money definition essay

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24.1 What Is Money?

Learning objectives.

• Define money and discuss its three basic functions.
• Distinguish between commodity money and fiat money, giving examples of each.
• Define what is meant by the money supply and tell what is included in the Federal Reserve System’s two definitions of it (M1 and M2).

If cigarettes and mackerel can be used as money, then just what is money? Money is anything that serves as a medium of exchange. A medium of exchange is anything that is widely accepted as a means of payment. In Romania under Communist Party rule in the 1980s, for example, Kent cigarettes served as a medium of exchange; the fact that they could be exchanged for other goods and services made them money.

Money, ultimately, is defined by people and what they do. When people use something as a medium of exchange, it becomes money. If people were to begin accepting basketballs as payment for most goods and services, basketballs would be money. We will learn in this chapter that changes in the way people use money have created new types of money and changed the way money is measured in recent decades.

The Functions of Money

Money serves three basic functions. By definition, it is a medium of exchange. It also serves as a unit of account and as a store of value—as the “mack” did in Lompoc.

A Medium of Exchange

The exchange of goods and services in markets is among the most universal activities of human life. To facilitate these exchanges, people settle on something that will serve as a medium of exchange—they select something to be money.

We can understand the significance of a medium of exchange by considering its absence. Barter occurs when goods are exchanged directly for other goods. Because no one item serves as a medium of exchange in a barter economy, potential buyers must find things that individual sellers will accept. A buyer might find a seller who will trade a pair of shoes for two chickens. Another seller might be willing to provide a haircut in exchange for a garden hose. Suppose you were visiting a grocery store in a barter economy. You would need to load up a truckful of items the grocer might accept in exchange for groceries. That would be an uncertain affair; you could not know when you headed for the store which items the grocer might agree to trade. Indeed, the complexity—and cost—of a visit to a grocery store in a barter economy would be so great that there probably would not be any grocery stores! A moment’s contemplation of the difficulty of life in a barter economy will demonstrate why human societies invariably select something—sometimes more than one thing—to serve as a medium of exchange, just as prisoners in federal penitentiaries accepted mackerel.

A Unit of Account

Ask someone in the United States what he or she paid for something, and that person will respond by quoting a price stated in dollars: “I paid $75 for this radio,” or “I paid $15 for this pizza.” People do not say, “I paid five pizzas for this radio.” That statement might, of course, be literally true in the sense of the opportunity cost of the transaction, but we do not report prices that way for two reasons. One is that people do not arrive at places like Radio Shack with five pizzas and expect to purchase a radio. The other is that the information would not be very useful. Other people may not think of values in pizza terms, so they might not know what we meant. Instead, we report the value of things in terms of money.

Money serves as a unit of account , which is a consistent means of measuring the value of things. We use money in this fashion because it is also a medium of exchange. When we report the value of a good or service in units of money, we are reporting what another person is likely to have to pay to obtain that good or service.

A Store of Value

The third function of money is to serve as a store of value , that is, an item that holds value over time. Consider a $20 bill that you accidentally left in a coat pocket a year ago. When you find it, you will be pleased. That is because you know the bill still has value. Value has, in effect, been “stored” in that little piece of paper.

Money, of course, is not the only thing that stores value. Houses, office buildings, land, works of art, and many other commodities serve as a means of storing wealth and value. Money differs from these other stores of value by being readily exchangeable for other commodities. Its role as a medium of exchange makes it a convenient store of value.

Because money acts as a store of value, it can be used as a standard for future payments. When you borrow money, for example, you typically sign a contract pledging to make a series of future payments to settle the debt. These payments will be made using money, because money acts as a store of value.

Money is not a risk-free store of value, however. We saw in the chapter that introduced the concept of inflation that inflation reduces the value of money. In periods of rapid inflation, people may not want to rely on money as a store of value, and they may turn to commodities such as land or gold instead.

Types of Money

Although money can take an extraordinary variety of forms, there are really only two types of money: money that has intrinsic value and money that does not have intrinsic value.

Commodity money is money that has value apart from its use as money. Mackerel in federal prisons is an example of commodity money. Mackerel could be used to buy services from other prisoners; they could also be eaten.

Gold and silver are the most widely used forms of commodity money. Gold and silver can be used as jewelry and for some industrial and medicinal purposes, so they have value apart from their use as money. The first known use of gold and silver coins was in the Greek city-state of Lydia in the beginning of the seventh century B.C. The coins were fashioned from electrum, a natural mixture of gold and silver.

One disadvantage of commodity money is that its quantity can fluctuate erratically. Gold, for example, was one form of money in the United States in the 19th century. Gold discoveries in California and later in Alaska sent the quantity of money soaring. Some of this nation’s worst bouts of inflation were set off by increases in the quantity of gold in circulation during the 19th century. A much greater problem exists with commodity money that can be produced. In the southern part of colonial America, for example, tobacco served as money. There was a continuing problem of farmers increasing the quantity of money by growing more tobacco. The problem was sufficiently serious that vigilante squads were organized. They roamed the countryside burning tobacco fields in an effort to keep the quantity of tobacco, hence money, under control. (Remarkably, these squads sought to control the money supply by burning tobacco grown by other farmers.)

Another problem is that commodity money may vary in quality. Given that variability, there is a tendency for lower-quality commodities to drive higher-quality commodities out of circulation. Horses, for example, served as money in colonial New England. It was common for loan obligations to be stated in terms of a quantity of horses to be paid back. Given such obligations, there was a tendency to use lower-quality horses to pay back debts; higher-quality horses were kept out of circulation for other uses. Laws were passed forbidding the use of lame horses in the payment of debts. This is an example of Gresham’s law: the tendency for a lower-quality commodity (bad money) to drive a higher-quality commodity (good money) out of circulation. Unless a means can be found to control the quality of commodity money, the tendency for that quality to decline can threaten its acceptability as a medium of exchange.

But something need not have intrinsic value to serve as money. Fiat money is money that some authority, generally a government, has ordered to be accepted as a medium of exchange. The currency —paper money and coins—used in the United States today is fiat money; it has no value other than its use as money. You will notice that statement printed on each bill: “This note is legal tender for all debts, public and private.”

Checkable deposits , which are balances in checking accounts, and traveler’s checks are other forms of money that have no intrinsic value. They can be converted to currency, but generally they are not; they simply serve as a medium of exchange. If you want to buy something, you can often pay with a check or a debit card. A check is a written order to a bank to transfer ownership of a checkable deposit. A debit card is the electronic equivalent of a check. Suppose, for example, that you have $100 in your checking account and you write a check to your campus bookstore for $30 or instruct the clerk to swipe your debit card and “charge” it $30. In either case, $30 will be transferred from your checking account to the bookstore’s checking account. Notice that it is the checkable deposit, not the check or debit card, that is money . The check or debit card just tells a bank to transfer money, in this case checkable deposits, from one account to another.

What makes something money is really found in its acceptability, not in whether or not it has intrinsic value or whether or not a government has declared it as such. For example, fiat money tends to be accepted so long as too much of it is not printed too quickly. When that happens, as it did in Russia in the 1990s, people tend to look for other items to serve as money. In the case of Russia, the U.S. dollar became a popular form of money, even though the Russian government still declared the ruble to be its fiat money.

The term money , as used by economists and throughout this book, has the very specific definition given in the text. People can hold assets in a variety of forms, from works of art to stock certificates to currency or checking account balances. Even though individuals may be very wealthy, only when they are holding their assets in a form that serves as a medium of exchange do they, according to the precise meaning of the term, have “money.” To qualify as “money,” something must be widely accepted as a medium of exchange.

Measuring Money

The total quantity of money in the economy at any one time is called the money supply . Economists measure the money supply because it affects economic activity. What should be included in the money supply? We want to include as part of the money supply those things that serve as media of exchange. However, the items that provide this function have varied over time.

Before 1980, the basic money supply was measured as the sum of currency in circulation, traveler’s checks, and checkable deposits. Currency serves the medium-of-exchange function very nicely but denies people any interest earnings. (Checking accounts did not earn interest before 1980.)

Over the last few decades, especially as a result of high interest rates and high inflation in the late 1970s, people sought and found ways of holding their financial assets in ways that earn interest and that can easily be converted to money. For example, it is now possible to transfer money from your savings account to your checking account using an automated teller machine (ATM), and then to withdraw cash from your checking account. Thus, many types of savings accounts are easily converted into currency.

Economists refer to the ease with which an asset can be converted into currency as the asset’s liquidity . Currency itself is perfectly liquid; you can always change two $5 bills for a $10 bill. Checkable deposits are almost perfectly liquid; you can easily cash a check or visit an ATM. An office building, however, is highly illiquid. It can be converted to money only by selling it, a time-consuming and costly process.

As financial assets other than checkable deposits have become more liquid, economists have had to develop broader measures of money that would correspond to economic activity. In the United States, the final arbiter of what is and what is not measured as money is the Federal Reserve System. Because it is difficult to determine what (and what not) to measure as money, the Fed reports several different measures of money, including M1 and M2.

M1 is the narrowest of the Fed’s money supply definitions. It includes currency in circulation, checkable deposits, and traveler’s checks. M2 is a broader measure of the money supply than M1. It includes M1 and other deposits such as small savings accounts (less than $100,000), as well as accounts such as money market mutual funds (MMMFs) that place limits on the number or the amounts of the checks that can be written in a certain period.

M2 is sometimes called the broadly defined money supply, while M1 is the narrowly defined money supply. The assets in M1 may be regarded as perfectly liquid; the assets in M2 are highly liquid, but somewhat less liquid than the assets in M1. Even broader measures of the money supply include large time-deposits, money market mutual funds held by institutions, and other assets that are somewhat less liquid than those in M2. Figure 24.1 “The Two Ms: October 2010” shows the composition of M1 and M2 in October 2010.

Figure 24.1 The Two Ms: October 2010

M1, the narrowest definition of the money supply, includes assets that are perfectly liquid. M2 provides a broader measure of the money supply and includes somewhat less liquid assets. Amounts represent money supply data in billions of dollars for October 2010, seasonally adjusted.

Source : Federal Reserve Statistical Release H.6, Tables 3 and 4 (December 2, 2010). Amounts are in billions of dollars for October 2010, seasonally adjusted.

Credit cards are not money. A credit card identifies you as a person who has a special arrangement with the card issuer in which the issuer will lend you money and transfer the proceeds to another party whenever you want. Thus, if you present a MasterCard to a jeweler as payment for a $500 ring, the firm that issued you the card will lend you the $500 and send that money, less a service charge, to the jeweler. You, of course, will be required to repay the loan later. But a card that says you have such a relationship is not money, just as your debit card is not money.

With all the operational definitions of money available, which one should we use? Economists generally answer that question by asking another: Which measure of money is most closely related to real GDP and the price level? As that changes, so must the definition of money.

In 1980, the Fed decided that changes in the ways people were managing their money made M1 useless for policy choices. Indeed, the Fed now pays little attention to M2 either. It has largely given up tracking a particular measure of the money supply. The choice of what to measure as money remains the subject of continuing research and considerable debate.

Key Takeaways

• Money is anything that serves as a medium of exchange. Other functions of money are to serve as a unit of account and as a store of value.
• Money may or may not have intrinsic value. Commodity money has intrinsic value because it has other uses besides being a medium of exchange. Fiat money serves only as a medium of exchange, because its use as such is authorized by the government; it has no intrinsic value.
• The Fed reports several different measures of money, including M1 and M2.

Which of the following are money in the United States today and which are not? Explain your reasoning in terms of the functions of money.

• A Van Gogh painting

Case in Point: Fiat-less Money

Figure 24.2

Michael Mandiberg – 1 million iraqi dinar – CC BY-SA 2.0.

“We don’t have a currency of our own,” proclaimed Nerchivan Barzani, the Kurdish regional government’s prime minister in a news interview in 2003. But, even without official recognition by the government, the so-called “Swiss” dinar certainly seemed to function as a fiat money. Here is how the Kurdish area of northern Iraq, during the period between the Gulf War in 1991 and the fall of Saddam Hussein in 2003, came to have its own currency, despite the pronouncement of its prime minister to the contrary.

