Suppose you were out on a heist. Upon your return, with large bags of money, an alien from Mars appeared. Fascinated by your excitement and fixation on the bags, they asked what it was. How would you explain money to them?
Writing today’s newsletter made me realize how little I know about money. As it stands, I am not satisfied with the conclusions drawn, and I will do more research and write about this subject some other time.
Nevertheless, in a fascinating talk about Artificial Intelligence, Stephen Fry (2024, 54:50) quotes an American philosopher, Daniel Dennett, who said money is among the few foundational human inventions, “the agreed control of which no one disputes.” Whether you are a communist, a capitalist, Chinese, or South African, the one thing everyone agrees on is that money is important and having it is useful.
I will use this as a starting point. Money is an invention.
Part One: The Theory of Money
As a rule, all inventions serve a purpose. Therefore, what is the purpose of money? A common narrative is that money succeeded the bartering system by solving the double coincidence problem. This is when each party must have what the other wants for a trade to happen. By acting as a durable store of value, money made it possible for each party not to worry about the goods the other party wanted. Money acted as an intermediary, allowing the other party to accept it and then spend it at a later date on what they wanted. In this regard, money is an intermediary commodity traded for goods deemed to have equivalent value.
Recent studies hold a different view. They argue that money is not a commodity (de Bruin et al., 2023, p.4). If it were a commodity, it would have intrinsic value. If it were exchanged for an ounce of gold, it should, in principle, be able to buy another ounce of gold. However, this is not the case.
A trade assumes that the goods given are worth less than the goods taken. If I gave you R10 for a loaf of bread, it assumes that the bread is more valuable to me than the R10 given. In other words, you would not, in turn, want to take the bread back for the same R10. In this regard, money does not have the same value as the goods for which it is traded, which undermines the claim that it is a durable store of value.
An alternative view regards money as a tool for keeping track of promises. Suppose I borrowed your bicycle and promised to return it. Instead of promising with words alone, I gave you a token that represents my promise: a rare photo of my great-grandfather with a note saying that if something happened to me or I did not return the bicycle, you could present it to my brother, who would redeem it.
Notice what just happened. First, I issued a credible promise. Second, I made that promise transferable. This captures the essence of the credit theory of money. Anything with the joint features of creditworthiness and transferability is money.
Going back to our example, suppose further that the person holding my tokenized promise was hit by a bus and their nephew found the promise. Likewise, the nephew could redeem the promise by presenting it to my brother. However, the nephew, not wanting a bicycle, could tender the token to their neighbour for furniture. Likewise, the neighbour could tender the token to yet another person and it may well be that the token changes hands without eventually returning to my family.
This demonstrates the basic principle of the credit theory of money, that it is a transferrable promise. In the next section, I will show that transferability is implied in credibility, meaning the real value of money is in its creditworthiness.
Part Two: Making Money
In the commodity theory, money is like gold, and it is exchanged for other goods using the same bartering principles. Supposing that you had apple trees, it follows that after a while, regardless of how much you love apples, you would value them less because you could not eat all of them. You would look for a neighbour, say, with bananas and trade with them. The principle, as shown earlier, is that a trade happens when the goods given are assumed to be less valuable than the goods taken. Likewise, a trade happens when the money tendered is assumed to be less valuable than the goods taken.
It seems, therefore, that the person who produces goods in exchange for money and does not, in turn, spend it, accumulates it. This paints the image that accumulating wealth is a function of industriousness and frugality—working like a slave and living like a pauper.
I can accept this image, but to what end? One can argue along the lines of the intrinsic value of work—that is, working is itself valuable. However, few people, let’s say someone working at a toll gate, could say that their work has intrinsic value. Most people endure work precisely because it allows them to do other things. Therefore, the image of a wealthy slave-pauper is untenable.
Now, I turn to the credit theory of money for a possible account of making money. On this account, credibility and transferability are money. It follows that a credible person who declares, in such a way that others believe them, that x is money has in fact created money. This account follows John Searle’s (1995) idea that money is a constitutive rule. In his seminal work, The Construction of Social Reality, Searle presents an account of different kinds of rules that shape society.
