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This chapter is from the book

The Invention of Money

Money is universally accepted as payment, a claim on other things—food, drink, clothing, operatic arias, travel, knowledge, or sex. It is a medium of exchange, a measure of the market value of real goods and services, a standard unit of value, and a store of wealth that can be saved and retrieved in the safe knowledge that it will be exchangeable into real things when retrieved.

Commodity money is anything that is simultaneously money but is a desired tradable commodity in its own right—money that is good enough to eat. Humans have experimented with dried fish, almonds, corn, coconuts, tea, and rice.6

The ancient Aztec cultures used cacao. The large green-yellow pods of the cacao tree produce a white pulp that, when dried, roasted, and ground, becomes chocolate. Some European pirates seized a ship full of cacao beans—a true El Dorado worth more than galleons filled with gold doubloons. Unaware of the value of the cargo and mistaking it for rabbit dung, the pirates dumped the cacao into the ocean.7

Commodities have intrinsic value and their supply cannot be changed easily. But restrictions on the availability of a commodity can artificially limit the amount of money, in turn limiting the volume of activity and trade. If water were used as a form of commodity money, then hoarding it to preserve wealth would reduce the amount available. People might die of thirst, but they would die rich. Commodities are also difficult to store, so inhibiting the capacity to amass and store wealth.

In economic chaos, war or collapse, commodity money reappears. In post-Saddam Iraq, mobile phone credit became a popular quasi-currency, rivaling banks and the Hawala system. Prostitutes asked for payment by way of mobile phone airtime credits, leading to the nickname scratch-card concubines. Even kidnappers asked for ransoms to be paid in the form of high-value phone cards.

Over time, more permanent forms of money have developed—massive stone tablets, animal skins and fur, whale teeth, and shells, especially the cowrie shell (the ovoid shell of a mollusk commonly found in the Indian and Pacific Ocean). Ultimately commodity money focused on precious metals, gold and (to a lesser extent) silver, until superseded by paper.

Fiat or paper money is the promise by the government or state to pay you whatever it says on the paper—usually in the form of more paper. It relies on acceptance—the trust of everyone to exchange often dog-eared and toxic notes into real things. Where gold relies on a deep-rooted mythology, paper money relies on a system of trust and faith as well as the sanctity and integrity of the underlying legal system.

Credit money—the last form of money—is a future claim against someone that can be exchanged for real goods and services. The person lending money trusts the borrower to repay the money lent at the agreed time in the future.

British economist John Maynard Keynes once gave his friend Duncan Grant, the artist, money as a birthday gift. Grant was enraged: “The thing is good as a means and absolutely unimportant in itself.” Keynes thought of money as “a mere intermediary without significance in itself which flows from one to another is received and dispensed and disappears when its work is done.”8

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