How Money Really Works
And why bitcoin won’t solve the fundamental problems
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When I was eight or nine years old, I would wash farm equipment for my dad, and he paid me a few dollars. I also used to pick up rocks from our fields for money. (Rocks in fields can really screw up a plow, so someone has to pick them up). I disliked these menial jobs, but I did them without hesitation because doing so was one of the few ways I could attain money.
This mindset is as far as most people’s understanding of money ever gets. Work to acquire money to acquire what we want and need. And while we’re all beholden to a far more nuanced and discomforting psychology underlying money, few of us realize it.
As I began to accumulate wealth throughout my twenties, I slowly learned what money really is. It’s not a “store of value,” as many think. Money is a measure of everyone else’s indebtedness to the person who holds it.
The more money you have, the more everyone else owes you.
This concept is hard to accept, even for many modern economists. To begin to grasp this idea, we need to take a brief look at the origins of money.
Let there be money
Pretty much all modern economic theories on money are wrong. This is because they are derivative from the seminal work of Adam Smith, who, in 1776, published Wealth of Nations and became the father of economics. In short, this book posited that humans originally conducted economic interactions with one another through bartering; that is, Tim trades his cow for thirty of Steve’s chickens.
The limitations of barter are obvious: coincidences of needs will be too rare to keep goods flowing. In other words, I won’t always have something to give you in exchange for something of yours I want. It is from this limitation that traditional economic theory supposes the concept of money emerged.
When I want something from you, but I don’t have anything you want, I need something to give you that you can then use to acquire what you do want. Thus, let there be money.
That’s easy enough to follow and seems logical: barter, then money. Next, conventional economics says, comes credit, which works as…