After the Gulf War, the northern, mostly Kurdish area of Iraq was separated from the rest of Iraq though the enforcement of the no-fly-zone. Because of United Nations sanctions that barred the Saddam Hussein regime in the south from continuing to import currency from Switzerland, the central bank of Iraq announced it would replace the “Swiss” dinars, so named because they had been printed in Switzerland, with locally printed currency, which became known as “Saddam” dinars. Iraqi citizens in southern Iraq were given three weeks to exchange their old dinars for the new ones. In the northern part of Iraq, citizens could not exchange their notes and so they simply continued to use the old ones.

And so it was that the “Swiss” dinar for a period of about 10 years, even without government backing or any law establishing it as legal tender, served as northern Iraq’s fiat money. Economists use the word “ fiat ,” which in Latin means “let it be done,” to describe money that has no intrinsic value. Such forms of money usually get their value because a government or authority has declared them to be legal tender, but, as this story shows, it does not really require much “fiat” for a convenient, in-and-of-itself worthless, medium of exchange to evolve.

What happened to both the “Swiss” and “Saddam” dinars? After the Coalition Provisional Authority (CPA) assumed control of all of Iraq, Paul Bremer, then head of the CPA, announced that a new Iraqi dinar would be exchanged for both of the existing currencies over a three-month period ending in January 2004 at a rate that implied that one “Swiss” dinar was valued at 150 “Saddam” dinars. Because Saddam Hussein’s regime had printed many more “Saddam” dinars over the 10-year period, while no “Swiss” dinars had been printed, and because the cheap printing of the “Saddam” dinars made them easy to counterfeit, over the decade the “Swiss” dinars became relatively more valuable and the exchange rate that Bremer offered about equalized the purchasing power of the two currencies. For example, it took about 133 times as many “Saddam” dinars as “Swiss” dinars to buy a man’s suit in Iraq at the time. The new notes, sometimes called “Bremer” dinars, were printed in Britain and elsewhere and flown into Iraq on 22 flights using Boeing 747s and other large aircraft. In both the northern and southern parts of Iraq, citizens turned in their old dinars for the new ones, suggesting at least more confidence at that moment in the “Bremer” dinar than in either the “Saddam” or “Swiss” dinars.

Sources : Mervyn A. King, “The Institutions of Monetary Policy” (lecture, American Economics Association Annual Meeting, San Diego, January 4, 2004), available at http://www.bankofengland.co.uk/speeches/speech208.pdf . Hal R. Varian, “Paper Currency Can Have Value without Government Backing, but Such Backing Adds Substantially to Its Value,” New York Times , January 15, 2004, p. C2.

Answer to Try It! Problem

• Gold is not money because it is not used as a medium of exchange. In addition, it does not serve as a unit of account. It may, however, serve as a store of value.
• A Van Gogh painting is not money. It serves as a store of value. It is highly illiquid but could eventually be converted to money. It is neither a medium of exchange nor a unit of account.
• A dime is money and serves all three functions of money. It is, of course, perfectly liquid.

Principles of Economics Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

27.1 Defining Money by Its Functions

Learning objectives.

By the end of this section, you will be able to:

• Explain the various functions of money
• Contrast commodity money and fiat money

Money for the sake of money is not an end in itself. You cannot eat dollar bills or wear your bank account. Ultimately, the usefulness of money rests in exchanging it for goods or services. As the American writer and humorist Ambrose Bierce (1842–1914) wrote in 1911, money is a “blessing that is of no advantage to us excepting when we part with it.” Money is what people regularly use when purchasing or selling goods and services, and thus both buyers and sellers must widely accept money. This concept of money is intentionally flexible, because money has taken a wide variety of forms in different cultures.

Barter and the Double Coincidence of Wants

To understand the usefulness of money, we must consider what the world would be like without money. How would people exchange goods and services? Economies without money typically engage in the barter system. Barter —literally trading one good or service for another—is highly inefficient for trying to coordinate the trades in a modern advanced economy. In an economy without money, an exchange between two people would involve a double coincidence of wants , a situation in which two people each want some good or service that the other person can provide. For example, if an accountant wants a pair of shoes, this accountant must find someone who has a pair of shoes in the correct size and who is willing to exchange the shoes for some hours of accounting services. Such a trade is likely to be difficult to arrange. Think about the complexity of such trades in a modern economy, with its extensive division of labor that involves thousands upon thousands of different jobs and goods.

Another problem with the barter system is that it does not allow us to easily enter into future contracts for purchasing many goods and services. For example, if the goods are perishable it may be difficult to exchange them for other goods in the future. Imagine a farmer wanting to buy a tractor in six months using a fresh crop of strawberries. Additionally, while the barter system might work adequately in small economies, it will keep these economies from growing. The time that individuals would otherwise spend producing goods and services and enjoying leisure time they spend bartering.

Functions for Money

Money solves the problems that the barter system creates. (We will get to its definition soon.) First, money serves as a medium of exchange , which means that money acts as an intermediary between the buyer and the seller. Instead of exchanging accounting services for shoes, the accountant now exchanges accounting services for money. The accountant then uses this money to buy shoes. To serve as a medium of exchange, people must widely accept money as a method of payment in the markets for goods, labor, and financial capital.

Second, money must serve as a store of value . In a barter system, we saw the example of the shoemaker trading shoes for accounting services. However, she risks having her shoes go out of style, especially if she keeps them in a warehouse for future use—their value will decrease with each season. Shoes are not a good store of value. Holding money is a much easier way of storing value. You know that you do not need to spend it immediately because it will still hold its value the next day, or the next year. This function of money does not require that money is a perfect store of value. In an economy with inflation, money loses some buying power each year, but it remains money.

Third, money serves as a unit of account , which means that it is the ruler by which we measure values. For example, an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $50 a pair. Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.

Finally, another function of money is that it must serve as a standard of deferred payment . This means that if money is usable today to make purchases, it must also be acceptable to make purchases today that the purchaser will pay in the future . Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to buy goods and services today and pay in the future. Thus, money serves all of these functions— it is a medium of exchange, store of value, unit of account, and standard of deferred payment.

Commodity versus Fiat Money

Money has taken a wide variety of forms in different cultures. People have used gold, silver, cowrie shells, cigarettes, and even cocoa beans as money. Although we use these items as commodity money , they also have a value from use as something other than money. For example, people have used gold throughout the ages as money although today we do not use it as money but rather value it for its other attributes. Gold is a good conductor of electricity and the electronics and aerospace industry use it. Other industries use gold too, such as to manufacture energy efficient reflective glass for skyscrapers and is used in the medical industry as well. Of course, gold also has value because of its beauty and malleability in creating jewelry.

As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other commodities held at a bank. During much of its history, gold and silver backed the money supply in the United States. Interestingly, antique dollars dated as late as 1957, have “Silver Certificate” printed over the portrait of George Washington, as Figure 27.2 shows. This meant that the holder could take the bill to the appropriate bank and exchange it for a dollar’s worth of silver.

As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved towards the use of fiat money . Fiat money has no intrinsic value, but is declared by a government to be a country's legal tender. The United States’ paper money, for example, carries the statement: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.” In other words, by government decree, if you owe a debt, then legally speaking, you can pay that debt with the U.S. currency, even though it is not backed by a commodity. The only backing of our money is universal faith and trust that the currency has value, and nothing more.

Watch this video on the “History of Money.”

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Philosophy of Money and Finance

Finance and philosophy may seem to be worlds apart. But they share at least one common ancestor: Thales of Miletus. Thales is typically regarded as the first philosopher, but he was also a financial innovator. He appears to have been what we would now call an option trader. He predicted that next year’s olive harvest would be good, and therefore paid a small amount of money to the owners of olive presses for the right to the next year’s use. When the harvest turned out to be as good as predicted, Thales earned a sizable amount of money by renting out the presses (Aristotle, Politics , 1259a).

Obviously, a lot has changed since Thales’ times, both in finance and in our ethical and political attitudes towards finance. Coins have largely been replaced by either paper or electronic money, and we have built a large infrastructure to facilitate transactions of money and other financial assets—with elements including commercial banks, central banks, insurance companies, stock exchanges, and investment funds. This institutional multiplicity is due to concerted efforts of both private and public agents, as well as innovations in financial economics and in the financial industry (Shiller 2012).

Our ethical and political sensitivities have also changed in several respects. It seems fair to say that most traditional ethicists held a very negative attitude towards financial activities. Think, for example, of Jesus’ cleansing of the temple from moneylenders, and the widespread condemnation of money as “the root of all evil”. Attitudes in this regard seem to have softened over time. However, the moral debate continues to recur, especially in connection with large scandals and crises within finance, the largest such crisis in recent memory of course being the global financial crisis of 2008.

This article describes what philosophical analysis can say about money and finance. It is divided into five parts that respectively concern (1) what money and finance really are (metaphysics), (2) how knowledge about financial matters is or should be formed (epistemology), (3) the merits and challenges of financial economics (philosophy of science), (4) the many ethical issues related to money and finance (ethics), and (5) the relationship between finance and politics (political philosophy).

1.1 What is Money?

1.2 what is finance, 2. epistemology, 3. philosophy of science, 4.1.1 the love of money, 4.1.2 usury and interest, 4.1.3 speculation and gambling, 4.2.1 deception and fraud, 4.2.2 avoiding conflicts of interest, 4.2.3 insider trading, 4.3.1 systemic risk and financial crises, 4.3.2 microfinance, 4.3.3 socially responsible investment, 5.1 financialization and democracy, 5.2 finance, money, and domestic justice, 5.3 finance and global justice, other internet resources, related entries, 1. metaphysics.

Money is so ever-present in modern life that we tend to take its existence and nature for granted. But do we know what money actually is? Two competing theories present fundamentally different ontologies of money.

The commodity theory of money: A classic theory, which goes back all the way to Aristotle ( Politics , 1255b–1256b), holds that money is a kind of commodity that fulfills three functions: it serves as (i) a medium of exchange, (ii) a unit of account, and (iii) a store of value. Imagine a society that lacks money, and in which people have to barter goods with each other. Barter only works when there is a double coincidence of wants ; that is, when A wants what B has and B wants what A has. But since such coincidences are likely to be uncommon, a barter economy seems both cumbersome and inefficient (Smith 1776, Menger 1892). At some point, people will realize that they can trade more easily if they use some intermediate good—money. This intermediate good should ideally be easy to handle, store and transport (function i). It should be easy to measure and divide to facilitate calculations (function ii). And it should be difficult to destroy so that it lasts over time (function iii).

Monetary history may be viewed as a process of improvement with regard to these functions of money (Ferguson 2008, Weatherford 1997). For example, some early societies used certain basic necessities as money, such as cattle or grain. Other societies settled on commodities that were easier to handle and to tally but with more indirect value, such as clamshells and precious metals. The archetypical form of money throughout history are gold or silver coins—therefore the commodity theory is sometimes called metallism (Knapp 1924, Schumpeter 1954). Coinage is an improvement on bullion in that both quantity and purity are guaranteed by some third party, typically the government. Finally, paper money can be viewed as a simplification of the trade in coins. For example, a bank note issued by the Bank of England in the 1700s was a promise to pay the bearer a certain pound weight of sterling silver (hence the origin of the name of the British currency as “pounds sterling”).

The commodity theory of money was defended by many classical economists and can still be found in most economics textbooks (Mankiw 2009, Parkin 2011). This latter fact is curious since it has provoked serious and sustained critique. An obvious flaw is that it has difficulties in explaining inflation, the decreasing value of money over time (Innes 1913, Keynes 1936). It has also been challenged on the grounds that it is historically inaccurate. For example, recent anthropological studies question the idea that early societies went from a barter economy to money; instead money seems to have arisen to keep track of pre-existing credit relationships (Graeber 2011, Martin 2013, Douglas 2016).

The credit theory of money: According to the main rival theory, coins and notes are merely tokens of something more abstract: money is a social construction rather than a physical commodity. The abstract entity in question is a credit relationship; that is, a promise from someone to grant (or repay) a favor (product or service) to the holder of the token (Macleod 1889, Innes 1914, Ingham 2004). In order to function as money, two further features are crucial: that (i) the promise is sufficiently credible, that is, the issuer is “creditworthy”; and (ii) the credit is transferable, that is, also others will accept it as payment for trade.

