Chapter 1
But First, What Is Money?
To understand how money is going digital, let’s take a step back. If I asked you to visualize money, chances are you’d conjure up a picture of dollar bills (okay, maybe twenty- or hundred-dollar bills), some coins, or a shiny credit card.
But money didn’t always look this way, and it won’t always look this way in the future, either. If we’re going to talk about the changing face of money, it’s important to understand what counts as money in the first place.
What Makes Money, Money?
Merriam-Webster’s definition of money is “something generally accepted as a medium of exchange, a measure of value, or a means of payment.” More technical definitions evoke the same key qualities. To break it down, money is the following:
• A Medium of Exchange: Money is something that can be used to facilitate an exchange of goods. It’s a method of payment.
• A Store of Value: In and of itself, it maintains value whether I use it today or tomorrow (inflation aside).
• A Unit of Account: Money can be used as a standard numerical unit to convey value.1
If you think about a dollar bill, you can see how it easily checks off those three qualities. You can exchange dollars for groceries, a dollar is worth the same amount whether you spend it today or if you pull it out of your wallet next week, and you know how expensive those groceries are based on the dollar amount assigned to them.
Experts vary in the exact number of characteristics, but there are six core ones to know, courtesy of the Federal Reserve Bank of Philadelphia:2
• Divisible Money must be easily divided into small parts so that people can purchase goods and services at any price.
• Portable Money must be easy to carry.
• Acceptable Money must be widely accepted as a medium of exchange.
• Scarce Money must be relatively scarce and hard for people to obtain.
• Durable Money must be able to withstand the wear and tear of many people using it.
• Stable Money’s value must remain relatively constant over long periods of time.
Why am I telling you all this? Because when we start to move beyond a physical dollar and think about where money will go digitally, these concepts quickly begin to feel abstract. We start to realize that money doesn’t necessarily mean a piece of paper with a past president’s face on it; it can be anything that displays a certain set of qualities. But before we get into any future forms money might take, I do want to walk through what economists consider the general evolution of “money” and how money came to look the way we know it today.
Back in the days of early human civilization, people relied on a bartering system. In ancient Mesopotamia (ca. 6000 b.c.),3 I could trade you my cow for your grain, and because neither of those items was assigned a value, we determined their value ourselves. “Money” did not exist. We were directly exchanging the items we needed, and their value was based on how much we needed them and what we were willing to give for them.
Sounds nice and simple, but bartering actually came with all sorts of challenges. You had to find someone who had exactly what you were looking for, and when you found that person, you had to have exactly what he needed too. As you can imagine, this was not very efficient. So, money had to evolve.
Out of bartering emerged a solution: commodity money, which is just a fancy way of saying that any useful item with a fixed and agreed-upon value, like beaver pelts and gold, could be used as currency. Simply put, society shifted from trading the items they needed to trading items they could use to buy and sell other things (for example, instead of trading beaver pelts because they needed beaver pelts, people traded beaver pelts in order to buy other necessities).
There are many ancient examples of commodity money (these changes don’t happen overnight): the anthropologist Chapurukha Kusimba points to the Mesopotamian shekel (that is, coin) used thousands of years ago, stamped silver and gold coins used in Asia Minor as early as 650 b.c., and the preponderance of metal coins used around the globe—from the Roman Empire to China—between 1250 b.c. and a.d. 1450.4
Advantages of commodities are that they are durable, portable, and easy to store—some of the most significant and important characteristics of money.5 But they have one significant downside: they exist in finite quantities. And as populations grew, so did the amount of currency being transacted. Governments that wanted to put more money into circulation couldn’t simply print more gold or more beaver pelts the way we do with dollars today. During the eighteenth century, colonial governments mostly used paper money that was backed by commodities. But if they lacked common commodities, like gold, they instead leveraged land-backed paper money. This money came out of so-called land offices and allowed people to use their land as collateral (kind of like a modern-day home equity line of credit, where you use your property value to access cash). Land offices, and the interest they collected, took off in places like New York, Pennsylvania, and Delaware.6
In the United States, the next major evolution of money was fiat money. Fiat money has value because a government declares it to be legal tender, which explains the name: “fiat” means “it shall be” in Latin.7 In other words, fiat money is worth what our government has decreed it to be worth. It is not backed by any physical commodity (a paper bill is no longer a stand-in for a stash of gold sitting somewhere). The value of a fiat dollar depends on the government’s ability to regulate the currency.
