Track 0 · Ledger · lesson 1
What money is for
9 min
Track 0 · Ledger · lesson 1
9 min
You have a chicken. You want shoes. The cobbler is a vegetarian.
This is the problem money solves, and it is worth sitting with for a moment, because almost everything else in this course is a consequence of it. Without money, every trade needs a double coincidence of wants — I have what you want, and you have what I want, at the same moment, in the same place. Most of the time that does not happen, so most of the time the trade does not happen.
Money is the thing that breaks the coincidence in half. You sell the chicken to whoever wants a chicken. You buy the shoes from whoever sells shoes. The two halves never have to meet.
Money is not wealth. Money is a claim on other people's work, and a technology for moving that claim around.
That distinction is going to keep mattering. A country cannot get rich by printing more claims, because the claims are not the thing — the work is. But a country with no way to move claims around stays poor no matter how much work it is capable of.
Anything that works as money is doing three separate jobs at once. They are usually taught as a list, which makes them sound equally important. They are not. They fail in different ways, and the failures look nothing alike.
A medium of exchange. The chicken problem. This is the job money exists for.
A store of value. It holds its worth between selling the chicken and buying the shoes — whether that is ten minutes or ten years.
A unit of account. It gives you one scale to compare a chicken, a pair of shoes and an hour of someone's time. Without it, a shop with 300 products would need 44,850 separate exchange rates.
Predict
Here is the part that most explanations skip: the three jobs make contradictory demands, and every form of money is a compromise between them.
A good medium of exchange wants to be abundant and easy to move. A good store of value wants to be scarce. Those are opposites. Push hard on one and you damage the other, which is roughly what every argument about monetary policy is about underneath the vocabulary.
Not the same thing
A claim on other people's work that you happen to be holding.
Things that produce, or entitle you to, future output — skills, tools, businesses, land, ownership.
Which is which? Put each one on a side.
A machine that makes 400 shoes a week
The cash you were paid for last month's shoes
Knowing how to make shoes
Check
Cattle, salt, shells, tobacco, cigarettes in prison camps, large immovable stones on the island of Yap. Each one satisfied the three jobs well enough for its time and place, and each one failed when the compromise stopped holding.
Cattle are a decent store of value and a hopeless medium of exchange, because you cannot pay half a cow and get change. Shells work beautifully until someone arrives with a boat and a lot of shells, at which point the scarcity that made them a store of value evaporates.
The pattern repeats: money stays money for as long as the thing that made it scarce keeps holding.