Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
When I was eight or nine years old, I would wash farm equipment for my dad, and he paid me a few dollars. I also used to pick up rocks from our fields for money. (Rocks in fields can really screw up a plow, so someone has to pick them up). I disliked these menial jobs, but I did them without hesitation because doing so was one of the few ways I could attain money.
This mindset is as far as most peopleâs understanding of money ever gets. Work to acquire money to acquire what we want and need. And while weâre all beholden to a far more nuanced and discomforting psychology underlying money, few of us realize it.
As I began to accumulate wealth throughout my twenties, I slowly learned what money really is. Itâs not a âstore of value,â as many think. Money is a measure of everyone elseâs indebtedness to the person who holds it.
The more money you have, the more everyone else owes you.
This concept is hard to accept, even for many modern economists. To begin to grasp this idea, we need to take a brief look at the origins of money.
Let there be money
Pretty much all modern economic theories on money are wrong. This is because they are derivative from the seminal work of Adam Smith, who, in 1776, published Wealth of Nations and became the father of economics. In short, this book posited that humans originally conducted economic interactions with one another through bartering; that is, Tim trades his cow for thirty of Steveâs chickens.
The limitations of barter are obvious: coincidences of needs will be too rare to keep goods flowing. In other words, I wonât always have something to give you in exchange for something of yours I want. It is from this limitation that traditional economic theory supposes the concept of money emerged.
When I want something from you, but I donât have anything you want, I need something to give you that you can then use to acquire what you do want. Thus, let there be money.
Thatâs easy enough to follow and seems logical: barter, then money. Next, conventional economics says, comes credit, which works as follows. I need something you have but I donât have either money or something sufficient to barter for the item. Given that money already exists as a means to measure the value of any given thing, I can give you an I-owe-you in exchange for the item. You will have extended the item I want to me on credit in the expectation that I will pay you back at some future point. If I donât pay you back in due course, itâs understood by both of us that you have the right to extract the value of the credit from me by whatever means society deems appropriate (e.g., garnishing my wages).
So, to recap, conventional economics says that first comes barter, the comes money, and finally comes credit.
This model hinges on money as a store of value at the center of the axis around which economic transactions revolve. But this is wrong.
Credit as the foundation
Credit is the foundation of economics, and existed long before standardized money as we know it today. If I wanted your cow but didnât have what you wanted in exchange, you would in reality be more likely to give me the cow on the expectation that I would return the favor at some future time point when the opportunity arose, even if we donât have an ordinal money system by which to value the cow. Itâs understood that youâve done something for me, and I owe you because of it. I am indebted to you.
Anthropological evidence suggests that most human economic interaction actually operated on a credit basis before money and standardized trade was widespread.
And this is where things start to get interesting.
Throughout history (innumerable examples abound in the anthropological literature), debtors have been beholden to creditors if they refuse to repay a debt. In many historical cultures (and some isolated cultures existing in modern times), I could take from you pretty much whatever I wanted if you didnât repay a debt you owed me. That includes your wife and your life if I deemed it appropriate.
In other words, creditors had absolute power over debtors. This holds true today, but our terms are more humane. If you donât pay the bank back on the loan you took from them, they can take your house or part of your paycheck. In some cases, they can force you to sell possessions you own to raise funds to pay them back.
Money as a representation of credit
Assuming credit preceded money per se, how did money arise, and what does it actually represent?
Letâs assume that I want your cow and we both understand that I cannot exchange something you want for it right now. I could give you my word that I would pay you back, which may be fine in a small, primitive society. But what if weâre living in a larger and more lively society? What if you know you need something for your cow right away, not at some future point when I can provide it? You might ask me to sign a piece of paper that says I owe the holder of the paper the value of a cow.
What comes next is important.
You could then take the piece of paper and trade it to a third person for whatever you need at the time, as long as you and the third person assume Iâm good for the debt. That is, the third person would be able to redeem the piece of paper for my owed debt at any time, and I would give them the equivalent value of a cow. So they give you what you want in exchange for the paper because it carries the assumed value of a cow redeemable by calling on me to pay up.
But what if the third person doesnât redeem the debt, but instead trades it to a fourth person, who trades it to a fifth and so on? Before long, that piece of paper becomes money. Whoever holds that paper is able to extract the debt from me if they ever see fit, or they can trade it someone else.
This whole system assumes that I am good for the debt if it ever actually gets called in. And this is exactly how our modern monetary system works. Money has value because we assume the issuer, i.e., the State, will be accountable for the debt it represents.
So, what is money, really?
Now that we understand that each unit of money one possesses represents an I-owe-you issued by another entity, we can start to unravel the implications of money.
If I have $100, that means I can extract a debt of $100 from someone else by exchanging the $100. In other words, the $100 I have represents not what I have, but what other people owe me.
As oneâs wealth grows, so does oneâs function as a creditor to society. As weâve seen, creditors have immense power over debtors. And effectively, anyone who does not have the money that you possess is in debt to you for that amount. Now, with menial sums most of us are used to, say less than $1 million, the implications are fairly minor, though nonetheless satisfying.