It is commonly thought that the most creditworthy issuer of money is the state. This thought provides an alternative explanation of the predominance of coins and notes whose value is guaranteed by states. But note that this theory also can explain so-called fiat money, which is money that is underwritten by the state but not redeemable in any commodity like gold or silver. Fiat money has been the dominant kind of money globally since 1971, when the United States terminated the convertibility of dollars to gold. The view that only states can issue money is called chartalism , or the state theory of money (Knapp 1924). However, in order to properly understand the current monetary system, it is important to distinguish between states’ issuing versus underwriting money. Most credit money in modern economies is actually issued by commercial banks through their lending operations, and the role of the state is only to guarantee the convertibility of bank deposits into cash (Pettifor 2014).

Criticisms of the credit theory tend to be normative and focus on the risk of overexpansion of money, that is, that states (and banks) can overuse their “printing presses” which may lead to unsustainable debt levels, excessive inflation, financial instability and economic crises. These are sometimes seen as arguments for a return to the gold standard (Rothbard 1983, Schlichter 2014). However, others argue that the realization that money is socially constructed is the best starting point for developing a more sustainable and equitable monetary regime (Graeber 2010, Pettifor 2014). We will return to this political debate below ( section 5.2 ).

The social ontology of money: But exactly how does the “social construction” of money work? This question invokes the more general philosophical issue of social ontology, with regard to which money is often used as a prime example. In an early philosophical-sociological account, Georg Simmel (1900) describes money as an institution that is a crucial precondition for modernity because it allows putting a value on things and simplifies transactions; he also criticizes the way in which money thereby replaces other forms of valuation (see also section 4.1 ).

In the more recent debate, one can distinguish between two main philosophical camps. An influential account of social ontology holds that money is the sort of social institution whose existence depends on “collective intentionality”: beliefs and attitudes that are shared in a community (Searle 1995, 2010). The process starts with someone’s simple and unilateral declaration that something is money, which is a performative speech act. When other people recognize or accept the declaration it becomes a standing social rule. Thus, money is said to depend on our subjective attitudes but is not located (solely) in our minds (see also Lawson 2016, Brynjarsdóttir 2018, Passinsky 2020, Vooys & Dick 2021).

An alternative account holds that the creation of money need not be intentional or declarative in the above sense. Instead money comes about as a solution to a social problem (the double coincidence of wants) – and it is maintained simply because it is functional or beneficial to us (Guala 2016, Hindriks & Guala 2021). Thus what makes something money is not the official declarations of some authority, but rather that it works (functions) as money in a given society (see also Smit et al. 2011; 2016). (For more discussion see the special issue by Hindriks & Sandberg 2020, as well as the entries on social ontology and social institutions ).

One may view “finance” more generally (that is, the financial sector or system) as an extension of the monetary system. It is typically said that the financial sector has two main functions: (1) to maintain an effective payments system; and (2) to facilitate an efficient use of money. The latter function can be broken down further into two parts. First, to bring together those with excess money (savers, investors) and those without it (borrowers, enterprises), which is typically done through financial intermediation (the inner workings of banks) or financial markets (such as stock or bond markets). Second, to create opportunities for market participants to buy and sell money, which is typically done through the invention of financial products, or “assets”, with features distinguished by different levels of risk, return, and maturation.

The modern financial system can thus be seen as an infrastructure built to facilitate transactions of money and other financial assets, as noted at the outset. It is important to note that it contains both private elements (such as commercial banks, insurance companies, and investment funds) and public elements (such as central banks and regulatory authorities). “Finance” can also refer to the systematic study of this system; most often to the field of financial economics (see section 3 ).

Financial assets: Of interest from an ontological viewpoint is that modern finance consists of several other “asset types” besides money; central examples include credit arrangements (bank accounts, bonds), equity (shares or stocks), derivatives (futures, options, swaps, etc.) and funds (trusts). What are the defining characteristics of financial assets?

The typical distinction here is between financial and “real” assets, such as buildings and machines (Fabozzi 2002), because financial assets are less tangible or concrete. Just like money, they can be viewed as a social construction. Financial assets are often derived from or at least involve underlying “real” assets—as, for example, in the relation between owning a house and investing in a housing company. However, financial transactions are different from ordinary market trades in that the underlying assets seldom change hands, instead one exchanges abstract contracts or promises of future transactions. In this sense, one may view the financial market as the “meta-level” of the economy, since it involves indirect trade or speculation on the success of other parts of the economy.

More distinctly, financial assets are defined as promises of future money payments (Mishkin 2016, Pilbeam 2010). If the credit theory of money is correct, they can be regarded as meta-promises: promises on promises. The level of abstraction can sometimes become enormous: For example, a “synthetic collateralized debt obligation” (or “synthetic CDO”), a form of derivative common before the financial crisis, is a promise from person A (the seller) to person B (the buyer) that some persons C to I (speculators) will pay an amount of money depending on the losses incurred by person J (the holder of an underlying derivative), which typically depend on certain portions (so-called tranches) of the cash flow from persons K to Q (mortgage borrowers) originally promised to persons R to X (mortgage lenders) but then sold to person Y (the originator of the underlying derivative). The function of a synthetic CDO is mainly to spread financial risks more thinly between different speculators.

Intrinsic value: Perhaps the most important characteristic of financial assets is that their price can vary enormously with the attitudes of investors. Put simply, there are two main factors that determine the price of a financial asset: (i) the credibility or strength of the underlying promise (which will depend on the future cash flows generated by the asset); and (ii) its transferability or popularity within the market, that is, how many other investors are interested in buying the asset. In the process known as “price discovery”, investors assess these factors based on the information available to them, and then make bids to buy or sell the asset, which in turn sets its price on the market (Mishkin 2016, Pilbeam 2010).

A philosophically interesting question is whether there is such a thing as an “intrinsic” value of financial assets, as is often assumed in discussions about financial crises. For example, a common definition of an “asset bubble” is that this is a situation that occurs when certain assets trade at a price that strongly exceed their intrinsic value—which is dangerous since the bubble can burst and cause an economic shock (Kindleberger 1978, Minsky 1986, Reinhart & Rogoff 2009). But what is the intrinsic value of an asset? The rational answer seems to be that this depends only on the discounted value of the underlying future cash flow—in other words, on (i) and not (ii) above. However, someone still has to assess these factors to compute a price, and this assessment inevitably includes subjective elements. As just noted, it is assumed that different investors have different valuations of financial assets, which is why they can engage in trades on the market in the first place.

A further complication here is that (i) may actually be influenced by (ii). The fundamentals may be influenced by investors’ perceptions of them, which is a phenomenon known as “reflexivity” (Soros 1987, 2008). For example, a company whose shares are popular among investors will often find it easier to borrow more money and thereby to expand its cash flow, in turn making it even more popular among investors. Conversely, when the company’s profits start to fall it may lose popularity among investors, thereby making its loans more expensive and its profits even lower. This phenomenon amplifies the risks posed by financial bubbles (Keynes 1936).

Given the abstractness and complexity of financial assets and relations, as outlined above, it is easy to see the epistemic challenges they raise. For example, what is a proper basis for forming justified beliefs about matters of money and finance?

A central concept here is that of risk. Since financial assets are essentially promises of future money payments, a main challenge for financial agents is to develop rational expectations or hypotheses about relevant future outcomes. The two main factors in this regard are (1) expected return on the asset, which is typically calculated as the value of all possible outcomes weighted by their probability of occurrence, and (2) financial risk, which is typically calculated as the level of variation in these returns. The concept of financial risk is especially interesting from a philosophical viewpoint since it represents the financial industry’s response to epistemic uncertainty. It is often argued that the financial system is designed exactly to address or minimize financial risks—for example, financial intermediation and markets allow investors to spread their money over several assets with differing risk profiles (Pilbeam 2010, Shiller 2012). However, many authors have been critical of mainstream operationalizations of risk which tend to focus exclusively on historical price volatility and thereby downplay the risk of large-scale financial crises (Lanchester 2010, Thamotheram & Ward 2014).

This point leads us further to questions about the normativity of belief and knowledge. Research on such topics as the ethics of belief and virtue epistemology considers questions about the responsibilities that subjects have in epistemic matters. These include epistemic duties concerning the acquisition, storage, and transmission of information; the evaluation of evidence; and the revision or rejection of belief (see also ethics of belief ). In line with a reappraisal of virtue theory in business ethics, it is in particular virtue epistemology that has attracted attention from scholars working on finance. For example, while most commentators have focused on the moral failings that led to the financial crisis of 2008, a growing literature examines epistemic failures.

Epistemic failings in finance can be detected both at the level of individuals and collectives (de Bruin 2015). Organizations may develop corporate epistemic virtue along three dimensions: through matching epistemic virtues to particular functions (e.g., diversity at the board level); through providing adequate organizational support for the exercise of epistemic virtue (e.g., knowledge management techniques); and by adopting organizational remedies against epistemic vice (e.g., rotation policies). Using this three-pronged approach helps to interpret such epistemic failings as the failure of financial due diligence to spot Bernard Madoff’s notorious Ponzi scheme (uncovered in the midst of the financial crisis) (de Bruin 2014a, 2015).

Epistemic virtue is not only relevant for financial agents themselves, but also for other institutions in the financial system. An important example concerns accounting (auditing) firms. Accounting firms investigate businesses in order to make sure that their accounts (annual reports) offer an accurate reflection of the financial situation. While the primary intended beneficiaries of these auditing services are shareholders (and the public at large), accountants are paid by the firms they audit. This remuneration system is often said to lead to conflicts of interest. While accounting ethics is primarily concerned with codes of ethics and other management tools to minimize these conflicts of interests, an epistemological perspective may help to show that the business-auditor relationship should be seen as involving a joint epistemic agent in which the business provides evidence, and the auditor epistemic justification (de Bruin 2013). We will return to issues concerning conflicts of interest below (in section 4.2 ).

Epistemic virtue is also important for an effective governance or regulation of financial activities. For example, a salient epistemic failing that contributed to the 2008 financial crisis seems to be the way that Credit Rating Agencies rated mortgage-backed securities and other structured finance instruments, and with related failures of financial due diligence, and faulty risk management (Warenski 2008). Credit Rating Agencies provide estimates of credit risk of bonds that institutional investors are legally bound to use in their investment decisions. This may, however, effectively amount to an institutional setup in which investors are forced by law partly to outsource their risk management, which fails to foster epistemic virtue (Booth & de Bruin 2021, de Bruin 2017). Beyond this, epistemic failures can also occur among regulators themselves, as well as among relevant policy makers (see further in section 5.1 ).

A related line of work attests to the relevance of epistemic injustice to finance. Taking Fricker’s (2009) work as a point of departure, de Bruin (2021) examines testimonial injustice in financial services, whereas Mussell (2021) focuses on the harms and wrongs of testimonial injustice as they occur in the relationship between trustees and fiduciaries.

Compared to financial practitioners, one could think that financial economists should be at an epistemic advantage in matters of money and finance. Financial economics is a fairly young but well established discipline in the social sciences that seeks to understand, explain, and predict activities within financial markets. However, a few months after the crash in 2008, Queen Elizabeth II famously asked a room full of financial economists in London why they had not predicted the crisis (Egidi 2014). The Queen’s question should be an excellent starting point for an inquiry into the philosophy of science of financial economics. Yet only a few philosophers of science have considered finance specifically (Vergara Fernández & de Bruin 2021). [ 1 ]

Some important topics in financial economics have received partial attention, including the Modigliani-Miller capital structure irrelevance theorem (Hindriks 2008), the efficient market hypothesis (Collier 2011), the Black-Scholes option pricing model (Weatherall 2017), portfolio theory (Walsh 2015), financial equilibrium models (Farmer & Geanakoplos 2009), the concept of money (Mäki 1997), and behavioral finance (Brav, Heaton, & Rosenberg 2004), even though most of the debate still occurs among economists interested in methodology rather than among philosophers. A host of topics remain to be investigated, however: the concept of Value at Risk (VaR) (and more broadly the concept of financial risk), the capital asset pricing model (CAPM), the Gaussian copula, random walks, financial derivatives, event studies, forecasting (and big data), volatility, animal spirits, cost of capital, the various financial ratios, the concept of insolvency, and neurofinance, all stand in need of more sustained attention from philosophers.

