MONEY.

1. The question.

I don’t understand what money is. By which I mean that I don’t have answers to questions like: “what is money?” and “how does money work?”. But what exactly don’t I understand? I need to get clear about that first. (This is an instance of the important rule: “if you don’t understand the question properly then you will never get an answer.”)

I know that what I don’t understand is some thing, which if I did understand it, would mean I could answer naive questions such as: “why can’t we just print lots of money and give it to everybody and then everybody would be rich?”. The usual answer to this is “because then there would be too much money chasing too few goods and the money would lose its value”. In the absence of knowing how money works, I understand the gist of this point but I don’t understand it properly. (The gist isn’t good enough.) To properly understand I would need to understand how money “chases goods” in the first place and what it means for there to be the “right amount” of money, as opposed to “too much” of it.

Another thing might be: British banknotes have a written statement on them. Like on the £10 note it says “I promise to pay the bearer on demand the sum of ten pounds”. But I thought that this banknote WAS ten pounds. What is someone going to give the bearer when the bearer demands? Also who is the ‘I’? If I had the answer to what money is I would understand the statement on the banknotes.

(Also what if, in the days when people still used cheques, I wrote on a cheque “The Bearer” as the payee. Then would this constitute forging money? People might use that cheque as currency. If I had a reputation for always honouring my cheques. If I understood what money was then I would be able to clear up this point too.)

So, I think that explains what exactly it is that I don’t understand when I say I don’t understand what money is. Or rather it explains a bit more. I can’t fully explain it. I sometimes think that if had the ability to explain fully what I mean when I say I don’t understand what money is, then I would probably have the ability to understand what money is.

2. An answer.

So back to the main question of “how does money work?”. By the way, I think that “how does money work?” is a better question than “what is money”? so I will normally refer to the former.

When I do an internet search for “how does money work?”. I find things like this

https://www.investopedia.com/articles/investing/092413/how-currency-works.asp

which says (to quote at length): “To understand why civilised societies have used currency throughout history, it’s useful to compare it to the alternative. Imagine you make shoes for a living and need to buy bread to feed your family. You approach the baker and offer a pair of shoes for a specific number of loaves. But as it turns out, he doesn’t need shoes at the moment. You’re out of luck unless you can find another baker - one who happens to be short on footwear - nearby. Money alleviates this problem. It provides a universal store of value that can be readily used by other members of society. That same baker might need a table instead of shoes. By accepting currency, he can sell his goods and have a convenient way to pay the furniture maker.”

This explains what I will refer to as the Barter Problem. A basic statement of which would be: a shoemaker has shoes and wants bread from the baker but the baker doesn’t want shoes. Money is the solution to this problem like this: the baker gives the shoemaker bread and in exchange gets money from the shoemaker instead of getting shoes.

But this isn’t really a detailed answer to the question of “how does money work?”. It says that money is a solution to the Barter Problem but it doesn’t explain how (by what process) money is the solution. For example: how does the money get created? When the baker takes money off the shoemaker instead of shoes, where did this money come from?

3. (Aside.) Trying to get an answer.

Whenever I read anything about this issue I fail to understand. The failure to understand is often even more stark and basic than that which I have described so far. For example the Bank of England published some documents a few years ago. With the aim (as far as I can tell) of explaining to the general public what banks do and how money works. In the document entitled: “Money creation in the modern economy”.

(From March 2014, see

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy)

This says: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” But what does this sentence mean? What does “matching” mean? What matches with what? It sounds like it is saying that (for example) that when Mary goes to get a loan of £1,000 the bank make a loan to her meaning they give her £1,000. And then they also create a deposit in her account as well to match that loan. So the deposit matches the loan.

Or does it mean that “creates a matching deposit” is what constitutes making the loan. But the text seems to suggest they are different things.

4. Desirable commodity.

One answer to the question of how money solves the Barter Problem is that the money which the fisherman gives the baker is something else, some other exchange item, where that something else is generally and universally desired. It’s something that everybody always wants and which they will always want and so solves the Barter Problem the basic point of which is that any particular bartered commodity is not always desired by everyone. So money is a generalised exchange item. It is the kind of thing that people often say becomes currency in places like prison. For example items like cigarettes or canned food. Something about which you might say: “you can’t have enough of this”. Note that this will have to mean not enough for you. It will have to be something that you were wanting to and able to consume without limits.