Most people would feel quite powerful walking around with $100,000 in their backpack. Why? Because the money they have means they can, for the most part, walk into any store and get whatever they want. That is, they can demand of the clerk the item they desire precisely because the clerk is in debt to the person for $100,000.
So, effectively, money represents power over other people. This is why we view extremely wealthy people with either reverence or with suspicion. Because whether we can articulate our concern, we understand subconsciously that we are indebted to that person for an amount far greater than we could ever pay. A person with $100 billion available could approach us and most likely take anything we have by offering a high enough price. As the saying goes, everyone has a price.
And why is this? Because our acquisition of wealth in exchange for whatever the wealthy person wants to buy represents an increment in our power as a creditor to society.
So, as long as money is accepted by everyone as a representation of a debt someone else will always be willing to pay, money is a representation of power over others.
This is why money is so appealingâââmoney is power, literally.
Why it takes money to make money
Weâve all heard the saying âthe first million is the hardest.â But why is this? Itâs because, after a certain threshold, one can employ oneâs available capital to extract debts from society without having to do the work him or herself.
With enough capital available, a wealthy person or corporation can extract debt from less wealthy people by effectively renting their time via paying them a wage. Of course, the wage that the wealthy entity pays will always be less than the value of the work for which the entity is paying.
Availability of lots of money at baseline allows an entity to setup the necessary infrastructure to extract more value from a wage paid to a worker than the worker could ever extract on his or her own in the absence of the infrastructure for the amount of money earned through the wage. This always means that people, corporations, or States with more wealth will have power over less-wealthy people.
The more money a person holds, and thus the greater societyâs debt to that person, the easier it is for that person to call in those debts from society in a manner that creates further wealth. This paradigm will never change as long as the idea of credit and debt exists. This naturally segues into a reality check for cryptocurrency enthusiasts who perceive bitcoin and other crypto coins as a new, fairer money system.
Why concerns about the ânational debtâ are unfounded
The United States carries a large load of âdebt,â and this causes endless political debate and many citizens actually seem to think that this could mean that the US will go bankrupt or somehow become beholden to the holders of our âdebt.â But this will not happen, and we donât need to worry about it.
As I mentioned above, money merely represents an I-owe-you that people trade continually because itâs assumed that the institution that originally issued that currency is good for it. Effectively, thereâs no need to ever approach the original issuer of the currency and demand the face value of the note because the value can be extracted from anyone else. For US Dollars, these currency notes, i.e., âI-owe-youâs,â are exchangeable basically anywhere in the world. Thus, the United States functions pragmatically like a bank for the world.
Would we be in a bad situation if somehow all the debt we had outstanding was called in directly from us at once? Sure. But will that ever happen? No. Because if it did the entire world economy would literally stop functioning properly. Any country that called in all itâs US debt at once would effectively be committing economic suicide.
So, the US national debt, which dumb politicians argue endlessly about, is a moot point.
Cryptocurrency is no different than fiat money
Cryptocurrency advocates point to many advantages of blockchain technology and the decentralized nature of the âcoinsâ that live on this infrastructure. And from a purely technological standpoint, such blockchains are going to solve a lot of problems. But many people also seem to be under the impression that cryptocurrencies will function as a better kind of money. This is a fallacy.
Crypto coins represent the exact same thing as fiat currency: a measure of debt extractable from other people. Thus, accumulation of cryptocurrency by any given entity will increase that entities power to extract debt from society.
Now, at this point, some might start to object that cryptocurrencies are better than fiat currency because they arenât prone to inflation. This is also a fallacy. Cryptocurrencies are prone to value inflation, whereas fiat currency is prone to supply inflation. In practice, these are no different: both increase the amount of societal debt the holder of the currency can extract.
The value of bitcoin, for instance, is measured as a comparison against the US Dollar in most cases. This price fluctuates as demand changes; thus, the value of bitcoin at any given time is meaningless because value inflation is arbitrary and can happen anytime.
Anyone who thinks cryptocurrencies could possibly replace fiat currencies anytime soon is naive to the fact that to establish a valuation for the crypto assets without the comparison of the fiat currency would be extremely difficult.
Conclusions
Weâve seen that credit, not money, is the foundation of human economic interaction, and that money really represents I-owe-youâs payable by society to the holder of the money. Weâve seen how viewing money through this framework makes it easier to understand why wealth begets wealth, and also why cryptocurrenciesâââor any other alternative to fiat currency for that matterâââcannot possibly solve problems of wealth inequality. Weâve also learned why worrying about the US national debt is a waste of time and energy.
The take-home message is this: think about money as a tool to manipulate what really matters in human economic interactionsâââcredit. All economic systems operate as credit extended and debt owed, thatâs it. Thus, thinking about the money you do have not as intrinsically valuable, but as a means to get other people to do things for you, can help you understand the society we live in and potentially think in new ways about how to grow your wealth.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.