Most existing work on finance in philosophy of science is concerned with models and modelling (see also models in science and philosophy of economics ). It seems intuitive to view financial markets as extremely complex systems: with so many different factors at play, predicting the price of securities (shares, bonds, etc.) seems almost impossible. Yet mainstream financial economics is firmly committed to the idea that market behavior should be understood as ultimately resulting from interactions of agents maximizing their expected utility. This is a direct application of the so-called neoclassical school of economics that was developed during the late nineteenth and early twentieth centuries. While this school continues to dominate textbooks in the field, there is a growing scholarly trend that seeks to criticize, complement or even replace some of its main assumptions. We can see how the problems play out in both corporate finance and asset pricing theory.

Corporate finance concerns the financing of firms. One question concerns a firm’s capital structure: should a firm obtain funding through equity (that is, from shareholders expecting dividends) or through debt (that is, from bondholders who lend money to the firm and have a contractual right to receive interest on the loans), or through a combination of the two. A key result in corporate finance is the Modigliani-Miller theorem, which says that a firm’s capital structure is irrelevant to its market value (Modigliani & Miller 1958). This theorem makes a number of highly unrealistic assumptions, among them the assumption that markets are efficient, and that there are no taxes. Alongside many other results in economics, it may therefore be considered as useless for predictive purposes; or even as dangerous, once used for such purposes nonetheless (Egidi 2014). In a detailed study of the Modigliani-Miller theorem, Hindriks (2008) has argued, however, that the value of highly idealized models in economics may lie in their providing counterfactual insights, just as in physics. Galileo’s law of free fall tells us what happens in a vacuum. Despite the fact that vacuum is rare in reality, the law is not uninformative, because it allows us to associate observed phenomena to the extent to which an unrealistic assumption must be relaxed. Similarly, if one of the assumptions that the Modigliani-Miller theorem makes is the absence of taxes, the observed relevance of capital structure may well have to be explained as resulting from particular tax regimes. The explanation obtained by relaxing unrealistic assumptions is called “explanation by concretization” (Hindriks 2008).

Explanation by concretization works if models and reality share at least a few concrete features. This is arguably the case for many extant models in finance, including models of bubbles and crises that are immediately relevant to explaining the 2008 crisis (Abreu & Brunnermeier 2003). A fairly recent development called “econophysics” may, however, be an exception. Econophysics uses physics methods to model financial markets (see Rickles 2007 for an overview). Where traditional models of crises include individual investors with beliefs and desires modelled by probability distributions and utility functions, econophysics models capture crises the way physicists model transitions of matter from fluid to solid state (Kuhlmann 2014).

Next, consider asset pricing theory. Ever since Bachelier’s groundbreaking mathematical treatment of asset pricing, financial economists have struggled to find the best way to determine the price developments of securities such as shares, bonds, and derivative instruments such as options. The mathematics of financial returns has received some attention in the literature (de Bruin & Walter 2017; Ippoliti & Chen 2017). Most models assume that returns follow Gaussian random walks, that is, stochastic processes in discrete time with independent and identically distributed increments. Empirical studies show, however, that returns are more peaked than Gaussian distributions, and that they have “fat tails”. This means that extreme events such as financial crises are far less improbable than the models assume. An exception with regards to these assumptions is Benoît Mandelbrot’s (1963) well-known contribution to financial mathematics, and work in this direction is gaining traction in mathematical finance.

A third aspect of financial models concerns the way they incorporate uncertainty (Bertolotti & Magnani 2017). Some of the problems of contemporary financial (and macroeconomic) models are due to the way they model uncertainty as risk, as outlined above (Frydman & Goldberg 2013). Both neo-classical models and behavioral economics capture uncertainty as probabilistic uncertainty, consequently ignoring Knightian uncertainty (Knight 1921 see also decision theory ). The philosophy of science literature that pertains to financial economics is, however, still fairly small (Vergara Fernández & de Bruin 2021).

Having considered the epistemic and scientific challenges of finance, we now turn to the broad range of compelling ethical challenges related to money and finance. The present part is divided into three sections, discussing 1) the claim that financial activities are always morally suspect, 2) various issues of fairness that can arise in financial markets, and 3) discussions about the social responsibilities of financial agents.

4.1 Money as the Root of All Evil?

Throughout cultural history, activities that involve money or finance have been subject to intense moral scrutiny and ethical debate. It seems fair to say that most traditional ethicists held a very negative attitude towards such activities. We will here discuss three very sweeping criticisms, respectively directed at the love of money (the profit motive), usury (lending at interest), and speculation (gambling in finance).

At the heart of many sweeping criticisms of money and finance lies the question of motive. For instance, the full Biblical quotation says that “the love of money is the root of all [kinds of] evil” (1 Timothy 6:10). To have a “love of money”, or (in less moralistic words) a profit motive, means to seek money for its own sake. It has been the subject of much moral criticism throughout history and continues to be controversial in popular morality.

There are three main variations of the criticism. A first variation says that there is something unnatural about the profit motive itself. For example, Aristotle argued that we should treat objects in ways that are befitting to their fundamental nature, and since money is not meant to be a good in itself but only a medium of exchange (see section 1.1 ), he concluded that it is unnatural to desire money as an end in itself ( Politics , 1252a–1260b). A similar thought is picked up by Marx, who argues that capitalism replaces the natural economic cycle of C–M–C (commodity exchanged for money exchanged for commodity) with M–C–M (money exchanged for commodity exchanged for money). Thus the endless accumulation of money becomes the sole goal of the capitalist, which Marx describes as a form of “fetishism” (Marx 1867, volume I).

A second variation of the criticism concerns the character, or more precisely the vice, that the profit motive is thought to exemplify (see also virtue ethics ). To have a love for money is typically associated with selfishness and greed, i.e., a desire to have as much as possible for oneself and/or more than one really needs (McCarty 1988, Walsh & Lynch 2008). Another association is the loss of moral scruples so that one is ready to do anything for money. The financial industry is often held out as the worst in this regard, especially because of its high levels of compensation. Allegations of greed soared after the 2008 crisis, when financial executives continued to receive million-dollar bonuses while many ordinary workers lost their jobs (Piketty 2014, McCall 2010, Andersson & Sandberg 2019).

A third variation of the criticism says that the profit motive signals the absence of more appropriate motives. Kant argued that actions only have moral worth if they are performed for moral reasons, or, more specifically, for the sake of duty. Thus it is not enough that we do what is right, we must also do it because it is right (Kant 1785). Another relevant Kantian principle is that we never should treat others merely as means for our own ends, but always also as ends in themselves (see also Kant’s moral philosophy ). Both of these principles seem to contrast with the profit motive which therefore is rendered morally problematic (Bowie 1999, Maitland 2002). It should come as no surprise that Kant was a strong critic of several examples of “commodification” and other market excesses (see also markets ).

There are two main lines of defensive argumentation. The most influential is Adam Smith’s well-known argument about the positive side-effects of a self-interested pursuit of profits: although the baker and brewer only aim at their own respective good, Smith suggested, they are “led by an invisible hand” to at the same time promote the public good (Smith 1776, see also Mandeville 1732). This argument is typically viewed as a consequentialist vindication of the profit motive (see also consequentialism ): positive societal effects can morally outweigh the possible shortcomings in individual virtue (Flew 1976).

A second argument is more direct and holds that the profit motive can exemplify a positive virtue. For example, there is the well-known Protestant work ethic that emphasizes the positive nature of hard work, discipline and frugality (Long 1972, Wesley 1771). The profit motive can, on this view, be associated with virtues such as ambition, industry, and discipline (see also Brennan 2021). According to Max Weber (1905), the Protestant work ethic played an important role in the development of capitalism. But it is not clear whether any of these arguments can justify an exclusive focus on profits, of course, or rather give permission to also focus on profits under certain circumstances.

If having a love of money seems morally suspect, then the practice of making money on money—for instance, lending money at interest—could seem even worse. This is another sweeping criticism directed at finance that can be found among the traditional ethicists. Societies in both Ancient and Medieval times typically condemned or banned the practice of “usury”, which originally meant all charging of interest on loans. As the practice started to become socially acceptable, usury came to mean the charging of excessive rates of interest. However, modern Islam still contains a general prohibition against interest, and many countries still have at least partial usury laws, most often setting an upper limit on interest rates.

What could be wrong with lending at interest? Some of the more obscure arguments concern the nature of money (again): Aristotle argued that there is something unnatural with “money begetting money”. While he allowed that money is a useful means for facilitating commercial exchange, Aristotle thought that it has no productive use in itself and so receiving interest over and above the borrowed amount is unnatural and wrong ( Politics , 1258b). A related argument can be found in Aquinas, who argued that money is a good that is consumed on use. Although a lender can legitimately demand repayment of an amount equivalent to the loan, it is illegitimate to demand payment for the use of the borrowed amount and so adding interest is unnatural and wrong ( Summa Theologica , II–II, Q78).

Some more promising arguments concern justice and inequality. For example, as early as Plato we see the expression of the worry that allowing interest may lead to societal instability ( The Republic , II). It may be noted that the biblical condemnations of usury most straightforwardly prohibit interest-taking from the poor. One idea here is that we have a duty of charity to the poor and charging interest is incompatible with this duty. Another idea is that the problem lies in the outcome of interest payments: Loans are typically extended by someone who is richer (someone with capital) to someone who is poorer (someone without it) and so asking for additional interest may increase the inequitable distribution of wealth (Sandberg 2012, Visser & MacIntosh 1998). A third idea, which is prominent in the protestant tradition, is that lending often involves opportunism or exploitation in the sense of offering bad deals to poor people who have no other options (Graafland 2010).

The Islamic condemnation of interest, or riba , adds an additional, third line of argument which holds that interest is essentially unearned or undeserved income: Since the lender neither partakes in the actual productive use of the money lent, nor exposes him- or herself to commercial risk, the lender cannot legitimately share in the gains produced by the loan (Ayub 2007, Birnie 1952, Thomas 2006). Based on this argument, contemporary Islamic banks insist that lenders and borrowers must form a business partnership in order for fees on loans to be morally legitimate (Ayub 2007, Warde 2010). Economists have over the years given several retorts to this argument. Some economists stress that lending also involves risk (e.g., that the borrower defaults and is unable to repay); others stress the so-called opportunity costs of lending (i.e., that the money could have been used more profitably elsewhere); and yet again others stress the simple time-preference of individuals (i.e., that we value present more than future consumption, and therefore the lender deserves compensation for postponing consumption).

The gradual abandonment of the medieval usury laws in the West is typically attributed to a growing acknowledgment of the great potential for economic growth unleashed by easy access to capital. One could perhaps say that history itself disproved Aristotle: money indeed proved to have a productive use. In a short text from 1787, Bentham famously poked fun at many of the classical anti-usury arguments and defended the practice of charging interest from a utilitarian standpoint (Bentham 1787). However, this does not mean that worries about the ethics of charging interest, and allegations of usury, have disappeared entirely in society. As noted above, usury today means charging interest rates that seem excessive or exorbitant. For instance, many people are outraged by the rates charged on modern payday loans, or the way in which rich countries exact interest on their loans from poor countries (Baradaran 2015, Graeber 2011, Herzog 2017a). These intuitions have clear affinities with the justice-based arguments outlined above.

A sweeping criticism of a more contemporary nature concerns the supposed moral defects of speculation. This criticism tends to be directed towards financial activities that go beyond mere lending. Critics of the capitalist system often liken the stock market to a casino and investors to gamblers or punters (Sinn 2010, Strange 1986). More moderate critics insist on a strict distinction between investors or shareholders, on the one hand, and speculators or gamblers, on the other (Bogle 2012, Sorell & Hendry 1994). In any case, the underlying assumption is that the similarities between modern financial activities and gambling are morally troublesome.

On some interpretations, these concerns are similar to those raised above. For example, some argue that speculators are driven by the profit motive whereas investors have a genuine concern for the underlying business enterprise (Hendry 2013). Others see speculation as “parasitic”, that is, to be without productive use, and solely dependent on luck (Borna & Lowry 1987, Ryan 1902). This latter argument is similar to the complaint about undeserved income raised in particular by Islamic scholars (Ayub 2007, Warde 2010).

