Hey smart people, Joe here.
How much money to do you have?
Don’t worry, this isn’t a patreon thing… (but we’re on Patreon now)
Anyway, seriously…count your gold.
…or your silver, or your Benjamins, or maybe even your rai stones if we have any fans from
the Pacific island of Yap.
How much ya got?
There’s a lot of ways to store your moolah, from the mattress to mutual funds, gold bars
or Venmo, but I’m willing to bet good money that your money is just, like, numbers in
some computer database.
And I recently found myself wondering: who says those bits and bytes are worth real money?
I mean, the Amazons and Walmarts of the world are perfectly happy when you tell your computer
to tell the stores’ computers to tell MasterCard’s computers to move that so-called “money”
around for you.
But how did we get from hoarding and exchanging gold to a world of 0’s and 1’s being shoved
around by algorithms?
The truth is that money has always been sort of imaginary—from people agreeing to agree
that two lumps of silver are definitely worth a goat, or some scribbling totally means you’re
rich to today’s crypto cyberstacks.
And at every step along the way, from clay tablets to Bitcoin, it turns out that these
shared delusions of value didn’t just come from social and political forces.
It was technology that made money possible.
[OPEN]
Say I’m a Mesopotamian farmer.
My wheat crop is kinda wimpy this year, so my neighbor Inkishush helps me out.
He needs some wool, and I owe him a favor, so I send some over.
Everyone’s happy.
But that didn’t involve any money.
Just the exchange of gifts, or maybe barter.
Easy!
But say his crop comes a few months before my sheep get fluffy enough.
Tracking who owes you over time is hard!
And it’s even harder if Inkishush insists my wool has to be just as nice as his wheat
or he’ll club me.
If only there were some technology that could help you record who owes who what…
The earliest forms of writing were all about accounting.
At first, people recorded actual wheat and wool or whatever, but eventually people started
recording all their debts in standardized units of account.
The way we have standard units like meters or degrees, early accounting used units like
cowry shells or shekels of grain.
Writing debts down in standard units serves one of the main functions of money: it lets
you store value, or save up favors to cash in later.
And when you do want to cash in, money gives you a medium of exchange— a convenient way
of swapping what you have for something you want.
Just record some new numbers in your ledgers, and as long as everyone trusts what’s written,
now you both agree on a new amount of imaginary value that each owes the other.
Boom!
That’s money.
And it’s actually why writing was invented!
I want to pause to stress how mind-blowing this is: money literally is accounting!
It’s just a way to agree on how much value someone has stored up and how to exchange
it later for actual stuff.
Yes, I just called accounting “mind blowing”.
Finally, you accountants out there get to claim some cool points.
But when we think of early money, we tend to think of commodity money—physical objects
that are useful, like rice grains, or pretty, like gold coins.
It lets you store value by…
literally storing it, and then exchange it by, well, exchanging the actual physical objects.
But using commodity money means you have to make commodity money, which is solved by production
technologies–like smelting.
But it also creates a more subtle technological problem: trust.
If your trading partner gives you a payment object—like, a coin—how can you be sure
that it is what they say it is?
Sure, it looks shiny, but how do you know Inkishush or Erasmus or Giovanni didn’t
dilute the metal?
To solve that problem, people invented touchstones: chunks of rock on which you’d scrape both
real gold and the coin you were offered.
The streaks would be different if the coin was impure.
A better solution was minted coins.
A government could guarantee a coin’s purity by stamping their official seal on a lump
of metal.
And milled or reeded edges—those little ridges you see on coins?
They could prevent anyone from secretly shaving off some extra gold for themselves.
These technologies let people trust money enough to trade it.
But commodity money has a problem: Get too much, and it’s a pain to carry around.
So people started storing their big piles of heavy metal in temples and banks, which
gave them paper receipts that they could cash in later.
It was a form of representative money—written notes with no intrinsic value promising that
whoever held one could exchange it later for the stuff with actual value.