First, there are regulative rules. These are rules that regulate actions. For instance, one can regulate how one behaves around the dinner table. Note, however, that the action can exist even without the rule, and the rule serves only to shape or direct the action in a particular way. This is in contrast to constitutive rules. Constitutive rules not only regulate but also create permissible actions. Take the rules of chess. Without them, the game itself does not exist. Seen this way, playing chess is participating in an otherwise completely made-up social reality.
For Searle, money is the same thing—it is a constitutive rule, which exists only because people accept it and participate in the resulting game in much the same way that we accept the rules of chess. This view is accused of not accounting for the realism of money (Maki, 2020). Some scholars argue that money exists because of the structure of the world in a real sense, and not because of the rules we impose on society as claimed by Searle. In other words, there is a sense in which money can not exist in a society like ours. All we deal with in finance is a formal notion of money, but it exists in non-formal ways which nevertheless permit social activities like trade and accounting in all societies. Therefore, the constitutive theory of money is insufficient.
I will not go any further in examining the ontology of money. However, I hope you can appreciate that it is complicated. What I find fascinating is that money is used intuitively even if it is not understood. It is somewhat similar to the use of one’s limbs by intuition, even without knowing about bones, nerves, cells, tissue, and so on that constitute the limb.
Going back to the credit theory of money, the way to make money, on this account, is to merely declare that this is money. This is, in effect, what governments do. Of course, this is provided that others believe you and that the token said to hold the promise is transferable. It follows that a token may be transferrable, as with a precious stone like gold, but if it is not deemed creditworthy, that is, someone else will accept it in exchange for something else, and it will not hold value. In other words, creditworthiness precedes transferability.
On this account, we can understand why currencies gain and lose value. It is not so much the demand, in the commodity sense, that changes. Rather, the value of money reflects the creditworthiness of a currency and how transferable it is. Thus, an unstable country (or even an unstable business or family) loses its claim on creditworthiness, thereby losing its capacity to attract money.
Conclusion
Looking back, I came into this newsletter with a naive view of money. I thought about money only in terms of the commodity theory—that is, it is a store of value, a unit of account, and so on. The little reading I’ve done shows that money is far more complicated than I initially thought. More than that, various scholars have different views of what it is, all of which are worth consideration.
What matters is that how one views a thing is how one relates to it. A friend recently got a pit bull, and somewhere in the back of my mind, I thought, that’s it, my visits will be limited henceforth. However, having spent time with the dog and having watched it grow, my view of pit bulls has changed. This is the same realisation I have about money. Perhaps I have no idea what it is, and spending more time with it will help.
Anyway, thank you for reading.
Until next week.
Vusi.
P.S. I am fascinated with the idea that one can simply declare that this is money and so it becomes money. On this account, cultivating credibility seems to be the most important thing to do. I find that this account is consistent with the reality that it is easy to raise money when one is credit-worthy. In a deeper sense, creditworthiness is reputability in making and keeping financial promises.
What I did not appreciate is that labour is only a means for acquiring reputability. There are other means, especially when one does not have the required reputability to attract a said amount of money, to raise it by borrowing other people’s reputations. This is fascinating and I will explore it in an upcoming newsletter.
References
de Bruin, B. et al. (2023) ‘Philosophy of Money and Finance’, in E.N. Zalta and U. Nodelman (eds) The Stanford Encyclopedia of Philosophy. Spring 2023. Metaphysics Research Lab, Stanford University. Available at: https://plato.stanford.edu/archives/spr2023/entries/money-finance/ (Accessed: 19 September 2024).
Mäki, U. (2020) ‘Reflections on the Ontology of Money’, Journal of Social Ontology, 6(2), pp. 245–263. Available at: https://doi.org/10.1515/jso-2020-0063.
Searle, J.R. (1995) The construction of social reality. New York : Free Press. Available at: http://archive.org/details/constructionofso00sear (Accessed: 22 September 2024).