A more distinct interpretation holds that speculation typically includes very high levels of risk-taking (Borna & Lowry 1987). This is morally problematic when the risks not only affect the gambler him or herself but also society as a whole. A root cause of the financial crisis of 2008 was widespread speculation on very risky derivatives such as “synthetic collateralized debt obligations” (see section 1.2 ). When the value of such derivatives fell dramatically, the financial system as a whole came to the brink of collapse. We will return to this issue below (in section 4.3.1 ). In this regard, the question of risk imposition becomes important too (Moggia 2021).

A related interpretation concerns the supposed short-sightedness of speculation. It is often argued that financial agents and markets are “myopic” in the sense that they care only about profits in the very near term, e.g., the next quarter (Dallas 2012). Modern disclosure requirements force companies to publish quarterly earnings reports. The myopia of finance is typically blamed for negative effects such as market volatility, the continuous occurrence of manias and crashes, inadequate investment in social welfare, and the general shortsightedness of the economy (e.g., Lacke 1996).

Defenders of speculation argue that it can serve a number of positive ends. To the extent that all financial activities are speculative in some sense, of course, the ends coincide with the function of finance more generally: to channel funds to the individuals or companies who can use them in the most productive ways. But even speculation in the narrower sense—of high-risk, short-term bets—can have a positive role to play: It can be used to “hedge” or off-set the risks of more long-term investments, and it contributes to sustaining “market liquidity” (that is, as a means for providing counterparties to trade with at any given point of time) which is important for an efficient pricing mechanism (Angel & McCabe 2009, Koslowski 2009).

4.2 Fairness in Financial Markets

Let us now assume that the existence of financial markets is at least in general terms ethically acceptable, so that we can turn to discuss some of the issues involved in making them fair and just for all parties involve. We will focus on three such issues: deception and fraud (honesty), conflicts of interest (care for customers), and insider trading (fair play).

Some of the best-known ethical scandals in finance are cases of deception or fraud. Enron, a huge US corporation, went bankrupt after it was discovered that its top managers had “cooked the books”, i.e., engaged in fraudulent accounting practices, keeping huge debts off the company’s balance sheet in an effort to make it look more profitable (McLean & Elkind 2003). Other scandals in the industry have involved deceptive marketing practices, hidden fees or costs, undisclosed or misrepresented financial risks, and outright Ponzi schemes (see section 2 ).

While these examples seem obvious, on further examination it is not easy to give an exact definition of financial deception or fraud. The most straightforward case seems to be deliberately misrepresenting or lying about financial facts. However, this assumes that there is such a thing as a financial fact, i.e., a correct way of representing a financial value or transaction. In light of the socially constructed nature of money and finance (see section 1 ), this may not always be clear. Less straightforward cases include simply concealing or omitting financial information, or refraining from obtaining the information in the first place.

A philosophical conception of fraud, inspired by Kant, defines it as denying to the weaker party in a financial transaction (such as a consumer or investor) information that is necessary to make a rational (or autonomous) decision (Boatright 2014, Duska & Clarke 2002). Many countries require that the seller of a financial product (such a company issuing shares) must disclose all information that is “material” to the product. It is an interesting question whether this suggestion, especially the conception of rationality involved, should include or rule out a consideration of the ethical nature of the product (such as the ethical nature of the company’s operations) (Lydenberg 2014). Furthermore, there may be information that is legitimately excluded by other considerations, such as the privacy of individuals or companies commonly protected by “bank secrecy” laws.

But is access to adequate information enough? A complication here is that the weaker party, especially ordinary consumers, may have trouble processing the information sufficiently well to identify cases of fraud. This is a structural problem in finance that has no easy fix, because financial products are often abstract, complex, and difficult to price. Therefore, full autonomy of agents may not only require access to adequate information, but also access to sufficient know how, processing ability and resources to analyze the information (Boatright 2014). One solution is to require that the financial services industry promotes transparent communication in which they track the understanding of ordinary consumers (de Bruin 2014b, Endörfer & De Bruin 2019, Shiller 2012).

Due to the problems just noted, the majority of ordinary consumers refrain from engaging in financial markets on their own and instead rely on the services of financial intermediaries, such as banks, investment funds, and insurance companies. But this opens up new ethical problems that are due to the conflicts of interest inherent in financial intermediation. Simply put, the managers or employees of intermediaries have ample opportunity, and often also incentives, to misuse their customers’ money and trust.

Although it is once again difficult to give an exact definition, the literature is full of examples of such misuse—including so-called churning (trading excessively to generate high fees), stuffing (selling the bank’s undesired assets to a client), front-running (buying an asset for the bank first and then reselling it to the client at a higher price) and tailgating (mimicking a client’s trade to piggyback on his/her information) (Dilworth 1994; Heacock, Hill, & Anderson 1987). Interestingly, some argue that the whole industry of actively managed investment funds may be seen as a form of fraud. According to economic theory, namely, it is impossible to beat the average returns of the market for any given level of financial risk, at least in the long term. Therefore, funds who claim that they can do this for a fee are basically cheating their clients (cf. Hendry 2013, Kay 2015).

A legal doctrine that aims to protect clients is so-called fiduciary duty, which imposes obligations on fiduciaries (those entrusted with others’ money) to act in the sole interest of beneficiaries (those who own the money). The interests referred to are typically taken to be financial interests, so the obligation of the fiduciary is basically to maximize investment returns. But some argue that there are cases in which beneficiaries’ broader interests should take precedence, such as when investing in fossil fuels may give high financial returns but pose serious risks to people’s future (Lydenberg 2014; Sandberg 2013, 2016). In any case, it is often thought that fiduciary duties go beyond the ideal of a free market to instead give stronger protection to the weaker party of a fragile relationship.

As an alternative or compliment to fiduciary duty, some argue for the adoption of a code of ethics or professional conduct by financial professionals. A code of ethics would be less arduous in legal terms and is therefore more attractive to free market proponents (Koslowski 2009). It can also cover other fragile relationships (including those of bank-depositor, advisor-client, etc.). Just as doctors and lawyers have a professional code, then, so finance professionals could have one that stresses values such as honesty, due care and accuracy (de Bruin 2016, Graafland & Ven 2011). But according to critics, the financial industry is simply too subdivided into different roles and competencies to have a uniform code of ethics (Ragatz & Duska 2010). It is also unclear whether finance can be regarded as a profession in the traditional sense, which typically requires a body of specialized knowledge, high degrees of organization and self-regulation, and a commitment to public service (Boatright 2014, Herzog 2019).

Probably the most well-known ethical problem concerning fairness in finance, and also perhaps the one on which philosophers most disagree, is so-called insider trading. Put simply, this occurs when an agent uses his or her position within, or privileged information about, a company to buy or sell its shares (or other related financial assets) at favorable times and prices. For example, a CEO may buy shares in his or her company just before it announces a major increase in earnings that will boost the share price. While there is no fraud or breach of fiduciary duty, the agent seems to be exploiting an asymmetry of information.

Just as in the cases above, it is difficult to give an exact definition of insider trading, and the scope of its operative definition tends to vary across jurisdictions. Most commentators agree that it is the information and its attendant informational asymmetry that counts and, thus, the “insider” need not be inside the company at all—those abusing access to information could be family, friends or other tippees (Irvine 1987a, Moore 1990). Indeed, some argue that even stock analysts or journalists can be regarded as insiders if they trade on information that they have gathered themselves but not yet made publicly available. It is also debatable whether an actual trade has to take place or whether insider trading can consist in an omission to trade based on inside information, or also in enabling others to trade or not trade (Koslowski 2009).

Several philosophical perspectives have been used to explain what (if anything) is wrong with insider trading. A first perspective invokes the concept of fair play. Even in a situation with fully autonomous traders, the argument goes, market transactions are not fair if one party has access to information that the other has not. Fair play requires a “level playing field”, i.e., that no participant starts from an unfairly advantaged position (Werhane 1989, 1991). However, critics argue that this perspective imposes excessive demands of informational equality. There are many asymmetries of information in the market that are seemingly unproblematic, e.g., that an antiquary knows more about antiques than his or her customers (Lawson 1988, Machan 1996). So might it be the inaccessibility of inside information that is problematic? But against this, one could argue that, in principle, outsiders have the possibility to become insiders and thus to obtain the exact same information (Lawson 1988, Moore 1990).

A second perspective views insider trading as a breach of duty, not towards the counterparty in the trade but towards the source of the information. US legislation treats inside information as the property of the underlying company and, thus, insider trading is essentially a form of theft of corporate property (often called the misappropriation theory) (Lawson 1988). A related suggestion is that it can be seen as a violation of the fiduciary duty that insiders have towards the company for which they work (Moore 1990). However, critics argue that the misappropriation theory misrepresents the relationship between companies and insiders. On the one hand, there are many normal business situations in which insiders are permitted or even expected to spread inside information to outside sources (Boatright 2014). On the other hand, if the information is the property of the company, why do we not allow it to be “sold” to insiders as a form of remuneration? (Engelen & van Liedekerke 2010, Manne 1966)

A third perspective deals with the effects, both direct and indirect, of allowing insider trading. Interestingly, many argue that the direct effects of such a policy might be positive. As noted above, one of the main purposes of financial markets is to form (or “discover”) prices that reflect all available information about a company. Since insider trading contributes important information, it is likely to improve the process of price discovery (Manne 1966). Indeed, the same reasoning suggests that insider trading actually helps the counterparty in the trade to get a better price (since the insider’s activity is likely to move the price in the “right” direction) so it is a victimless crime (Engelen & Liedekerke 2010). However, others express concern over the indirect effects, which are likely to be more negative. Allowing insider trading may erode the moral standards of market participants by favoring opportunism over fair play (Werhane 1989). Moreover, many people may be dissuaded from even participating in the market since they feel that it is “rigged” to their disadvantage (Strudler 2009).

4.3 The Social Responsibility of Finance

We will now move on to take a societal view on finance, and discuss ideas relating to the broader social responsibilities of financial agents, that go beyond their basic role as market participants. We will discuss three such ideas here, respectively focusing on systemic risk (a responsibility to avoid societal harm), microfinance (a responsibility towards the poor or unbanked), and socially responsible investment (a responsibility to help address societal challenges).

One root cause of the financial crisis of 2008 was the very high levels of risk-taking of many banks and other financial agents. When these risks materialized, the financial system came to the brink of collapse. Many banks lost so much money that their normal lending operations were hampered, which in turn had negative effects on the real economy, with the result that millions of “ordinary” people around the world lost their jobs. Many governments stepped in to bail out the banks and in consequence sacrificed other parts of public spending. This is a prime example of how certain financial activities, when run amok, can have devastating effects on third parties and society in general.

Much subsequent debate has focused on so-called systemic risk, that is, the risk of failures across several agents which impairs the functioning of the financial system as such (Brunnermeier & Oehmke 2013, Smaga 2014). The concept of systemic risk gives rise to several prominent ethical issues. To what extent do financial agents have a moral duty to limit their contributions to systemic risk? It could be argued that financial transactions always carry risk and that this is “part of the game”. But the important point about systemic risk is that financial crises have negative effects on third parties (so-called externalities). This constitutes a prima facie case for a duty of precaution on the part of financial agents, based on the social responsibility to avoid causing unnecessary harm (James 2017, Linarelli 2017). In cases where precaution is impossible, one could add a related duty of rectification or compensation to the victims of the harm (Endörfer 2022). It is, however, a matter of philosophical dispute whether finance professionals can be held morally responsible for these harms (de Bruin 2018, Moggia 2021).

Two factors determine how much an agent’s activity contributes to systemic risk (Brunnermeier & Oehmke 2013, Smaga 2014). The first is financial risk of the agent’s activity in the traditional sense, i.e., the probability and size of the potential losses for that particular agent. A duty of precaution may here be taken to imply, e.g., stricter requirements on capital and liquidity reserves (roughly, the money that the agents must keep in their coffers for emergency situations) (Admati & Hellwig 2013). The second factor is the agent’s place in the financial system, which typically is measured by its interconnectedness with—and thereby potential for cascading effects upon—other agents. This factor indicates that the duty of precaution is stronger for financial agents that are “systemically important” or, as the saying goes, “too-big-to-fail” institutions (Stiglitz 2009).

As an alternative to the reasoning above, one may argue that the duty of precaution is more properly located on the collective, i.e., political level (James 2012, 2017). We return to this suggestion below (in section 5.1 ).

