In a fascinating talk on 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 — except for Elon Musk, who thinks it will be obsolete in the next decade. Is he right? On what grounds is he even making such an assertion?
My project in this article is to ask the basic questions related to money. What is it, and how does it work? I am aware that libraries of books exist on this topic. Therefore, this is not about becoming an expert; it is about formulating a basic but accurate understanding of money. I will imagine that I am an alien from Mars who has never seen or heard of money and pry into the most basic questions. In the process, I hope to see money differently and adopt a fresh and empowering perspective.
Part One: Theories of Money
A common narrative is that money succeeded the bartering system by solving the double coincidence problem. If I have a banana and you have an apple, trading would be possible only if I want an apple and you want a banana. This is a double coincidence. However, it is seldom the case in the open market that parties want what the other party has to offer. This gives rise to tokens, often as precious metals or commodities, that serve as intermediary devices. Tokens allow the other party to accept the trade knowing that they can tender it later, on something else, or elsewhere. This is the classic commodity theory of money, which construes it as a durable store of value and a medium of exchange.
However, there are problems with the commodity theory of money (de Bruin et al., 2023, p.4). For instance, if money were truly durable, then when it is exchanged for an ounce of gold, it should, in principle, be able to buy another ounce of gold. However, this is not the case because money loses value over time due to inflation and the principle of trade. Trading presumes that the exchanged goods have a different perceived value by the trading parties. A loaf of bread to the seller is less valuable than the money they are willing to charge for it. To the buyer, the money is less valuable than the loaf of bread. In this regard, money does not have the same value as the goods for which it is traded, which is why, all things being equal, money exchanged for an ounce of gold cannot buy another ounce of gold. Adding inflation, which is the erosion of the value of money over time, further undermines the idea that money is a durable store of value.
The commodity theory of money held sway until Mitchel Innes (1913) published a scathing essay to the contrary. He posits an account of fishermen from England fishing in Newfoundland. Since they visit only during the fishing season, they do not hold the region’s currency. Nevertheless, they go out to sea and return with stock, which they offer to traders. In turn, traders record their receipts and issue a note to the fishermen, who draw on it to replenish their supplies. At the end of the fishing season, the final tally is made and a note is given to the fishermen, who redeem it in England. In this arrangement, the note offered serves as a medium of exchange, however, it is not a commodity; it is credit—a promise to pay. This is the credit theory of money.
The credit theory enjoins us to think about money as a transferable promise. Notably, the promise made by the traders was not only redeemable by the fishermen for supplies, but the balance was also redeemable upon their return to England. By way of analogy, suppose I borrowed your bicycle and promised to return it. Instead of promising with words alone, I gave you a token in the form of a rare photo of my great-grandfather with a note that if something happened to me or I did not return the bicycle, you could present it to my brother, who would redeem it. In this case, I have issued credit, or a promise to do something in future. Secondly, I have made that promise transferrable to my brother, meaning the promise endures beyond our direct relationship. As such, I have (i) made a promise, and (ii) made it transferrable.
Suppose further that the person holding my promise were hit by a bus and I vanished. Then, their nephew found the promise. Likewise, their 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 serves as a medium of exchange without eventually returning to my family. In this case, the token remains valuable for as long as my family remains worthy of the promise, or creditworthy. In today’s language, my family would be the central bank.
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 would follow 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 presumed to be less valuable than the goods taken. Likewise, a trade happens when the money tendered is presumed to be less valuable than the goods taken. We trade when we believe what we want is more valuable than what we have. This brings us to the first insight about making money.
It seems the accumulation of wealth, in principle, is (a) low-cost access to valuable goods, and (b) reinvesting the proceeds. With regards to (a), it seems there are two variable features (a.i) low cost, and (a.ii) valuable goods. The pursuit of wealth on this front is the pursuit of the lowest cost means of producing the highest value goods. This is what innovation is all about. The second part (b) of the model refers to one’s behaviour having accumulating wealth. Where (a) is established, it appears that re-investing the proceeds into more innovation results in the faster accumulation of wealth. So, the formula for wealth creation is to innovate continuously and live frugally. At least, this is what the commodity theory would say about making money.
