Different people in different locations and times have used different instruments – seashells, squirrel hides, large stones and metals to conduct trade. The first commodity money – coins – were minted in Mesopotamia about 5000 years ago.
The key thing here is that money is a human agreement – based on a narrative that recognizes its value. The narrative exists only in a network, and the larger the network the stronger the narrative.
Over time precious metals (mainly gold and silver) emerged as the best monetary instruments – freely chosen by the market because people agreed so, because the monetary metals had these main criteria:
- Recognizable
- Divisible
- Durable
- Incorruptible
- Scarce
- Fungible
- Units of account
The First point to understand about ‘money’ is that its value primarily exists due to its salability – to transfer Value over Time and Space.
In a free-market humans have over time selected gold and silver to be used as money, mainly due to the aforementioned criteria – and because you can’t easily find/create more of it compared to existing stock (ie Gold has a High ‘stock to flow’ ratio).
The Second point to understand about Money is that Money is a Network. The more nodes in the network, the more valuable the network becomes – this is often called ‘Metcalfe’s Law’. Only with money in a network can it be used as ‘currency’ or a medium of exchange.
With these two main points established:
- Currency / money is a network between humans
- Desirable qualities of money resemble those of gold.
..We can then contemplate how should we act should a better money emerge? In a rational, free market humans would choose the money which best fulfills the criteria of money (ie that Best transfer Value over Time and Space).
The case that Bitcoin is better than Gold at being the ‘base layer’ of money is elegantly argued by the Winklewoss Twins in their piece “The case for 500k Bitcoin“.
For example this table shows that in many aspects of being money – Bitcoin is better than gold:
So why do we need a new money or alternatives to the fiat moneys – USDs, Euros and pesetas of the world? Because money is at the base of the financial system, and the current financial system is broken.
The rich are getting richer, the poor are getting left behind -and I will argue in the next post – that no amount ‘UBI’, ‘MMT” or ‘taxing the rich’ will resolve the fundamental issues.