The U.S. dollar became fiat in 1971, when Nixon moved us off the “gold standard” (before 1971, the U.S. dollar could be redeemed for gold, and the value of a dollar was tied to the value of gold).8 In other words, at just shy of fifty years old, the dollar as we know it today is a small blip in the history of money.
But while the nature of money has evolved quite a bit over the course of history, each new medium—bartering, commodities, fiat money—was born out of essential needs that emerged over time.
I know this may all seem a bit academic, but here’s why I think it matters: I firmly believe that what we think of as money right now will evolve—and is already evolving. If you look at history, it is only inevitable that our current definition of money is as fleeting as the $10,000 bills that were issued in the 1940s. Today’s tech revolution is ushering in new forms of money that look nothing like any we have ever seen. Understanding the characteristics they share with the bills in your wallet can help you understand not just cryptocurrencies, but whatever unanticipated new modes of money the future may bring.
1. “The Properties of Money,” Money Project, money.visualcapitalist.com; “Functions of Money,” The Economic Lowdown (podcast), episode 9, Federal Reserve Bank of St. Louis, www.stlouisfed.org.
2. “Functions and Characteristics of Money: A Lesson to Accompany The Federal Reserve and You,” Federal Reserve Bank of Philadelphia, 2013, www.philadelphiafed.org.
3. “Barter System History: The Past and Present,” Mint, www.mint.com.
4. Chapurukha Kusimba, “Making Cents of Currency’s Ancient Rise,” Smithsonian, June 20, 2017, www.smithsonianmag.com.
5. “What Is Money?,” Investopedia, May 31, 2018, www.investopedia.com.
6. Sharon Ann Murphy, “Early American Colonists Had a Cash Problem. Here’s How They Solved It,” Time, Feb. 27, 2017, time.com.
7. Neale Godfrey, “A Few Words About Bitcoin . . . Because Fiat Is Not Just a Car,” Forbes, May 8, 2015, www.forbes.com.
8. “What Is Money?,” Investopedia.
Chapter 1
But First, What Is Money?
To understand how money is going digital, let’s take a step back. If I asked you to visualize money, chances are you’d conjure up a picture of dollar bills (okay, maybe twenty- or hundred-dollar bills), some coins, or a shiny credit card.
But money didn’t always look this way, and it won’t always look this way in the future, either. If we’re going to talk about the changing face of money, it’s important to understand what counts as money in the first place.
What Makes Money, Money?
Merriam-Webster’s definition of money is “something generally accepted as a medium of exchange, a measure of value, or a means of payment.” More technical definitions evoke the same key qualities. To break it down, money is the following:
• A Medium of Exchange: Money is something that can be used to facilitate an exchange of goods. It’s a method of payment.
• A Store of Value: In and of itself, it maintains value whether I use it today or tomorrow (inflation aside).
• A Unit of Account: Money can be used as a standard numerical unit to convey value.1
If you think about a dollar bill, you can see how it easily checks off those three qualities. You can exchange dollars for groceries, a dollar is worth the same amount whether you spend it today or if you pull it out of your wallet next week, and you know how expensive those groceries are based on the dollar amount assigned to them.
Experts vary in the exact number of characteristics, but there are six core ones to know, courtesy of the Federal Reserve Bank of Philadelphia:2
• Divisible Money must be easily divided into small parts so that people can purchase goods and services at any price.
• Portable Money must be easy to carry.
• Acceptable Money must be widely accepted as a medium of exchange.
• Scarce Money must be relatively scarce and hard for people to obtain.
• Durable Money must be able to withstand the wear and tear of many people using it.
• Stable Money’s value must remain relatively constant over long periods of time.
Why am I telling you all this? Because when we start to move beyond a physical dollar and think about where money will go digitally, these concepts quickly begin to feel abstract. We start to realize that money doesn’t necessarily mean a piece of paper with a past president’s face on it; it can be anything that displays a certain set of qualities. But before we get into any future forms money might take, I do want to walk through what economists consider the general evolution of “money” and how money came to look the way we know it today.