Even in normal times, people with very low income or wealth have hardly any access to basic financial services. Commercial banks have little to gain from offering such services to them; there is an elevated risk of loan losses (since the poor lack collateral) and it is costly to administer a large amount of very small loans (Armendáriz & Morduch 2010). Moreover, there will likely be cases where some bank officers discriminate against underprivileged groups, even where extensive legal protection is in place. An initiative that seeks to remedy these problems is “microfinance”, that is, the extension of financial services, such as lending and saving, to poor people who are otherwise “unbanked”. The initiative started in some of the poorest countries of the world, such as Bangladesh and India.

The justifications offered for microfinance are similar to the justifications offered for development aid. A popular justification holds that affluent people have a duty of assistance towards the poor, and microfinance is thought to be a particularly efficient way to alleviate poverty (Yunus 1998, 2007). But is this correct? Judging from the growing number of empirical “impact studies”, it seems more correct to say that microfinance is sometimes helpful, but at other times can be either ineffective or have negative side-effects (Hudon & Sandberg 2013, Roodman 2012). Another justification holds that there is a basic human right to subsistence, and that this includes a right to savings and credit (Hudon 2009, Meyer 2018). But critics argue that the framework of human rights is not a good fit for financial services that come with both benefits and challenges (Gershman & Morduch 2015, Sorell 2015).

Microfinance is of course different from development aid in that it involves commercial banking relations. This invites the familiar political debate of state- versus market-based support. Proponents of microfinance argue that traditional state-led development projects have been too rigid and corrupt, whereas market-based initiatives are more flexible and help people to help themselves (Armendáriz & Morduch 2010, Yunus 2007). According to critics, however, it is the other way around: Markets will tend to breed greed and inequality, whereas real development is created by large-scale investments in education and infrastructure (Bateman 2010, H. Weber 2004).

In recent years, the microfinance industry has witnessed several “ethical scandals” that seemingly testify to the risk of market excesses. Reports have indicated that interest rates on microloans average at 20–30% per annum, and can sometimes be in excess of 100%, which is much higher than the rates for non-poor borrowers. This raises questions about usury (Hudon & Ashta 2013; Rosenberg, Gonzalez, & Narain 2009). However, some suggest a defense of “second best”, or last resort, when other sources of aid or cheaper credit are unavailable (Sandberg 2012). Microfinance institutions have also been accused of using coercive lending techniques and forceful loan recovery practices (Dichter & Harper (eds) 2007; Priyadarshee & Ghalib 2012). This raises questions about the ethical justifiability of commercial activity directed at the desperately poor, because very poor customers may have no viable alternative to accepting deals that are both unfair and exploitative (Arnold & Valentin 2013, Hudon & Sandberg 2013).

Socially responsible investment refers to the emerging practice whereby financial agents give weight to putatively ethical, social or environmental considerations in investment decisions—e.g., decisions about what bonds or stocks to buy or sell, or how to engage with the companies in one’s portfolio. This is sometimes part of a strictly profit-driven investment philosophy, based on the assumption that companies with superior social performance also have superior financial performance (Richardson & Cragg 2010). But more commonly, it is perceived as an alternative to mainstream investment. The background argument here is that market pricing mechanisms, and financial markets in particular, seem to be unable to promote sufficient levels of social and environmental responsibility in firms. Even though there is widespread social agreement on the evils of sweatshop labor and environmental degradation, for instance, mainstream investors are still financing enterprises that sustain such unjustifiable practices. Therefore, there is a need for a new kind of investor with a stronger sense of social responsibility (Sandberg 2008, Cowton & Sandberg 2012).

The simplest and most common approach among these alternative investors is to avoid investments in companies that are perceived to be ethically problematic. This is typically justified from a deontological idea to the effect that it is wrong to invest in someone else’s wrongdoing (Irvine 1987b, Langtry 2002, Larmer 1997). There are at least three interpretations of such moral “taint”: (1) the view that it is wrong in itself to profit from others’ wrongdoings, or to benefit from other people’s suffering; (2) the view that it is wrong to harm others, or also to facilitate harm to other; or (3) the view that there is a form of expressive or symbolic wrongdoing involved in “morally supporting” or “accepting” wrongful activities.

The deontological perspective above has been criticized for being too black-and-white. On the one hand, it seems difficult to find any investment opportunity that is completely “pure” or devoid of possible moral taint (Kolers 2001). On the other hand, the relationship between the investor and the investee is not as direct as one may think. To the extent that investors buy and sell shares on the stock market, they are not engaging with the underlying companies but rather with other investors. The only way in which such transactions could benefit the companies would be through movements in the share price (which determines the companies’ so-called cost of capital), but it is extremely unlikely that a group of ethical investors can significantly affect that price. After all, the raison d’être of stock exchanges is exactly to create markets that are sufficiently liquid to maintain stable prices (Haigh & Hazelton 2004, Hudson 2005). In response to this, the deontologist could appeal to some notion of universalizability or collective responsibility: perhaps the right question to ask is not “what happens if I do this?” but instead “what happens if we all do this?”. However, such more complicated philosophical positions have problems of their own (see also rule consequentialism and collective responsibility )

A rival perspective on socially responsible investment is the (more straightforward) consequentialist idea that investors’ duty towards society consists in using their financial powers to promote positive societal goods, such as social justice and environmental sustainability. This perspective is typically taken to prefer more progressive investment practices, such as pushing management to adopt more ambitious social policies and/or seeking out environmentally friendly technology firms (Mackenzie 1997, Sandberg 2008). Of course, the flip side of such practices, which may explain why they are less common in the market, is that they invite greater financial risks (Sandberg 2011). It remains an open question whether socially responsible investment will grow enough in size to make financial markets a force for societal change.

Recent work has started exploring whether concrete sustainable finance policies (such as those suggested by the European Commission’s Sustainable Finance Action Plan) will generate sufficient funds to pay for climate change mitigation and adaptation, based as they are on policies of information provision only (De Bruin 2023).

5. Political Philosophy

Discussions about the social responsibility of finance are obviously premised on the observation that the financial system forms a central infrastructure of modern economies and societies. As we noted at the outset, it is important to see that the system contains both private elements (such as commercial banks, insurance companies, and investment funds) and public elements (such as central banks and regulatory bodies). However, issues concerning the proper balance between these elements, especially the proper role and reach of the state, are perennially recurrent in both popular and philosophical debates.

The financial system and the provision of money indeed raise a number of questions that connect it to the “big questions” of political philosophy: including questions of democracy, justice, and legitimacy, at both the national and global levels (on the history of political thinking about money see Eich 2019, 2020, 2022; Ingham 2004, 2019; Martin 2013). The discussions around finance in political philosophy can be grouped under three broad areas: financialization and democracy; finance, money and domestic justice; and finance and global justice. We consider these now in turn.

Many of the questions political philosophy raises about finance have to do with “financialization”. The phenomenon of “financialization”, whereby the economic system has become characterized by the increasing dominance of finance capital and by systems of financial intermediation (Ertürk et al. 2008; Davis 2011; Engelen et al. 2011; Palley 2013), is of potentially substantial normative significance in a number of regards. A related normative concern is the potential growth in political power of the financial sector, which may be seen as a threat to democratic politics.

These worries are, in effect, an amplification of familiar concerns about the “structural power” or “structural constraints” of capital, whereby capitalist investors are able to reduce the freedom of action of democratic governments by threatening “investment strikes” when their preferred political options are not pursued (see Lindblom 1977, 1982; Przeworski & Wallerstein 1988; Cohen 1989; B. Barry 2002; Christiano 2010, 2012; Furendal & O’Neill 2022). To take one recent version of these worries, Stuart White argues that a republican commitment to popular sovereignty is in significant tension with the acceptance of an economic system where important choices about investment, and hence the direction of development of the economy, are under the control of financial interests (White 2011).

In many such debates, the fault-line seems to be the traditional one between those who favor social coordination by free markets, and hence strict limitations on state activities, and those who favor democratic politics, and hence strict limitations on markets (without denying that there can be intermediate positions). But the current financial system is not a pure creature of the free market. In the financial system that we currently see, the principle that individuals are to be held financially accountable for their actions, and that they will therefore be “disciplined” by markets, is patchy at best. One major issue, discussed above, is the problem of banks that are so large and interconnected that their failure would risk taking down the whole financial system—hence, they can anticipate that they will be bailed out by tax-payers’ money, which creates a huge “moral hazard” problem (e.g., Pistor 2013, 2017). In addition, current legal systems find it difficult to impose accountability for complex processes of divided labor, which is why there were very few legal remedies after the financial crisis of 2008 (e.g., Reiff 2017).

The lack of accountability intensifies worries about the power relations between democratic politicians and individuals or corporations in the financial realm. One question is whether we can even apply our standard concept of democracy to societies that have the kinds of financial systems we see today. We may ask whether societies that are highly financialized can ever be true democracies, or whether they are more likely to be “post-democracies” (Crouch 2004). For example, states with high levels of sovereign debt will need to consider the reaction of financial markets in every significant policy decision (see, e.g., Streeck 2013 [2014], see also Klein 2020) Moreover “revolving doors” between private financial institutions and supervising authorities impact on the ability of public officials to hold financial agents accountable. This is similar to the problems of conflicts of interest raised above (see sections 2 and 4.2.2 ). If financial contracts become a central, or maybe even the most central, form of social relations (Lazzarato 2012), this may create an incompatibility with the equal standing of citizens, irrespective of financial position, that should be the basis of a democratic society and its public sphere of deliberation (see also Bennett 2020 from an epistemic perspective).

While finance has, over long stretches of history, been rather strictly regulated, there has been a reversed trend towards deregulation since roughly the 1970s. After the financial crisis of 2008, there have been many calls for reregulation. Proposals include higher capital ratios in banks (Admati & Hellwig 2013), a return to the separation of commercial banking from speculative finance, as had been the case, in the US, during the period when the Glass-Steagall Act was in place (Kay 2015), or a financial transaction tax (Wollner 2014). However, given that the financial system is a global system, one controversial question is whether regulatory steps by single countries would have any effect other than capital flight.

When it comes to domestic social justice, the central question relating to the finance system concerns the ways in which the realization of justice can be helped or hindered by how the financial system is organized.

A first question here, already touched upon in the discussion about microfinance above ( section 4.3.2 ), concerns the status of citizens as participants in financial markets. Should they all have a right to certain financial services such as a bank account or certain forms of loans, because credit should be seen as a primary good in capitalist economies (see, e.g., Hudon 2009, Sorell 2015, Meyer 2018)? More broadly, how does the pattern of access to credit affect the distribution of freedom and unfreedom within society? (see Dietsch 2021; Preiss 2021). These are not only issues for very poor countries, but also for richer countries with high economic inequality, where it becomes a question of domestic justice. In some countries all residents have the right to open a basic bank account (see bank accounts in the EU in Other Internet Resources ). For others this is not the case. It has been argued that not having access to basic financial services creates an unfairness, because it drives poorer individuals into a cash economy in which they are more vulnerable to exploitative lenders, and in which it is more difficult to build up savings (e.g., Baradaran 2015). Hence, it has been suggested either to regulate banking services for individuals more strictly (e.g., Herzog 2017a), to consider various forms of household debt relief (Persad 2018), or to offer a public banking service, e.g., run by the postal office, which offers basic services at affordable costs (Baradaran 2015).

Secondly, financialization may also have more direct effects on socio-economic inequality. Those with managerial positions within the financial sector are disproportionately represented among the very top end of the income distribution, and so the growth of inequality can in part be explained by the growth in the financial sector itself (Piketty 2014). There may also be an effect on social norms, whereby the “hypermeritocratic” norms of the financial sector have played a part in increasing social tolerance for inequality in society more broadly (Piketty 2014: 265, 2020; see also O’Neill 2017, 2021). As Dietsch et al. point out, the process of increasing financialization within the economies of the advanced industrial societies has been encouraged by the actions of central banks over recent decades, and so the issue of financialization also connects closely to questions regarding the justice and legitimacy of central banks and monetary policy (Dietsch, Claveau, & Fontan 2016, 2018; see also Jacobs & King 2016).