But there is no such thing as an always desired commodity. There will always come a point when you (as an individual) will have too much of any particular item, even of tinned food. And then you might not want to accept it in exchange for something else.

Some explanations I have read even say that the general exchange item can be something very common, like seashells. For example this

https://www.youtube.com/watch?v=mwSAuNb44lU

which says: “Some communities use cocoa seeds as money, other communities use seashells.”

I don’t see how this would work though. If we were using seashells anybody could just go and get as many as they wanted from the seashore.

5. Gold.

More often it is said that gold is the general exchange item. And historically this indeed has been the case. I can’t deny that, but I don’t understand how.

The first thing about gold is that it isn’t very intrinsically desirable. It has just a few very limited uses. (For example it is useful for plating other metals because it does not corrode.) I can imagine that some (non-perishable) foodstuff might be currency. But I can’t see how gold could be. Because what is the reason for the desirability of gold? As far as I can see it is just the fact that everybody else desires it.

Is the idea that it is desirable because it is a scarce item? But I could sign my name on a few pieces of paper. Then those signed papers would be a scarce item. But they wouldn’t become desirable because of that.

Second, I don’t understand how gold has any relation to wealth. There is only a limited unchanging quantity of gold. But wealth can increase. So wealth can’t be identical to gold.

Suppose there was a poor town. By poor I mean that its inhabitants had very little food and their houses did not shelter them properly and their clothes were ragged. And then they found some gold. And so would be considered wealthy. But would they be? By wealthy I mean having an increased standard of material living. The population of the town wouldn’t get this solely due them finding the gold. They wouldn’t get plenty of nice food, sturdy houses and splendid clothing just because they have got gold. That would depend on other factors such as other people wanting the gold. Other people who, in exchange for the gold, would do work to improve the standard of living of the townspeople. By work I mean producing food and housing and clothes. So if there were no other people the gold wouldn’t make the townspeople wealthy.

In contrast to this, imagine that, instead of finding gold, the townspeople found ways of being more productive. Ways of making things (clothes and buildings etc) quicker and better and ways of making new things like machinery and health inducing substances. Then they would be more wealthy straight away. This wouldn’t be dependent on gold or anything or anyone else. In general it is things like productive capacity which results in an improvement in standard of living. And these things have got nothing to do with gold.

Or indeed with any kind money. If the poor town acquired a huge amount of money, they would to be wealthier as a result in the same way that they wouldn’t be wealthier as a result of finding gold.

The idea applies to pensions. People worry about having enough money, pension income, to live in their old age when they are retired. But that retirement income only has value due to the productive capacities of the younger generation. (If you insist on thinking about it in terms of money then you could say: pension income comes from taxes (or pension contributions) paid for by the younger generation.) So instead of worrying about having enough pension income, you should worry about there being sufficiently skilled people to provide you with a decent standard of living in your old age. What if you saved a lot of money but the younger people were all stupid and lazy. Then your money would get you nowhere.

6. Owing money.

Apart from the idea that money is some “universally desired” item, another idea is that it is an IOU. I think this makes more sense. So, in the above example, when the baker says he does not want any shoes the shoemaker gives to the the baker a paper statement which says “I owe (promise to give) to the bearer of this paper note, and in exchange for the note, one kilo of bread.” Then suppose the baker wants a table and goes to the carpenter but the carpenter doesn’t want any bread. The carpenter gives the baker a table and gets from the baker the IOU for the bread. Then the carpenter, later, might want shoes and so he gives that IOU to the shoemaker. (The exchanges rates don’t make sense here but you get the idea.)

The IOU note that the shoemaker gives to the baker is a new thing created by the shoemaker as an object that can be exchanged. It has no intrinsic value. This fits with the standard description of money as a medium of exchange.

Thinking of money as an IOU would also explain how it can be created out of nothing. Because an IOU is a promise to pay and when I make a promise it is made out of nothing. When I “give you my word” I don’t give you anything material.

