24. What is Money?
We have our first guest! Artem is a philosopher of corporate ethics with an academic background in economics, and he’s helping us explore what money is.
How do we even go about answering this question? Money is magic, it’s invisible, Marx spoke of the “alchemy of money”. We can trace the history of money, but to do that we already need a theory of what money is so that we can identify it in the historical record. A better approach is to think about the function of money - people when they cooperate face a coordination problem, and they require a technology to solve this.
The standard theory is that money arose from barter, which eventually got intermediated for convenience by an easily-transportable non-perishable good like gold or salt. This, however, does not explain a lot of what money does.
Take the American trade deficit - the world sends goods to America, and America sends dollars in return. Everyone wants some dollars in their pocket, not just to spend but to have, and they are happy to work hard to get them. So in effect, Americans can import stuff for free, just issuing bits of paper or numbers on a database to grateful foreigners in exchange.
Or take the Maria Theresa thaler, a silver coin issued by Austria-Hungary in the eighteenth century. Vienna used these coins to pay Ethiopia for its massive coffee imports, and around the Red Sea these coins became popular as they had a reliably high silver content and were difficult to forge. Long after Europe had moved onto the gold standard and they stopped being legal tender, and in the face of concerted efforts to replace them, these coins remained essential to trade between Persia, the Red Sea and the Horn of Africa.
The credit theory of how money came can help explain these case studies. This has money as a form of IOU, solving the problem of intertemporal production (you will have a good to trade next week, but need something to eat this week), and an IOU from someone everyone trusts to be good for it is worth a lot more than an IOU from some random. Artem breaks new ground by giving an intuitive story based in an archipelago of fishing villages of how money as credit could have come about in a state of nature, and how it became abstracted into the form we experience today.
If you want to read more about this, we’ve put a reading list on our website. And in the name of honesty, we should confess that we were wrong on one thing - the Persians did have a coin, and it had a picture of a king on it.