Thirdly, many debates about the relation between distributive justice and the financial system revolve around the market for mortgages, because for many individuals, a house is the single largest item for which they need to take out a loan, and their mortgage their main point of interaction with the financial system. This means that the question of who has access to mortgage loans and at what price can have a major impact on the overall distribution of income and wealth. In addition, it has an impact on how financial risks are distributed in society. Highly indebted individuals are more vulnerable when it comes to ups and downs either in their personal lives (e.g., illness, loss of job, divorce) or in the economy as a whole (e.g., economic slumps) (Mian & Sufi 2014). The danger here is that existing inequalities—which many theories of justice would describe as unjust—are reinforced even further (Herzog 2017a).

Here, however, a question about the institutional division of labor arises: which goals of distributive justice should be achieved within markets—and specifically, within financial markets—and which ones by other means, for example through taxation and redistribution? The latter has been the standard approach used by many welfare systems: the idea being to let markets run their course, and then to achieve the desired patterns of distribution by taxation and redistribution. If one remains within that paradigm, questions arise about whether the financial sector should be taxed more highly. In contrast, the approach of “pre-distribution” (Hacker 2011; O’Neill & Williamson 2012; O’Neill 202), or what Dietsch calls “process redistribution” (2010), is to design the rules of the economic game such that they contribute to bringing about the distributive pattern that is seen as just. This could, for example, mean regulating banking services and credit markets in ways that reduce inequality, for example by imposing regulations on payday lenders and banks, so that poor individuals are protected from falling into a spiral of ever higher debt. A more radical view could be to see the financial problems faced by such individuals as being caused by more general structural injustices the solution of which does not necessarily require interventions with the financial industry, but rather more general redistributive (or predistributive) policies.

Money creation: Another alternative theoretical approach is to integrate distributive concerns into monetary policy, i.e., when it comes to the creation of money. So far, central banks have focused on the stability of currencies and, in some cases, levels of employment. This technical focus, together with the risk that politicians might abuse monetary policy to try to boost the economy before elections, have been used in arguments for putting the control of the money supply into the hands of technical experts, removing monetary policy from democratic politics. But after the financial crisis of 2008, many central banks have used unconventional measures, such as “quantitative easing”, which had strongly regressive effects, favoring the owners of stocks or of landed property (Fontan et al. 2016, Dietsch 2017); they did not take into account other societal goals, e.g., the financing of green energy, either. This raises new questions of justice: are such measures justified if their declared aim is to move the economy out of a slump, which presumably also helps disadvantaged individuals (Haldane 2014)? Would other measures, for instance “helicopter money” that is distributed to all citizens, have been a better alternative? And if such measures are used, is it still appropriate to think of central banks as institutions in which nothing but technical expertise is required, or should there be some form of accountability to society? (Fontan, Claveau, & Dietsch 2016; Dietsch 2017; Riles 2018; see also Tucker 2018; van ’t Klooster 2020; James & Hockett 2020, Downey 2021). [ 2 ]

We have already discussed the general issue of the ontological status of money ( section 1.1 above). But there are also significant questions in political philosophy regarding the question of where, and by what sorts of institutions, should the money supply be controlled. One complicating factor here is the extensive disagreement about the institutional basis of money creation, as described above. One strand of the credit theory of money emphasizes that in today’s world, money creation is a process in which commercial banks play a significant role. These banks in effect create new money when they make new loans to individual or business customers (see McLeay, Radia, & Thomas 2014; see also Palley 1996; Ryan-Collins et al. 2012; Werner 2014a,b). James Tobin refers to commercial bank-created money, in an evocative if now dated image as “fountain pen money”, that is, money created with the swish of the bank manager’s fountain pen (Tobin 1963).

However, the relationship between private commercial banks and the central bank is a complicated one, such that we might best think of money creation as a matter involving a kind of hybrid public-private partnership. Hockett and Omarova refer to this relationship as constituting a “finance franchise”, with private banks being granted on a “franchise” basis the money-creating powers of the sovereign monetary authority, while van ’t Klooster describes this relation between the public and private as constituting a “hybrid monetary constitution” (Hockett & Omarova 2017; van ’t Klooster 2017; see also Bell 2001). In this hybrid public-private monetary system, it is true that private commercial banks create money, but they nevertheless do so in a way that involves being regulated and subject to the authority of the central bank within each monetary jurisdiction, with that central bank also acting as “lender of last resort” (Bagehot 1873) when inter-bank lending dries up. [ 3 ]

When the curious public-private nature of money creation is brought into focus, it is not surprising that there should exist views advocating a shift away from this hybrid monetary constitution, either in the direction of a fully public option, or a fully private system of money creation.

Advocates of fully public banking envisage a system in which private banks are stripped of their authority to create new money, and where instead the money supply is directly controlled either by the government or by some other state agency; for example by the central bank lending directly to firms and households. Such a position can be defended on a number of normative grounds: that a public option would allow for greater financial stability, that a fully public system of money creation would allow a smoother transmission of democratic decisions regarding economic governance; or simply because of the consequences of such a system with regards to socioeconomic inequality and environmental sustainability (see Jackson & Dyson 2012; Wolf 2014a,b; Lainà 2015; Dyson, Hodgson, & van Lerven 2016a,b; Ingham, Coutts, & Konzelmann 2016; Dow 2016; Wodruff 2019; van’t Klooster 2019, Mellor 2019, Dietsch 2021; for commentary and criticism see Goodhart & Jensen 2015; Fontana & Sawyer 2016, Larue et al. 2020).

In stark contrast, a number of libertarian authors have defended the view that the central bank should have no role in money creation, with the money supply being entirely a matter for private suppliers (and with the consumers of money able to choose between different rival suppliers), under a system of “free banking” (e.g., Simons 1936; Friedman 1962; von Hayek 1978; Selgin 1988). Advocacy of private money creation has received a more recent stimulus with the rise of Bitcoin and other crypto-currencies, with some of Bitcoin’s advocates drawing on similar libertarian arguments to those offered by Hayek and Selgin (see Golumbia 2016, Robison 2022). One can also mention the “alternative currencies” movement here which defends private money creation on entirely different grounds, most often by appeal to the value of community (see Larue 2022, Larue et al. 2022).

Finally, a number of issues relate questions about finance to questions about global justice. The debate about global justice (see also global justice ) has weighed the pros and cons of “statist” and “cosmopolitan” approaches, that is, approaches to justice that would focus on the nation state (maybe with some additional duties of beneficence to the globally poor) or on the global scale. The financial system is one of the most globalized systems of social interaction that currently exist, and global entanglements are hard to deny (e.g., Valentini 2011: 195–8). The question thus is whether this creates duties of justice on the financial system, and if so, whether it fulfills these duties, i.e., whether it contributes to making the world more globally just, or whether it tends in the opposite direction (or whether it is neutral).

There are a number of institutions, especially the World Bank and the International Monetary Fund (IMF), that constitute a rudimentary global order of finance. Arguably, many countries, especially poorer ones, cannot reasonably opt out of the rules established by these institutions (e.g., Hassoun 2012, Krishnamurthy 2014). It might therefore appear to be required by justice that these institutions be governed in a way that represents the interests of all countries. But because of historical path-dependencies, and because a large part of their budget comes from Western countries, the governance structures are strongly biased in their favor (for example, the US can veto all important decisions in the IMF). Miller (2010: 134–41) has described this situation as “indirect financial rule” by the US (see also Herzog 2021).

An issue worth noting in this context is the fact that the US dollar, and to a lesser degree the Euro, function as de facto global currencies, with a large part of global trade being conducted in these currencies (e.g., Mehrling 2011, Eichengreen 2011). This allows the issuing countries to run a current account deficit, which amounts to a redistribution from poorer to richer countries for which compensation might be owed (Reddy 2005: 224–5). This fact also raises questions about the distribution of power in the global sphere, which has often been criticized as favoring Western countries (e.g., Gulati 1980, United Nations 2009). However, global financial markets serve not only to finance trade in goods and services; there are also questions about fluctuations in these markets that result exclusively from speculations (see also sect.1.4.3 above). Such fluctuations can disproportionately harm poorer countries, which are more vulnerable to movements of capital or rapid changes in commodity prices. Hence, an old proposal that has recently been revived and defended from a perspective of global justice is that of a “Tobin tax” (Tobin 1978), which would tax financial transactions and thereby reduce volatility in international financial markets (Reddy 2005, Wollner 2014).

A second feature of the current global order that has been criticized from a perspective of justice is the “borrowing privilege”. As Pogge describes (e.g., 2008: chap. 4), the governments of countries can borrow on international financial markets, no matter whether they have democratic legitimacy or not. This means that rogue governments can finance themselves by incurring debts that future generations of citizens will have to repay.

Sovereign debt raises a number of questions that are related to global justice. Usually, the contracts on which they are based are considered as absolutely binding (e.g., Suttle 2016), which can threaten national sovereignty (Dietsch 2011), and raises questions of the moral and political responsibilities both of citizens of debtor nations, and of creditor countries themselves (Wiedenbrüg, 2018a, 2018b). These problems obtain in particular with regard to what has been called “odious” debt (Sack 1927, Howse 2007, Dimitriu 2015, King 2016): cases in which government officials sign debt contracts in order to enrich themselves, with lenders being aware of this fact. Such cases have been at the center of calls for a jubilee for indebted nations. At the moment, there are no binding international rules for how to deal with sovereign bankruptcy, and countries in financial distress have no systematic possibility of making their claims heard, which is problematic from a perspective of justice (e.g., Palley 2003; Reddy 2005: 26–33; Herman 2007; C. Barry & Tomitova 2007; Wollner 2018). The IMF, which often supports countries in restructuring sovereign debt, has often made this support conditional upon certain requirements about rearranging the economic structures of a country (for a discussion of the permissibility of such practices see C. Barry 2011).

Finally, and perhaps most importantly, the issue of financial regulation has a global dimension in the sense that capital is mobile across national boundaries, creating the threats to democracy described above. This fact makes it difficult for individual countries, especially smaller ones, to install the more rigid financial regulations that would be required from a perspective of justice. Just as with many other questions of global justice (see, e.g., Dietsch 2015 on taxation), we seem to see a failure of coordination between countries, which leads to a “race to the bottom”. Making global financial institutions more just is therefore likely to require significant levels of international cooperation.

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• Debt, Trust and the Functions of Money

When Westerners first came upon the remote island of Yap (Federated States of Micronesia) in the 19 th  century, far from anywhere in the Pacific, they were surprised to find that the islanders used a bizarre currency. It consisted of large circular discs of limestone with a hole in the middle. These disks, called Rai, were between 1 and 12 feet in diameter. They were quarried from an island called Palau, some 280 miles away, and carried from there by outrigger canoes, to be propped up around the island, and part-owned by one person after another, representing value. Some were even shipwrecked at sea, but remained as part of the currency, for everyone knew their quality, history, position, value and current owner.

These stone disks could in no way be carried about and used as coins, but they were currency, for they were assigned in payment for specific social exchanges: marriages, inheritances, political deals, even pigs. More mundane items, like food and fibres, could be exchanged for shell money, or through a customary obligation in which it was obvious who owed how much to whom, and repayment was expected to occur in kind, when the time came.

If one looks up  the Rai , it is simply called money. In one sense this is true. But it is also profoundly misleading, for a Rai is not a currency which can buy you anything and everything, it is only a marker or token recording the value of a changed relationship which has been entered into by two parties, in certain circumstances – a kind of contract.

It indicates the existence of a particular social linkage, in that particular society. It is one of the means whereby social relations are ordered, whether they are relations involving power, family connections, transmission of status goods, or family obligation. In Yap, the monetary system relies on an oral history of ownership. Each transaction is recorded in this history, and no physical movement of the stone is needed; no physical possession, as with metal coins.

Reciprocity and Obligation in Non-commercial Cultures

Indeed, for most of human existence as hunter gatherers, interchange was governed by social reciprocity; obligation to be helpful, fair and just according to tradition. To be fair to other members of the family, of the village, of the tribe. To participate in the essential sharing of effort and goods which maintain the community. To behave in accordance with the rules of rank and status. The kind of sharing which occurs in families, where repayment is not expected.

There was no universal, abstract, measure of value; no actual money. For there was no commerce as we know it, no established market in which goods could be traded. It was social obligation and status which held societies together. In these small societies it was easy and natural to keep track of who was pulling his weight and who was not. Daily transfer of necessities was done by an informal system of reciprocity, in which a notional unit of exchange was never needed.

