Money: From barley to bitcoin, a system of trust

Money is a much broader concept, but its function as a medium of exchange is a useful place to start in order to truly understand what it is. Image: Shutterstock

 

'Money makes the world go round' is a proverb almost everyone has heard. Money is all around us. Identified by a long list of names such as rupaya, paisa, taka, rokda, qián, geld, argent, pecunia and many others, money has become an essential element of almost every society on the planet. Yet, very few people are able to lucidly answer the basic question, "What is money?" When asked the question, most people start listing the different uses of money. For example, money can be used to purchase goods and services, a function of money which represents its use as a 'medium of exchange'. Money is a much broader concept, but its function as a medium of exchange is a useful place to start in order to truly understand what it is.

Ask yourself, why do farmers sell vegetables in exchange for a few coloured pieces of inherently worthless paper? They do this because they trust that shopkeepers will sell them goods, like clothes, in exchange for those pieces of paper. Shopkeepers sell clothes for those pieces of paper because they trust they can buy medicines with them, and on and on it goes. Thus, worthless pieces of paper are transformed into valuable currency notes only in our common imagination. Money is a purely psychological construct with one key underlying variable: trust. As historian Yuval Noah Harari says in his book 'Sapiens: A Brief History of Humankind', "Money is a system of mutual trust, and not just any system of mutual trust: money is the most universal and most efficient system of mutual trust ever devised." 

What can be used as money?

Ask anyone what money is, and they will point to a currency note or coin issued by the Reserve Bank of India (RBI), backed by the Government of India. However, money is not made up of paper or metal; it is made up of trust. Money can be anything people are willing to use to denominate prices and facilitate the exchange of a wide variety of goods and services. Money should also enable people to store wealth conveniently for a long period. Today, it is possible to use worthless pieces of paper to perform these functions (called 'fiat money') because a large number of people trust the RBI and the government. A long time ago, when money was first created, trust on such a large scale was absent. Hence, things which had inherent value were initially used as money (called 'commodity money').

History's first money was recorded more than 5000 years ago in Sumeria, where a fixed amount of barley grains was used as money. The most common measure was called a 'sila' (approximately one litre of barley). It is easy to trust barley as money because of its inherent value (that humans can eat it), but it isn't easy to store and transport. This need led to the use of a variety of commodity monies: cowry shells, electrum, silver, gold, copper and many more. With the advent of the digital age, computer bits were added to this list. Today, more than 90 percent of the money is in an intangible digital format and sits on computer servers. Inventors and users of decentralised cryptocurrencies may have lost trust in central banks, but they still believe in the concept of money.

[This article has been reproduced with permission from Indian Institute of Technology Bombay, Mumbai]