7. Problems.

The next thing is: yes OK money solves the Barter Problem. But doesn’t it raise other problems? One thing is that money is like a pseudo-commodity in the bartering system. (A “dummy commodity”.) It doesn’t involve abolishing that system. So that means money must still be bartered, by which I mean used. So, for example, if Jack has got some money from selling bread and he doesn’t spend it. And, if he had spent it, he would have spent it on buying apples from Mary. This means that Mary is stuck with apples she doesn’t want. She doesn’t have the spendable money she would have got from selling them to Jack. And, if she had spent it, she would have spent it on buying bread from Jack in future. It feels like the whole system grinds to a halt if people try to save money. (I think I am just muddled about this.)

And money, by being a generalised medium of exchange, is more susceptible to being saved because of that. By not being an actual commodity it seems like it will keep its value forever. But it won’t. It’s value depends on its being spent.

Another question is: how did we get to the Barter Problem situation in the first place? Did the shoemaker used to exchange shoes for bread with the baker. But then one day the baker stopped needing shoes? Or did the shoemaker used to get his bread from somewhere else before. Or maybe he has just started eating bread.

Also: when the baker accepts the shoemaker’s money is it the case that he (the baker) still wants a table and that he knows that the carpenter wants shoes? If so then everything is OK. If not then it might turn out that he (the carpenter) doesn’t want shoes and then things might not work out. But maybe I am getting off the issue of money now and onto the question of supply and demand. Although that relates to the issue of money also.

All very confusing.

8. The equality of money.

There are three ideas here and I’m not sure how (or if) they all relate to each other. Or even if they make any sense.

First, for some person to be rich there needs to be poor people. So wealth implies inequality. This is true in the simple sense that wealth is a relative concept. Like ‘big’ or ‘tall’. But there is another, different, sense in which it is true that rich people need poor people. Suppose that Jack had an income of 100,000 dollars a week and everybody else had an income of 1,000 dollars a week which was sufficient for them to live very comfortably and they were quite happy with it. Then Jack’s 100,000 would be worthless and he would not be able to use it to improve his standard of living above that of everybody else. Because nobody would want his money (as they are happy with what they’ve got) and so nobody would be willing to do anything to get it. Normally what would happen is that the people on 1,000 would want Jack’s money and so would do things to improve his standard of living in exchange for some of that money. - Maybe what I mean is that Jack being wealthy depends on poorer people wanting his money?

Second, suppose that, in a given population of various incomes, we increased everyone’s income by 20%. Then none of them would be any richer than they were before. But if I raised the income of just 5% of the population by 20% then that 5% would be richer.

Third, wealth is a zero-sum game. Which means that a part of a population can only become wealthier by taking wealth off some other part of the population making them poorer. So, as above, when I said about raising the income of 5% of the population by 20%. Strictly speaking this would only fully result in the 5% becoming wealthier if the income of the remaining 95% is reduced (in total) by whatever amount the top 5% are getting extra.

9. Illusion.

The thought that money is an illusion is often stated as some kind of profound insight but more often it’s just an amusing observation.

For example, suppose Jack knows nothing of the existence money. And then we give him some employment and tell him that he can get anything he needs (food, clothing etc) from stores that are around town. We give him a card and tell him he must present this whenever he gets what he wants from a store. (This card is some kind of debit or credit card but we don’t tell Jack that.) We tell him to be sensible about what he gets. We tell him: look at what other people are getting, aim to get about an average amount of stuff. In this scenario, as far as Jack is concerned, there is no such thing as money. All that’s happened is that he has got a comfortable standard of living in exchange for doing some work. No money involved at all.

At “all you can eat” buffets it seems as if you are being given an unlimited amount of food. But there is a limit which is your appetite.

You can describe the richest person in the world as someone “who can have anything they want”. This is a correct definition and it does not need to mention (money or) the extent of the wants. Which means it is as likely to apply to someone with limited wants (and not much money) as it is to someone with many wants and lots of money. In both these cases money is no object when it comes to getting what they want.

Note also it is correct to use the superlative ‘richest’ in both these cases. Because nobody can be richer than such a person although they might have more money.

