Episode 1 – What is Money?

Money. Money makes the world go round, it’s the root of all evil. It goes cha-cha-ching, it rules everything around ya, a dollar dollar bill yo. So ask yourself, how much do you really know about… wonga?

Probably not as much as you think, and probably not as much as you should, right? But fear not, I… am going to change all that. And if you’re looking for skillz to pay those crypto billz then get subscribed because we’ll have a new episode every week. This is School of Block.

To properly understand money we have to go back, way back, right to the beginning, you know, before MONEY was even invented.

So, somewhere back in the bronze age – for those of you whose memory has faded since school, that’s between about 3000 and 1000 Before Christ, when societies functioned completely without money. No money, no problem. But how, you ask? Well, they BARTERED, you know.

And it worked pretty well… most of the time. Let’s say I’ve got two cats, and what I really want is three goats. Assuming the goat owner wants cats, and values his goats at 2/3 of a cat each, this is going to work out just fine. In a society where there’s enough people with enough cats, goats, timber and grain that they can juggle their wants and needs, you can more or less get by. Everything eventually evens itself out.

But you can see the problem here. Not very efficient, is it?

What if the goat owner has 4 goats but one of them has got a gammy leg? And manage? You say you don’t want that one. He says it’s a goat like all the others. 

What if you’ve only got one cat? That’s worth a goat and a half. But half a goat isn’t much good. And you don’t want to spend your whole cat on just one goat. That’s bad value. 

And what if your goat owner doesn’t actually want cats? Big problem. 

Enter money, the “solution” to all those inefficiencies. To this kind of society money was literally the shizz. And there’s a few reasons for this. 

First, it’s a store of value. So, unlike a goat, it won’t get old and die.

Secondly, it has to be a medium of exchange accepted by everyone – that is, everyone understands it and places the same value on it. 

Thirdly, it’s fungible, which sounds like something the kids take on holiday but it actually means that one unit of money is the same as any other unit of money. No mangy goats. Each unit interchangeable one for another with no loss of value.  

It also helps if it’s divisible – so any unit of money can be split in 2, 5 or 10. Down to a practical lower limit, obviously. 

Finally it has to be finite- you can’t just make more of it any time you like. Goats are pretty easy to breed, so you can just make more whenever you want. With money, there is (in theory at least) a knowable supply. 

The Chinese were the first to introduce money in a form we might recognise. In about 770BC they made miniature representations of the tools and weapons they normally traded out of bronze. Due to the spiky nature of these little implements, they soon settled on a circular form factor, and yep – you guessed it – invented the coin. The Chinese weren’t content with just inventing money, they spun the innovation engine even faster and around 700BC moved from metal coins to paper money. 

By the time the legendary explorer Marco Polo visited China in approximately 1271, the emperor of China had a good handle on both the cash supply and various denominations. In fact, where a dollar bill might say ‘In God we Trust’, the Chinese inscription on their notes at the time was “Counterfeiters will be decapitated”. Charming. 

But this also brings us to another inherent problem with money. How easy is it to verify what you’re looking at is real? And how difficult is it to forge? Excellent questions we’ll return to shortly. 

But first, let’s discuss what money can be. 

Money can be a commodity. So, as some early societies experimented with, money could be sea shells, or even salt – although measuring salt and counting seashells both have their practical limits. 

Commodities can even be chickens, cows or goats – although modern society has tended towards precious metals like silver and gold. Problem is they’re not so easy to carry round in your pocket. 

So this is where REPRESENTATIVE MONEY comes in. Technically this was actually invented before coins, but we know it best as the banknote that says “I promise to pay the bearer on demand… ” however much the value of the note is. And this was usually gold.  

Why? Gold possesses a number of attributes that for a very long time has made it the ultimate and soundest form of money. It’s hard to get hold of, hard to make more of, it’s divisible and it’s saleable across time.  But gold is of course far from perfect — it’s heavy, impractical to carry around and storing it requires robust security and, in large quantities, warehousing facilities, vaults, you know, proper Fort Knox stuff. And try processing a payment of 10 ounces from your warehouse in Singapore to a merchant in london. And think of where gold is mined. You can probably imagine the Yukon, or the great Australian mines or the great Olimpiada in the savage lands of Siberia. But you probably don’t think of tiny Papua New Guinea which is home to the world’s largest gold mine. Historically this has been one of the most corrupt countries in the world. So gold mining as an industry is centralised and corruptible. Not ideal. 

