You have it in your wallet, you use it to buy stuff, and you’re probably glad when people give it to you. But what is it really?
In western culture, it’s easy to think of money as part of ‘human nature,’ but homo sapiens is estimated to have been on earth for about 300,000 years, and the earliest use of ‘money’ dates to about 5,000 years ago—less than 2% of our history. So, no, probably not ‘nature.’
Tribal societies throughout history have lived and survived by simply sharing and giving and cooperating with one another. In a tribal economy, people know and trust each other, and they work together for the good of the whole tribe. They may also extend their trust to humans in general—they’ll feed and help the traveler, and they trust that when they themselves are the traveler, other humans will welcome and care for them.
Somewhere along the line of humanity’s growth and development, we transferred some of our trust in our fellow humans to an object we now call money. To the degree that we need money, we need it because people don’t trust other humans to care for each other and reciprocate gift giving. Money works to the degree that it does because people trust the money. They trust that it will be honored and accepted by other people.
Here in the modern western world, the use of money has become completely pervasive and enormously complex, but the simple principle is it’s a human invention used to make it easier for people who don’t know and trust each other to exchange goods and services.
Money is used to represent value. When you provide a valuable product or service and accept a piece of paper or an electronic account entry in exchange, that exchange is based on agreement and trust. Both parties to the exchange agree that the piece of paper or account entry represents value, and you trust that it will be accepted by someone else in exchange for something you consider valuable. Without agreement and trust money would have no value.
In current times, money is mostly in the form of paper notes, metal coins, or recorded additions and subtractions in accounts. In addition to facilitating exchange, it is used as a unit of account—a way of assigning relative value to commodities or services. It also serves as a store of value—it can be collected and saved for future needs.
Money flows from person to person to person, continually circulating in the economy. Your employer pays you, you pay the grocery store, the landlord, the gas station, they pay their employees, their employees buy goods or services from your employer, who pays you again. Round and round.
An economy as a whole doesn’t need to have enough money to pay for everything all at once, but it does need to have enough in circulation to pay for the exchanges that people need and want to make. If you have an expanding or contracting population or economy, the supply of money needs to be able to flex with the economy. If the United States as it exists today were trying to operate its economy using the money supply used by the thirteen colonies, that would be a serious problem.
As Graph 1 shows, there’s a lot of debt in the current economy, and in defiance of all sense and logic, debt is far greater than money. If money were doing its job of facilitating exchange, and if it were flexing with the needs of the producing economy, why would people need to go into so much debt? And how did we manage to get more debt than money?
There is a very mechanical reason for the ever-growing debt in the U.S. and the world. It has to do with how money is and isn’t supplied to the economy.
Last modified: January 26, 2022