Such a ‘richest person’ would be confused when they saw a sign at the store which said: “buy one get one free”. They’d think: it’s all free! And if they saw 100 dollars lying in the street they would walk past it. Although they would be confused by the fact that they would still feel that excitement about finding money that they are used to feeling from before they became a ‘richest person’.

If Mary earns 10 dollars for a job and Jack earns 20 dollars for the same job. And they each use the money to buy a satisfying meal. But Mary has a more modest appetite than Jack. Her meal costs 10 and Jack’s costs 20. Then, while it might not seem to be the case on the face of it, they have both earned the same.

10. Spending.

There is an old saying (which I just made up) “You’ve only got as much money as you’ve spent.” Because suppose Jack is a wealthy businessman and he accumulates money but without any plans on how to spend it. And then he (sadly) dies before he got a chance to spend the money. (He ignored people who said: “you can’t take it with you!”) Then that’s exactly the same as if he didn’t accumulate any money at all. The only money he really had in his life was the money he had spent and got the benefit of.

In general, the only thing you can do with money is spend it. You can’t save it. Even if you spend it on something useless and someone says “you’ve just wasted your money!” they wouldn’t be right to say that. The money was spent not wasted.

You should spend your money as you acquire it. Or, if you’re not going to spend it straight away, you should have in mind exactly where and on what and with whom you are going to spend it. But then you might as well just give that whom the money now. It will improve their cash-flow.

11. Giving.

Some people have an issue with government social welfare programmes which result in other people “getting money for nothing”. But “getting money for nothing” is a lot more common than welfare.

Other examples are: lotteries, rents, bank account interest, insurance payouts, share dividends, gains due to price fluctuations especially on stock markets. And if we extend the description to “something” rather than “money” there are even more examples. The circumstances into which we are born are something for nothing.

12. Getting.

How much money is enough money (for people)? Is any amount enough? As far as getting money goes people seem to apply the principle of: get as much as you possibly can. Which is really no principle at all.

So suppose you are aged about 18 and find yourself to be quite talented and clever. You will then seek to acquire whatever particular skills will get you the maximum paying employment that they possibly can. If you are able to acquire whatever skills it takes to be a top lawyer or footballer then you will do so knowing that this will get you the most money possible.

The other way of doing things would be to first of all decide what standard and quality of life you desire and then do whatever acquire the skills to get the employment you need to get what amount money you need do to get the desired quality of life. This amount might be a lot less than what you are actually capable of earning.

Nobody ever does the following. They decide what life they want and then get a job which pays at least as much as they require. Then, whatever amount they get paid above that they get they give it away. Or tell their employers they don’t want it.

Another related issue is how people decide what the value of their work is. People often say that they don’t get paid enough. Nobody ever says they get paid too much. But if the former happens then the latter must happen too. And on what basis can anybody say that their work is worth whatever they are saying it is worth.

I find wage differentials to be objectionable. But I’m not sure why. Suppose Jack spends all day sewing clothes. And Mary is a lawyer and she get paid 10 times as much as Jack. That seems wrong. Jack works just as hard as Mary and so should get the same. But here I don’t mean that I think the government should make laws to stop this. I’m thinking Mary should think different. Because (I assume) Mary thinks to herself: “I’m worth (as a person) 10 times as Jack”? Which is not a nice thing to think. Maybe I’m also thinking about what Mary wants. If Jack earns enough to live a comfortable life then why does Mary want more? Suppose Jack, on his salary, can afford a small three bedroom house and a car. But Mary wants a big house in the country and gold ornaments and lots of foreign holidays. I would think there’s something wrong with her, mentally.

I would feel embarrassed if I had to ask somebody for a lot of money (some amount that might be a day’s wage for most people) for having done some job which took me only half an hour. Regardless of how much time and effort it took me to learn how to do that job.

Sometimes I amuse myself by imagining a some well-known ostentatiously wealthy person instead happily living a less opulent lifestyle. Imagine Donald Trump living in a small semi-detached house in the suburbs of a small town mowing his lawn on a Sunday morning wearing some beaten up old slippers. Or Victoria Beckham after finishing her job as a teacher at the local primary school returning to her terraced house with her shopping from Tescos. But all happy regardless!