Back in the days of early human civilization, people relied on a bartering system. In ancient Mesopotamia (ca. 6000 b.c.),3 I could trade you my cow for your grain, and because neither of those items was assigned a value, we determined their value ourselves. “Money” did not exist. We were directly exchanging the items we needed, and their value was based on how much we needed them and what we were willing to give for them.
Sounds nice and simple, but bartering actually came with all sorts of challenges. You had to find someone who had exactly what you were looking for, and when you found that person, you had to have exactly what he needed too. As you can imagine, this was not very efficient. So, money had to evolve.
Out of bartering emerged a solution: commodity money, which is just a fancy way of saying that any useful item with a fixed and agreed-upon value, like beaver pelts and gold, could be used as currency. Simply put, society shifted from trading the items they needed to trading items they could use to buy and sell other things (for example, instead of trading beaver pelts because they needed beaver pelts, people traded beaver pelts in order to buy other necessities).
There are many ancient examples of commodity money (these changes don’t happen overnight): the anthropologist Chapurukha Kusimba points to the Mesopotamian shekel (that is, coin) used thousands of years ago, stamped silver and gold coins used in Asia Minor as early as 650 b.c., and the preponderance of metal coins used around the globe—from the Roman Empire to China—between 1250 b.c. and a.d. 1450.4
Advantages of commodities are that they are durable, portable, and easy to store—some of the most significant and important characteristics of money.5 But they have one significant downside: they exist in finite quantities. And as populations grew, so did the amount of currency being transacted. Governments that wanted to put more money into circulation couldn’t simply print more gold or more beaver pelts the way we do with dollars today. During the eighteenth century, colonial governments mostly used paper money that was backed by commodities. But if they lacked common commodities, like gold, they instead leveraged land-backed paper money. This money came out of so-called land offices and allowed people to use their land as collateral (kind of like a modern-day home equity line of credit, where you use your property value to access cash). Land offices, and the interest they collected, took off in places like New York, Pennsylvania, and Delaware.6
In the United States, the next major evolution of money was fiat money. Fiat money has value because a government declares it to be legal tender, which explains the name: “fiat” means “it shall be” in Latin.7 In other words, fiat money is worth what our government has decreed it to be worth. It is not backed by any physical commodity (a paper bill is no longer a stand-in for a stash of gold sitting somewhere). The value of a fiat dollar depends on the government’s ability to regulate the currency.
The U.S. dollar became fiat in 1971, when Nixon moved us off the “gold standard” (before 1971, the U.S. dollar could be redeemed for gold, and the value of a dollar was tied to the value of gold).8 In other words, at just shy of fifty years old, the dollar as we know it today is a small blip in the history of money.
But while the nature of money has evolved quite a bit over the course of history, each new medium—bartering, commodities, fiat money—was born out of essential needs that emerged over time.
I know this may all seem a bit academic, but here’s why I think it matters: I firmly believe that what we think of as money right now will evolve—and is already evolving. If you look at history, it is only inevitable that our current definition of money is as fleeting as the $10,000 bills that were issued in the 1940s. Today’s tech revolution is ushering in new forms of money that look nothing like any we have ever seen. Understanding the characteristics they share with the bills in your wallet can help you understand not just cryptocurrencies, but whatever unanticipated new modes of money the future may bring.
1. “The Properties of Money,” Money Project, money.visualcapitalist.com; “Functions of Money,” The Economic Lowdown (podcast), episode 9, Federal Reserve Bank of St. Louis, www.stlouisfed.org.
2. “Functions and Characteristics of Money: A Lesson to Accompany The Federal Reserve and You,” Federal Reserve Bank of Philadelphia, 2013, www.philadelphiafed.org.
3. “Barter System History: The Past and Present,” Mint, www.mint.com.
4. Chapurukha Kusimba, “Making Cents of Currency’s Ancient Rise,” Smithsonian, June 20, 2017, www.smithsonianmag.com.
5. “What Is Money?,” Investopedia, May 31, 2018, www.investopedia.com.
6. Sharon Ann Murphy, “Early American Colonists Had a Cash Problem. Here’s How They Solved It,” Time, Feb. 27, 2017, time.com.
7. Neale Godfrey, “A Few Words About Bitcoin . . . Because Fiat Is Not Just a Car,” Forbes, May 8, 2015, www.forbes.com.
8. “What Is Money?,” Investopedia.
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