And as far back as 12th century China, some governments decided they could just declare
certain pieces of paper were worth something, even without shiny, valuable objects in a
vault somewhere to back them up.
You couldn’t trade them in for gold, but neither could your neighbor, so everyone just
agreed to pretend.
It became way more practical to carry these notes around instead of clay tablets or all
that heavy metal, all thanks to technologies for writing, printing, and making paper.
So that’s how old-school technologies made old-school money possible.
But in the 1800’s, new technologies started to dramatically change how money was stored
and exchanged, starting with the telegraph.
In 1872, Western Union set up a system where customers could “wire” money to other
offices across the U.S.
Your grandma could give money to one office and that office would send a specially coded
message to a district clearing house, which would verify the money had been handed over,
then send a second coded telegram to the receiving office telling them it was ok to give you
your birthday cash.
For the first time, money could move faster than people!
Just five years later, more than 38,000 wire transfers were moving nearly $2.5 million
around the country each year.
Fast forward to the 1960s and people were doing way more buying, particularly with these
newfangled credit card things, which quickly tell a merchant who to call to collect your
money later.
But every time a store needed to check a customer’s credit card, they had to call on the phone
and someone had to manually check paper records.
Fortunately, electronic computers were just becoming a thing.
Ledgers could now be read by machines, so when someone called, banks could now let the
computers authorize card payments.
And those magnetic strips let the merchant’s machine automatically call the credit company’s
machine, taking more humans out of the process.
Fewer people, fewer errors, and faster than ever.
But remember that money is about storing value too.
During the 60’s, banks started installing other electronic computers that replaced punch
cards with magnetic disks or tapes that could hold tens of megabytes!
Which is only a fraction of this video file… it was a different time.
Since the 70’s, computerized financial data has just kept growing.
In 2018 alone, payment networks processed nearly 370 billion transactions.
Instead of finicky phone calls between glorified calculators, digital networks now whisk transactions
to huge farms of mainframe computers that handle each one in a fraction of a second,
essentially 100% of the time.
Mainframes are the behemoths of the computer world.
Super-fast input and output, obscene amounts of disk space, and all sorts of extra machinery
for extreme reliability and security.
Can’t play Fortnite on ‘em, but they do have special error-correcting memory chips
that can even catch if a random cosmic ray switches a 0 to a 1 on some chip and changes
your $24 into $1048.
On top of that, sophisticated machine learning programs take just milliseconds to compare
my purchase against my past behavior and millions of other people’s, and make sure this purchase
was really made by me, and not some Nigerian prince buying toy ponies with my stolen card
number.
Because I would never do that.
This technology all works so well, we hardly even think about it anymore.
And right about now I know what you’re thinking… is he gonna talk about cryptocurrencies like
Bitcoin because they’re like, the future of money or something?
There’s a lot of videos about the ins and outs of cryptocurrencies, but one thing that
makes them unique is that instead of one ledger of imaginary money kept by one person or multi-billion-dollar
company in one place, everyone using the currency cooperates to keep one giant ledger of imaginary
money that lives somewhere in the cloooouds…
But where traditional forms of money work by everyone trusting everyone else, cryptocurrencies
kind of work by no one trusting anyone else?
Everyone keeps a copy of tThe ledger of who has what, and only updates it is only updated
after a bunch of computers have competed to solve really hard math puzzles designed to
make sure prove they haven’tno one has messed around with the records.
It's a new money technology without a middleman, which has some advantages for… certain things…
and also if you don’t trust your government, but at its heart it’s still aboutit basically
serves all the classical functions of money: storing and exchanging imaginary value via
the magic of accounting.
Of course, the role of technology is not all rainbows and ponies.
All this “progress” has made it much easier for someone to do real damage to your imaginary
money by hacking into stores’ treasure troves of credit card numbers and stealing them.
On the whole, though, we can safely say technology is why money exists.
Technology and invention, not just psychology or economic theories, have continuously made
our use of money faster, more convenient, and more trustworthy—, even if it is all
completely made up.
Stay Curious.