Money can mean freedom for some and slavery to others. Money has been called the root of all evil. Some say time is money. But money is a tool and your understanding of money can help you reap the benefits that money brings to a society.
Before money, human interaction was based on a barter system. Barter is a way of trading among individuals who own goods or services and trade directly for other goods and services. For example, if a farmer raises dairy cows and produces milk while his neighbor is a carpenter who builds barns, they would both gain from a trade. When the farmer needs a new barn for his cows and the carpenter needs milk, they can trade directly. However, this sort of arrangement has serious limitations. If the barn project were a large project the carpenter may not want the equivalent value in milk because the milk would most likely spoil before he was able to consume it. They would need something as a bridge during the transaction to make the value of both sides equal or else no agreement could be reached.
Bring on the money. Money has been developed by humans over time to bridge the gap of value in transactions. Throughout most of human history money has been a naturally occurring economic consensus among societies. The people of a community would naturally converge on a single good to be used as the value-bridge in transactions. Stones, seashells, commodities, and precious metals have all had their time serving as money in societies throughout history. The good used as money at any given time began serving as money due to the circumstances of the economy and the availability of goods in the economy. Money would naturally converge on the good that best served the function of money, to act as a bridge between transactions and help deals find equilibrium so that both parties can benefit from a trade agreement. The good that emerged in each society would have certain characteristics that helped human recognize the ability to serve as money. Scarcity, durability, fungibility, divisibility are a few but not all. The characteristics of money help societies identify and converge on the best money available to them at any given time in history, but do not define money.
Money is not a commodity or a good. Money is not the characteristics of money. Money is the space, time, and knowledge between transactions in an economy. Money is a tool for moving value through time and space. The benefits of money to a society is the efficiency gained on all transactions. Once you can understand this, you can understand that money can take on forms that did not seem possible to you before. For example, the Farmer and the Carpenter may come to an agreement that does not look like money but does serve the function of money. The farmer may offer the carpenter 50 gallons of milk for his labor to erect the barn. The carpenter agrees but only if the farmer will provide a fresh gallon once a week for 50 weeks rather than 50 gallons all at once. The agreement to move the value of the milk into the future on a contract is a form of money. The contract moves the value of the milk through time into the future. This example is a simple abstract of money as a tool to move value to a more desirable time for both parties. This version of money is between two individuals and involves two types of goods and service. For money to serve a whole community or society it will need to scale past simple contracts for trading goods and services.
For economies to scale money in the past, the individuals would converge on a good that would be used to serve the function of money. Individuals would naturally begin to use a certain good for one side of every transaction to move the value between transactions. An example would be the farmer pays the carpenter an ounce of gold to erect the barn, then the carpenter could purchase a gallon of milk with 1/50th of an ounce of gold in the future. The transaction is the same but now we have introduced a medium to serve the function of money. This form of money can scale much better than a simple contract between two parties. The gold can be used in other transactions and bring in other parties to scale across the community. If you understand gold’s role in this economy you can understand that the gold is not money by itself, but is serving the role of money and that money is the tool to scale transactions and to move value though time and space throughout an economy.
Money is the tool, not the good. Money is the network between transactions that allows value to move inside of an economy. Societies have been zeroing in on the most efficient networks for moving value though the economy. The fiat banking system was the most efficient network for money until it lost its ability to function as money. The fiat banking system can no longer move value through time into the future without a steady decline in value. Individuals feel this loss of value over time and move out of fiat currency. Societies for the last 50 years have been searching again for the best tool for money. We have seen the value of assets take on a money role as individuals have been using homes, equities, gold, and other assets to try to move value from previous transactions into the future. Most of these goods cannot function properly as money in today’s world of the internet and global commerce.
Individuals will naturally converge on the best tool for money over the coming years. They will converge on the tool that treats their future value the best. The tool that gives them the most functionality to move value across the globe and across time. The tool that gives them the most optionality to use money in transactions in a broad market. The natural convergence of individuals to the best money is just beginning. Bitcoin will serve individuals. Bitcoin will serve as the money.