Oh, also, did I mention, criminals love gold so… if gold is your game you need to get your security game on lock.

In the light of all that representative money looks pretty damn dope. Rock up at your central bank, give them a ten dollar note, and get 10 dollars worth of gold straight back. 

That was, until the 1930s when the UK and US abandoned the gold standard. The US were sort of still attached to it until Nixon applied the final nail back in 1973. And since then, the pound and the dollar, and just about every other state currency around the world has become known as FIAT MONEY. 

What does that mean? It’s latin for ‘let it be so’. And it means that the value of this cash is taken on trust. It has value because the government says it does, and because the people believe it. Now remember when I said money had to be scarce? Obviously not so scarce that no-one has any, but it has to be difficult to make more. You can’t just invent more of it whenever you like. 

Well, without the gold standard, that’s kind of what governments have been doing with fiat money ever since. And there is a problem with that – it’s called inflation. Which, rather neatly brings us round to digital money. The most talked about version of which, cryptocurrencies – like Bitcoin, Ethereum are beginning to see real traction. 

But is the algorithmically mined Bitcoin real money you ask? Good question.

Saifedean Ammous, economics professor extraordinaire wrote a book called The Bitcoin Standard, where he set out a series of tests for what money needs to be, breaking them down into three main classes. We’ll look at how bitcoin compares to fiat, and for the hell of it, goats too.

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The first test. STORE OF VALUE. 

A few things that can contribute to this. Is your money physically durable? Is it forgeable? How easy is it to make more?

Let’s start with goats. Last about 10 years. Hard to make fake ones, but pretty easy to make real ones. Overall, not really killing it in this test.

Fiat money. Notes last, well – a little while. But they do get forged quite a lot. And central banks absolutely love printing more of it. Especially when trying to prop their economies up in the face of a global pandemic. Did you know that 1/5 of all US dollars ever made were printed in 2020? Mad huh? 

And bitcoin. Will last as long as we’ve got power to run computers, devastatingly hard to forge, and pretty damn hard to mine unless you happen to sit on a warehouse full of high powered graphics cards and cheap electricity. But, can we really call it a store of value when its price has bigger swings than a giant’s playground?

Let’s move on to the second test. MEDIUM OF EXCHANGE. 

Is this form of money saleable across time, space and scale? That is to say will your money retain its value – how easily can you send it to someone, and how easily can you divide it up?

Frankly this test is a disaster for the goats. They’re terrible on long haul flights, and woefully indivisible.

Fiat does a little better, but wire transfers are expensive and slow and currency exchange adds friction and inefficiency.

Bitcoin, yup, doing the bizzo once again. Doesn’t degrade, fast, cheap and frictionless to send and the smallest unit – the sat is only a 20th of a cent. Amazing.

Right. Final test. UNIT OF ACCOUNT. 

Is your money fungible, countable and acceptable? 

Yes, if you’re an insomniac you can try counting goats, but let’s see the bank teller try that one at scale on his weighing machine. 

Fiat money does better in this category than the others. Strong fungibility, easy to count and with the exception of international currencies, largely acceptable.

Fungible yes, countable of course, but where Bitcoin has struggled in the past is it’s acceptability to multiple parties. This is changing quickly though.

Fun fact: globally $1000 of Bitcoin is now seen as more desirable than $1000 of government bonds, real estate and even gold.

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So what are we left with? The surprising realisation that if you want to take charge of your financial future – don’t start accumulating goats. 

There’s many different forms of money, some perhaps better than others. 

Bitcoin is the new kid in town, making all kinds of waves. But it’s got no shortage of challenges in front of it, from regulation to integration and even ecological concerns around the power consumed by mining. And imagine the geopolitics involved if some countries fight it whilst others embrace it. 

But either way, whether it succeeds or fails, the decade ahead of us is going to fundamentally change the way we see, use and store the means of our wealth. 

So yes – occasionally it does pay a little to think about what money actually is because if you’re looking to save, or hedge yourself against a financial reality that seems to be spinning further and further out of control then it helps to know what it is you’re up against.”