Seeing as we still have the site up, I thought it might be a good idea to try and find all the old passwords etc, find my way in, and try to recall how to create a post here. Done. Now, do I have anything to say? Um, well yes. Lets start with some jokes…
I think I want to start by saying that some of my musings on money, currency etc in the “economics” department were slightly imprecise and/or incomplete. I’ll stand by stuff I have written on complexity, chaos, zen, and how everything is actually the same, and that we must abandon control to gain control, but I think I had not yet taken those ideas and fully digested them before composing the stuff on money. We’ll proceed with first a borrowed joke for warm-ups, then one I just thought of, then some truth based on it.
A guy walks into a Zen Pizzeria. He says: “Make me one with everything.” <rim shot>
Q: Why don’t they need waiters in Zen restaurants?
A: Because in the chaos of the kitchen, the order simply emerges.
Now the simple truth:
Gold is money.
I want to share a simple way to view how we discovered money, or perhaps better said, why currency came to be used to represent the naturally-emergent concept of “money”, a concept which spontaneously was created in our minds as our economies grew in complexity beyond just a few goods that were traded amongst us.
Consider an economy consisting of twenty-six distinct goods and services. Label them A through Z. Make two columns of characters, like this:
In order for this model economy to function, we must have trading of all these goods and services. To trade, we must have a concept of the rate of exchange for each possible goods-pairing. That is, we must know the value-ratios of A to B, A to C, A to Z, B to C, etc. Draw lines between all these pairs on our two columns. Note that the value ratio of B to A is just the inverse of A to B, and there is no sense in trading A for A, or B for B. In the previous musings on money, I expressed this as the N-squared value problem, but by drawing two columns and all the crossing lines, we can visually see the complexity of this relative-value problem. In an economy of N goods and/or services, the total number of distinct pairings is N*(N-1)/2, the “triangular” numbers. Without a currency to aid trade, our alphabetic economy requires that we remember 26*25/2 or 325 different exchange rates, 325 unique lines between columns. While it is unlikely that any one economic actor will trade in all goods, one can easily see the problem as our economies grow more specialized.
Now let’s see the solution that our minds came up with. Long before we knew what “money” was, our minds were already using it, we just didn’t have a word for it. Take one letter, say “M”, remove it from both lists, and put it in the middle of the two columns:
C M C
Now our relative-value problem can be greatly simplified, and our minds were already doing this, before we recognized the fact. Our minds put something in the middle, and only drew lines from left to middle to right. This is an important point. We did not “invent” money, we discovered it. Money already existed as an idea, because it was useful to us to model reality. It that sense it is similar to a concept like “position” or “velocity”. Did position and velocity not exist until Newton wrote his equations? I submit they did exist, and our minds used the concepts to allow us to throw and catch objects, for instance, and Newton simply helped us with the vocabulary, and refined our understanding by giving us math that used these ideas, so we could make better predictions. In the case of trade also, something was already there. Our discovery was that we could move one of the physical goods we traded to the middle of the two columns to greatly simplify things, and to do math on market problems. How so?
Bacq to our list, note that the relative value of A to M is the inverse of M to A, and so we now only have to remember 25 relative values, draw a total of 25 lines. By moving M to the middle, our economy can fully function while keeping our mental processing simple. Money linearizes the n-squared value problem, and a market of N goods (currency excluded) can trade with just N “prices”. The concept of money allows the concept of price to exist. The good “currency” allows real prices to exist, and to have a good for which other goods can be traded, yet still with just N rates. Again, similar to “position”, the concept of “price” existed before we started formally, consciously using it, and doing math on markets. Our unconscious was already doing the math, just as we do the math to catch the thrown ball.
How I can know that the statement “Gold is money” is true? When my sister asked me “Why gold?” being perhaps of the camp that believes there could be other goods placed in the middle and still have a “truthful” market economy based on that currency, I responded, as we were sitting in the shade of trees at the time: “Why tree? It is the same question, and the same answer.”
We cannot really know why gold is money, any more than we can know why trees evolved to have roots, trunks, branches, leaves. The only possible completely true answer is “Because it works.” We can speculate that roots are required to gather nutrients, trunk and branch to support and convey the tree’s sap to the leaves. It seems pretty likely. We can also speculate why gold emerged as currency in our economies, and I have written elsewhere on this. It is relatively scarce, durable, divisible with a sharp knife, etc. and these reasons seem pretty likely. In some other world, or another geologic time, trees might have lost out to mosses, say, but not in the here and now. In other worlds, other times, something other than gold could be money (and was!), but not in this one, not now. Once a life-form is selected-for, it typically lasts a while. Yes, species (pardon the pun) go extinct, but those that survive for very long tend to be pretty robust and adaptive. Those that argue that gold as money is an extinct concept are going to get a sharp awakening. It is still money, and is used by the biggest banks and the wealthiest as a secure store of value, and is still used to settle international trade. Despite the obvious advantage (to some) of paper fiat currencies, gold has not gone away.
In a subsequent article I will discuss gold currency standards, and why the arguments against gold-backed currency fail tests of logic.