are and what characteristics they have. For example, gold doesn’t rust, so gold is a good choice for jewelry, and it’s considered more valuable than iron. This is partly why people in Szechuan embraced paper money: It wasn’t practical to haul around enough iron coins to spend because they weren’t worth much. A pound of salt cost a pound and a half of iron coins!10
As we started doing most of our business with strangers instead of with people we knew, having a trustworthy currency became much more important. Official money made it harder to cheat or trick people. Have you heard the phrase Money is the root of all evil? It’s been said that in fact, evil is the root of all money!11
REALLY BIG MONEY
But money isn’t all about business and trade. Let’s take a look at another of the currencies we mentioned at the beginning of this chapter.
Yap, an island in Micronesia, has two kinds of money: dollars for everyday use and rai, or stone money carved into circles, for ceremonial use. Today, you’d buy everyday things with dollars, but rai might be used as gifts for birth or marriage. In the past, rai could be used for buying everything from food to paying a war debt.12 This isn’t as rare as it sounds: The history of economics has a lot to do with war and slavery, which are unfortunately two of the oldest human activities.
Rai were quarried on Palau, an island almost 300 miles away. Some rai are small enough to hold, but the ones that made Yap famous are several feet wide, some as tall as a person. If they needed to be moved, a long pole would be put through a hole carved in the center, and two people would hoist the pole onto their shoulders.
Once a rai was brought somewhere, it didn’t move often. Traditionally, families might keep their rai outside their homes to show their worth. Today, they are often seen outside hotels or in the village bank, an outdoor collection of massive stones set up in a public space.13
Large rai could be exchanged without actually being moved. In fact, one fell from the boat on its journey from the quarry, but it continues to be traded today, even though it’s still sitting on the ocean floor!14
If it sounds unusual to own money without ever actually having it in your possession, it’s not too different from how anyone with a bank account handles most of their earning and spending today. When you pay for something with a debit card or a pay app, your money might as well be invisible. You’re just changing a few lines of digital code, subtracting a number from your bank account and adding it to the store’s account.
You might think that the largest rai would be more valuable than smaller rai, but that’s not necessarily true. Each rai has its own story, passed down from the generations before, which determines how much it’s worth.
The oldest rai were quarried and carved using shell and stone tools and brought back to Yap in small boats. Later, Europeans came to the island, introduced iron tools, and brought rai back to Yap on their large ships.
Iron tools and large boats made the process easier, which made those rai less valuable. Today, even small traditionally carved rai can be worth more than larger ones that were quarried with European tools. The value of any individual rai comes from Yapese history and culture itself.
INVISIBLE MONEY
As we’ve seen, the invention of money is partly about making trade easier. Coins in the ancient world had all the properties that are still useful in currency today: They were long-lasting and easy to carry (at least in small quantities), and they could be used to measure value and to pay for things.
They had another important characteristic, too: scarcity. When something is rare and in demand, its value rises. Even paper money is rare, not because paper is hard to find but because governments decide how much paper money to print. If we used homemade Unicorn Dollars or chunks of gravel instead of coins, we would have no way to control the amount of money in the system, so its value would be very low.
We pointed out that most transactions these days are done with invisible money, which exists in computer code. But did you know that banks can actually use this process to create money? Every time a bank makes a loan, it’s making brand-new money!
This might be one of the hardest things to understand about how money works. It’s easy to think about money when it’s a fixed amount in your wallet. It’s a lot harder to think about it as something that can be created out of nowhere. Making loans helps the economy grow, and as long as the loans get repaid, the system works the way it’s supposed to.
But how much physical cash is actually out there? In 2021, there was about $2.07 trillion in circulation15 (currency moving around between businesses and people and banks). That’s more money than you’ll ever see in your life! But that’s nothing compared to the size of the entire economy, which includes all the invisible money that we hold in bank accounts and investments: At the same time, the US economy was worth nearly $24 trillion!16
BLOCKED
Recently, another kind of invisible money has been getting a lot of attention: cryptocurrency. Cryptocurrency, or crypto, is a type of virtual money that exists outside the system of banks and governments. The first cryptocurrency, bitcoin, was created in 2008 after a huge financial crisis in which many people lost their jobs and homes17 and trust in banks was low. The idea behind it was to use digital technology to create an independent, fair financial system.
