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Date: 2016-12-04 10:56 pm (UTC)
hairyears: (0)
From: [personal profile] hairyears
[needed: short bit of “what even is money?” without inserting an entire economics text]

See what you can pick out of this:

Money is two things: a medium of exchange, and a measure of value.

The 'medium of exchange' part is easy: you could trade entirely on favours and networks of personal relationships, without any money changing hands, and people did exactly that before there was coinage or tally-tokens or records of tithes at the temples.

Note that this isn't barter: there's no money, but there is a medium of exchange. The medium's an interlocking web of personal relationships and promises and favours; but there's no common token, nothing you can count or weigh out, and no records.

Easy in a village, where everyone knows you, but hard to do in a city where you have to deal with strangers - and in an urban life, where you're not self-sufficient and everything's a transaction - so you need some kind of token.

This token needs to be widely accepted: you take someone's money in the certainty that someone else will accept it and, bar a certain amount of haggling, you're confident that you gave a fair price and you'll get a fair price.

You don't want to discover that there are only two people on the island who use conch shells as tokens: you, and the guy who bought your boat and is now visible as a sail on the horizon.

You also don't want to discover that you're in the USA in the middle of the 19th century, and the Dollar Bills you brought in from Maine aren't accepted at face value here in Louisiana.

Or maybe they're not accepted at all: look up the 'Free Banking Era' in the USA for a lesson in how badly this can go wrong, and discover that the USA didn't really have a 'Dollar Bill' until the Civil War.

In theory, the medium or currency's usefulness in getting a fair price - the measure of value - is a decentralised consensus arising in the collective decision-making process of thousands or millions of daily transactions.

In practice, the measure of value is stabilised by the concept of 'Legal Tender', in which the law insists that there are classes of transaction which are definitively settled by these tokens: temple offerings, legally-enforceable debts, taxes, payments and bond redemptions by the State.

It isn't 'pinned' or even stabilised by reference to a gold standard or a silver percentage in coinage: coinage is often debased, and trust in the issuing authority even more so.

This mistrust of a central monetary authority is central to the existence of alternative currencies: but the alternatives rely on confidence and a stable consensus about value among a massive user base, engaged in millions of transparent transactions every day.

I say 'stabilised', but not 'stable'.

The value consensus reponds badly to external shocks and internal crises. The obvious examples of internal crises are a liquidity crunch following the collapse of a major bank, which requires a 'lender of last resort'; or, conversely, an imbalance in the economy creating inflationary pressures - these can only be resolved by recession, political intervention, or by an authority with the ability to restrict the money supply.

The market may have intrinsic corrective mechanisms that provide stability against day-to-day fluctuations in supply and demand: or it may not; but it definitely doesn't for larger shocks, which can and do induce deflationary or inflationary spirals - and these can kick an economy back into the trust and personal relationship transactions of the pre-monetary era.

Or, in an economy where there are competing currencies, we can see participants losing the value they had stored in Reichmarks, or Roubles, or Continental Dollars; and there are no winners, merely those who have avoided losses on their 'real' dollars and now must trade in a shrunken economy where the value held by the losers has been destroyed.

So 'money' is more than a token agreed between a buyer and a seller: it's a widespread agreement among a large number of buyers and sellers that they will respect that token and use it in fair trades that are a fair approximation to a consensus of value; and it's a collective confidence in the existence of corrective mechanisms to prevent wild swings in this value.

There is nothing requiring correction or expansion in your chapter on Blockchain technologies in the world of finance: but I will look out for more recent examples, with particular reference to egregious stupidity.

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