Now, I turn to the credit theory’s account of making money. In this view, money is credibility and transferability. It follows that a credible person who decrees, in such a way that others believe them, that x is money has created money. It’s as simple as that. This account may sound far-fetched, but it follows John Searle’s (1995) idea of 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 behaviour at the dinner table. Note, however, that the behaviour can exist even without the rule, and the rule serves only to shape or direct the behaviour. This is in contrast to constitutive rules. Constitutive rules not only regulate but also create behaviour. Take the rules of chess. Without them, the game itself would not exist. Seen this way, playing chess is participating in an otherwise completely made-up social reality where behaviour depends entirely on the rules as they are constituted. For Searle, money is the same—it is a set of constitutive rules. It is made up.
Going back to the credit theory of money, the way to make money is to merely declare that this is money! This is, in effect, what governments and central banks do. However, the value of the money depends on the credibility of the institution that makes the money, which feeds into its transferrability. Put simply, the Rand, as underwritten by the South African Reserve Bank (SARB) and the State, holds value because of the credibility of these institutions. Moreover, the currency is transferable because other people buy into the underwriter’s credibility. It seems, therefore, that the underwriter’s credibility is the principal value, whose sphere of influence can be construed as transferrability. So, the path to wealth creation on this account is reputation and influence.
Understanding Money
Where the commodity theory tries to posit an objective theory of money, the credit theory is unashamedly subjective. By objective, I mean that the commodity theory explains value in terms of activities external to the individual. The price of bread, for instance, is not determined by one individual. It is determined systematically by market forces. Of course, this is determined further by notions of scarcity, which themselves include, although I cannot claim they are limited to, social, legal, moral, and environmental. Nevertheless, all these factors have empirical underpinnings, which is why I claim the commodity theory of money is objective. Of course, people have different information at their disposal, the asymmetry of which is why trade exists. Therefore, the ultimate value of goods is not entirely objective. However the epistimic virtue of value in the commodity theory is grounded in empirical undertakings — that is to say, in things that can be measured.
The credit theory, on the other hand, is grounded in subjective notions. By subjective, I am referring to notions that cannot necessarily be measured empirically but are determined by belief. This opens the Pandora’s box on what we mean by “belief”. This subject has been discussed extensively by scholars, including Bishop and McKaughan (2023). Nevertheless, one of the difficulties of accepting faith as a form of knowledge is that it lacks evidence. It seems opposed to the empiricist view. On this account, faith has been cast aside by the sciences, notwithstanding its consequence in history. After all, empires have been built on faith — on the beliefs that the world is so construed. And perhaps this has been possible precisely because faith seems to transcend (or at least exist outside of) the empirical world.
The epistemology of faith is better understood in terms of the mechanics of literature, myth and narrative. For instance, it is said that Napoleon’s mother dreamed of giving birth to a giant baby, which was seen as a prophecy of his impact in the world. The same applies to King Shaka kaSenzangakhona. His grandfather, as depicted in the series iLembe, fell into a coma and had a vision of a grand leader who would unify all the clans. Recently, Donald Trump’s assassination attempts strengthened his (and his followers’) resolve in what is now known as the Make America Great Again (MAGA) movement. While these may be brushed aside as superstitions, it is known that narrative constructs (or stories) carry significant normative power. Therefore, inasmuch as faith is not grounded in evidence, its impact in building consensus and grounding normative principles is nevertheless evident.
I claim, therefore, that the credit theory of money is at best underpinned by narrative, which is not to say it must be cast aside.
While the epistemology of both the commodity and credit theories of money is different, the unifying factor is that they both seek to justify value.
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 am having 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, of attracting a said amount of money by borrowing other people’s reputations. This is fascinating and I will explore it in an upcoming newsletter.
References
- Pinker, S. (2007). The language instinct: How the mind creates language. HarperCollins (Original work published 1994)
- Mitchell-Innes, A. (1913) What is Money? Cosimo Classics.
- 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).
- Bishop, J. and McKaughan, D.J. (2023) ‘Faith’, in E.N. Zalta and U. Nodelman (eds) The Stanford Encyclopedia of Philosophy. Winter 2023. Metaphysics Research Lab, Stanford University. Available at: https://plato.stanford.edu/archives/win2023/entries/faith/ (Accessed: 1 June 2025).