Here’s how it works: Bitcoin and other cryptocurrencies are created and stored on a decentralized network called a blockchain. This means that no single organization is responsible for controlling its value or recording transactions. Instead, every transaction is recorded on the blockchain: Every computer in the network records every transaction at once. This is supposed to make bitcoin more trustworthy, sort of like making a promise in front of your entire class. But there’s a downside to having this kind of independent system: Because no one is overseeing it, you can lose access to your crypto wallet if you forget your password.
Crypto scams are big business, too. In 2018, the CEO of a cryptocurrency exchange (a marketplace for buying and selling cryptocurrencies) died, and the passcode to his encrypted computer died with him. Over 100,000 people lost access to their accounts. Later on, an investigation discovered that the company had been scamming its customers even before the CEO’s death, moving hundreds of millions of dollars off the blockchain and into its own private accounts.18
At the moment, cryptocurrencies are popular investments, but they aren’t often used to buy things. El Salvador was the first country to make bitcoin a legal currency,19 but in most other countries, you can’t spend it easily. The first transaction to use bitcoin happened in 2010, when a man in Florida bought two pizzas for 10,000 bitcoin, or $25.20 That probably wouldn’t work at your local pizza place.
Bitcoin’s price has changed a lot since then. In November 2021, one bitcoin was worth $69,000. In November 2022, its value was down to $21,000. 21 But how can something that was created out of nothing have any value? It’s partly scarcity: There will only ever be 21 million bitcoin in existence.
It also takes a lot of electricity to mine, or earn, bitcoin. Computers earn bitcoin by solving complicated math puzzles. The first computer to solve a particular puzzle wins the bitcoin, so miners compete against one another to run more, faster computers.22 That requires power! In one year, bitcoin uses as much energy as a small country like Malaysia.23 That doesn’t count other cryptocurrencies and blockchain technologies like non-fungible tokens (NFTs), digital certificates of ownership for online artworks and other content. Energy use is a very real cost that gives bitcoin some of its value, even as it emits over 24 million tons of CO2 every year, contributing to global warming.24
So far the value of bitcoin has risen and fallen so wildly that it hasn’t proven to be a good way to run an economy. Most Salvadorans don’t use it and most businesses don’t take it, even though they’re supposed to by law. But maybe that’s a good thing: A year after the government made it an official currency, bitcoin’s value was down by more than half! Cryptocurrency is still such a new technology that it’s hard to tell how things will look in the future. Will crypto become a useful currency or stay as it is, an investment with potentially high risks and rewards?
IN $ WE TRUST
Ultimately, every currency relies on trust. It’s ironic that currency is useful to us because we can use it to do business with people we’ve never met and that we have no reason to trust, but our entire money system would fall apart if we didn’t all trust in one important idea: that our money is worth something, whether it’s made of paper or binary code.
We all use money because we all believe everyone else will accept it and use it, too. As soon as people stop believing money is worth something—poof! It’s worthless. That’s pretty serious magic.
What about that pooping donkey money, though?
It was used briefly in parts of Germany around the First World War. The German economy was in such bad shape that a variety of notgeld, or “emergency money,” was printed on everything from foil to compressed coal dust to give Germans a way to pay for things. There were no computers at the time, so virtual money wasn’t an option.
The donkey was only one of many types of notgeld, some issued by the government and some by local towns and even by clubs. By 1924, Germany stopped allowing people to print and use notgeld, and the pooping donkey and its friends became collectors’ items, as they still are today.25
What happens to your currency when it’s not considered money anymore? In the case of the donkey notgeld, even the people who made the currency knew it wouldn’t be good forever. Below the donkey was printed as a joke about how anyone who used this money was a donkey, too.
Copyright © 2023 by Rebecca Donnelly.
Copyright © 2023 by Jen Keenan.