13. Your money.

When people say things like: “This is my money, I’ve earned every penny of it through my own hard work” I think: “have you really?”. (It’s even more weird when they say (in the USA) that they ‘made’ that money.)

So suppose Jack is wealthy. Because he worked hard. He worked in the widget factory for 50 years all his life. From when he left school at 15 to when he retired at 65. He worked 50 hours a week and had high productivity. And he is rightly proud of this. With his earnings he bought a house for his family and he got a nice car. He says to people: “I never got anything off anybody else, it was all from hard work and paying my way through life”. His point is that he “fended for himself”. Was self-reliant, a “self made man”. And that, in his life he “paid his way” and didn’t ever rely on others paying for him.

But he did rely on other people!

First of all, it’s not true that he did everything for himself. He didn’t produce his own food and shelter. He relied on other people to do that. The only thing he was good at was making widgets. In a complex division of labour nobody can “fend for themselves”. In general Jack is part of a web of efforts and his alone isn’t sufficient to get him what he got. (Elizabeth Warren explains it better than me. See https://www.youtube.com/watch?v=htX2usfqMEs, time 0:56 “there is nobody in this country who got rich on his own”.)

Second, Jack relied on there being a demand for widgets. It could have happened that the bottom fell out of the widget market and he got made redundant and never got another job half as good. More generally: his talents and efforts had a certain market value which they might not have done in another place or at another time.

Third, the quantity and quality of stuff Jack got with his earnings depended on other circumstances. In the past, when cars hadn’t been invented, it wouldn’t have bought him the nice car it did now.

So, because of all this, the term “my money” and saying that you “earned” it seems somehow strange and wrong. Money is wealth and wealth is a complex phenomena which you can’t own.

People think that their salary is a reward for their work. It’s not. It’s just a consequence. A consequence which is determined by lots of factors.

The term ‘wealth creator’ is usually used to refer to entrepreneurs, people who set up and run businesses. But all their employees (and any workers anywhere) are creating wealth just as much.

14. The love of money.

When I hear people say that they want to be rich. That sounds incomplete to me. By saying they want to be rich they mean that they want money. But they don’t (at least I hope they don’t!) just literally mean that they want money (banknotes) and that’s it. They mean they want to have some particular things that they can get with the money. Suppose somebody had a wish that they had a trillion dollars. And I made it true. But I also made it so that it was impossible for them to spend it. They would complain: that’s not what they wanted!

When people say they want lots of money, instead they should say what things they want that require money to buy.

When people say they want money, really they mean that they want what it buys. They want the nice things money can buy. Some people confuse the two and accumulate money without ever spending it! Somehow they have confused the means with the ends. Maybe they want the security that having lots of money gives you. But security is knowing that people won’t harm you and won’t fail to help you when you need it or won’t do nice things for you. And you could have all these things without having money. And, conversely you could have money without having all these things.

Someone might be obsessed with the accumulation of money but it might be to spend on building free hospitals for people. In which case the love of money is good.

15. Money technology.

By money technology I mean the means by which money is present and used in the real world. The most obvious example of this is the banknote. I use banknotes but I don’t own them at any point. They are the property of the government. It might seem like I own them but I don’t. In the same way that I don’t own traffic lights even though I use them. (Sorry that’s not a great example.)

The government owns the materials which are used in operating the money system. And people who use that system don’t pay for it directly. It costs money to print and distribute money. But money users don’t pay for that directly. It is paid for through general government taxation.

But there are parts of the money system which are privately owned. The debit and credit card system is owned by private operators. And they do charge users. They charge merchants (sellers) fees. Most customers aren’t aware of these. But indirectly these costs are passed onto customers via prices. More recently there are things like PayPal which, again, charge fees.

I can imagine people calling for these kinds of things to be nationalised. Mostly because they are almost a monopoly.

16. Alternatives.

Imagine we had a system like this. At the start of the year people say what they want in the coming year. Then other people spend year producing the stuff that people have said they want. And then they exchange and deliver to each other the produce. This system does not need money.

There are a few things which would need to be figured out. Like who produces what and what each person gets in exchange. Also we would need to figure out what to do about things that people don’t know in advance if they will want them during the year, for example healthcare.

[18 November 2017]

[last amended December 2023]