In more complex societies, reciprocity was formalised through the giving of gifts. Serial exchange of gifts established alliances, created obligations and denoted solidarity. In certain societies giving became an almost aggressive act, as in the competitive distribution or utter destruction of wealth by high status individuals asserting their hierarchical position in the potlatch ceremonies of the indigenous people of North West Canada; ceremonies in which the host challenged a guest chieftain to exceed him in his ability or ‘power’ to give away or to destroy goods, valuable items, like blankets or ornamental copper shields (worth the same as a slave). British colonisers considered such practices primitively wasteful, and contrary to the ‘civilized values’ of accumulation, and tried to suppress them. But, such profligacy is essential to the maintenance of the very structure of that society. Something considered more important than the hoarding of mere goods, or the colonisers’ money.

To modern Westerners, the customs of other peoples often look bizarre when compared to our commercial practices. Commercial practices that give us access to status goods like fancy clothes, or necessities like bread, and for which we pay with money.

For instance, the Lele people of central Africa, in what was the Belgian Congo, with whom the British anthropologist Mary Douglas lived in the 1950s, did have a sort of currency, a piece of raffia cloth; cloth which a man could weave in about three hours.

But these cloths were not used as a currency to buy daily goods. Instead this ‘cloth money’ was restricted to a particular variety of non-commercial ‘payments’ which were required in Lele society, and for which ‘cloth money’ was needed. Their function was to maintain social relationships within the Lele. Cloths were used as entrance fees to religious cult groups, fees to ritual healers, for marriage dues, as a reward to a Lele wife for giving birth, as fines for adultery, as compensation for fighting and blood debts, and as tribute to chiefs.

The Lele valued raffia cloth as highly as Europeans valued gold. But because the structure and values of Lele society were very different, payment in cloth was made in very different circumstances. The motives for payment were social, not commercial.

This system meant that older men owned more cloths than the younger ones. They were richer and had more power; power to control the younger men, who had to borrow from them in order to join the required cult groups, or to marry. However, as contact with Westerners increased, cloths were traded for Belgian money, and an exchange rate between them established. A young man could work for the foreigners and, with his pay in franks, could buy cloths to bypass his elders and, for instance, use the cloths to join a cult group. So the traditional structure of social control across the generations was progressively weakened and the society disrupted by this contact with an alien system of money.

Societies with extremes of riches were linked with power and conquest, with tribute, plunder and booty. Rule was always linked with access to riches, but not to trade, and seldom have traders been granted the status that businessmen have now.

Where there was trade, mutually agreed values were used, equivalent to a kind of monetary standard. This money could be represented by a certain weight of silver, by a rare shell, or even by an iron meat-skewer, an obol, as in pre-classical Greece. Always an intermediary substance was used which could be valued as a standard in relation to the commodities being traded. A cowrie shell could be worth two yams, or one sea cucumber. But barter was always rare and only used in extreme situations. No modern archaeologist or anthropologist has ever found a society which regularly made its trades through barter.

Proto-accounting: Correspondence Counting

In Mesopotamia, archaeologists found quantities of curious little clay objects: cubes, pyramids, cylinders, cones, some of them 8,000 years old. At first these seemed like gaming pieces for something like chess. But no gaming boards were found. Finally, in the 1970s, the French archaeologist, Denise Schmandt-Besserat, realised that each shape actually represented a different commodity in daily life; a sheep, a loaf of bread, a jar of honey.

Such counters were adequate to record small transactions. A few items at a time could easily be kept as a record of a transaction; clay counters used for primitive accounting; for correspondence counting, as it is called. Correspondence counting is easy: you don’t need to know how to count, you just need to look at two quantities and verify that they are the same. These little clay objects were tokens of proto-money.

The Challenge for Centralized States

By 5,000 years ago (3,000 BCE) centralised states were established in the Fertile Crescent, states run on bureaucratic lines, with hierarchically controlled command economies, where goods were rationed. Military dictatorships of a kind. Their size and complexity posed quite new and difficult problems of organisation. For an urban economy needs planning and taxation. It needs to feed its troops, and there is trading too. These states were centred in cities, such as Uruk, in Mesopotamia, modern day Iraq, on the banks of the Tigris, with a population of over 50,000.

(3) Numeracy, which created a new concept – number – a concept that could represent quantity without having to count actual tokens.

Accounting began when a number of clay tokens were first inserted into a clay envelope. The envelope was sealed and tally marks were made on the outside to denote the kind and the number of tokens inside; five sheep, ten baskets of grain, seven jars of honey.

The marks were used to record the back-and-forth of the tokens, which themselves were recording the back-and-forth of the sheep, the grain, and the jars of honey. But something revolutionary had happened. The abstract marks on the envelope-tablets matched the tokens inside which were no longer counted, but were read off from the surface of the envelope. It may be that the first such envelope-tablets showed impressions of the tokens themselves, pressing the hard clay tokens into the soft clay tablet.

Soon the ancient accountants realized it would be simpler to make the marks not with the clumsy tokens, but with a reed pen; to supersede three-dimensional objects with two-dimensional symbols. Thus cuneiform writing was born, composed of lines, of triangles, circles and other marks. A stylized picture, representing an impression of a token, representing a commodity.

Then, in a further burst of creativity, they began to use different marks for (1) a commodity and (2) its quantity. Now only two symbols were needed to record any quantity of anything (even the 140,000 measures of grain, which appear on one tablet). This separation was a double invention, of (a) symbolic writing and (b) numeracy. The writing down of numbers, made things much clearer, and the process of recording exploded. Vast numbers of tablets have been found in Mesopotamia, records of money transactions and contracts, dating back to more than 5,000 years ago.

So out of the process of recording quantities of concrete objects, writing appeared. Writing which could then be used to record our thoughts on other topics, to write down stories and to crystalize ideas. A technology invented to transmit our thoughts across both space and time.

Primitive Money – with Multiple Denominators of Value

But there was still no actual money, no abstract idea to represent value, and no coinage. There was only accounting (and auditing; the hearing of the accounts as they were read out). Mostly there was no need for a unit of account, as it was the actual commodities that were being accounted for: the baskets of grain, the sheep, the jars of honey. There was little trade between individuals, no market. What was essential was that the authorities keep track of what was where, and when, and that what was planned had been accomplished, or not. (Much as happened in the command economy of the Soviet Union later on).

But, as elsewhere, there was trade. Timber, precious metal, slaves, and perfume from abroad were traded for the local cloth, pottery and other artifacts. And where there is trade, a money of account is needed; a money based on measurement, on metrication, on commonly agreed units of weight. For instance, a certain weight of silver would be equivalent in value to a certain amount of timber, and a different weight of silver would be worth a basket of barley. The most commonly used denominators of value were weights of silver, copper, tin, lead and barley. These weights even had names, such as Shekel, Mina and Talent, with 60 Shekels to a Mina, and 60 Minas to a Talent. But these were not units of money,  only of weight  of silver.

The Invention of Finance

The Mesopotamians also invented another key process, primitive finance. Loans were made; credits for seed, for animals and other needs, like trade. The seeds would be sown and, later on, the harvest would repay the debt. Like now, these operations of finance were a kind of time travel. Loans allowed a person to do something at one time and pay for it later on, when he had more wealth.

But how was a borrower to repay the lender for the use of his wealth? For unlike calling on your family’s resources, lending was a favor for which payment was expected. Payment for the use of money till the debt was paid. Payment for moving wealth through time. This payment of a portion of the debt, assessed at an agreed rate through time, was then a new idea. We call it interest now.

So there was lending and borrowing, credit and debt, and there was payment of interest, mostly at 20%/annum, though higher, more usurious rates sometimes applied, like those we see from present day loan sharks. And, if the borrower could not repay, there was a penalty for debt default. Default often resulted in debt-slavery, where the debtor’s children, or the whole family, could be enslaved, until the debt was paid off – or forgiven.

Quite early on the rulers recognised that, in a money economy, the process of finance (the sending of money forward through time) tends to concentrate wealth in the hands of the money-lenders. And that for a society to continue functioning, there has to be a certain balance between creditor and debtor.

The flow of money between creditor and debtor needs to be maintained, otherwise the system crashes. It crashes just like a bicycle, which must keep moving to maintain its balance. For the creditors and debtors are part of the same system, both are essential to the throughput of money, and the debtors need enough wealth to sustain their lives, as well as to repay their debts.

For as the rich get richer automatically, the poor get poorer, like a kind of economic ratchet. Those with wealth have an intrinsic advantage, in that owning more than they need, they do not have to borrow to continue or to expand their activities. But the poor will likely need to borrow, for they have no reserves. In time, the gap between creditors and debtors grows so wide that the poor can’t repay their debts, and the system seizes up.

To retain a balance, rulers recognised that this ratchet needs to be reset every so often. So, sometime before 2,000 BCE, regular forgiveness of debt was instituted in the ancient world that cancelled all the rural (but not commercial) debt. Indeed, the ancient Hebrews had something called a Jubilee, “a trumpet-blast of liberty” that occurred every 50 years, a time when all debts were forgiven and slaves released.

Judaism condemned usury between Jews, but allowed it to be levied on non-Jews. Later on, both Christianity and Islam went further and imposed a total ban on usury, on the taking of interest, in recognition of the damaging pull towards increasing inequality which results, and which not only pushes the majority into penury, but gums up the flow of money. (Hypocritically, medieval Christians allowed, and even encouraged Jews to lend money with interest.)

No doubt the emphasis on charity and humanitarian aid, a feature in all three monotheistic religions, was  actually   maintained  by this same realization about usury. For once these religions became formalized, they increasingly focused on social control and stabilization. They all recognized that money, to retain its value, has to continue moving from person to person, and it has to be spread relatively evenly. If it stagnates, it fades away, it vanishes, the measured wealth dies out.

Money as a Universal Scale of Economic Value – The First Coins

The momentous invention of money, as both a universal, and a decentralised, scale of economic value, only occurred long after the invention of accounting, and it probably occurred in tandem with the invention of standardised metal tokens – coins. With them, came markets, too.

As Felix Martin writes:

“ This spread of money’s first two components – the idea of a universally applicable unit of value and the practice of keeping accounts in it – reinforced the development of the third: the principle of decentralised negotiability. The new idea of universal economic value …

“ Now money was opening up a still more radical horizon: traditional social obligations could not only be valued on a universal scale, but transferred from one person to another. The miracle of money had an equally miraculous twin – the miracle of the market. And with the invention of coinage, a dream technology for recording and transferring monetary obligations from one person to another was born …

“ Markets require people to be able to negotiate a sale or agree a wage on their own, instead of feeding their preferences into a central authority in order to receive back a directive on how to act. But successful negotiation requires a common language – a shared idea of what words mean. For markets to function there therefore needs to be a shared concept of value and standardised units in which to measure it. Not a shared idea of what particular goods or services are worth – that is where the haggling comes in – but a shared unit of economic value so that the haggling can take place at all. Without general agreement on what a dollar is, we could no more haggle in the marketplace over prices in dollars than we can talk to the birds and the bees …”

It was not until sometime in the 7 th  century BCE, two and a half millennia after the Uruk period, that the first metal coins appeared. They were minted in Lydia (what is now Western Turkey), and were made of electrum, a natural alloy of gold and silver. This invention was soon copied by other Greeks around the Aegean Sea. By 480 BCE there were nearly one hundred mints in the region.

Coins were a great improvement on previous units of account. They were small and valuable, and above all, they could be standardised in value. So perhaps ten coins could buy a horse and twenty buy a slave. What’s more, no weighing was needed to transact a deal, and better still for some, the process was anonymous.

“ Everywhere, traditional social obligations were transformed into financial relationships. In Athens, traditional agricultural sharecroppers were converted into contractual tenants paying money rents. The so-called ‘liturgies’ – the ancient, civic obligations of the thousand wealthiest inhabitants of the city to provide public services ranging from choruses for the theatre to ships for the navy – were now assessed in financial terms…the rewards granted by the state to victors at the Pan-Hellenic athletic competitions began to be prescribed in monetary terms…500 drachmas for a champion at the Olympics…

“By the fifth century BCE Athens was, in the words of the great politician Pericles, ‘a salary-drawing city’. Jury, magistracy, and military service were all paid in money. Citizens were paid to attend public festivals and even, by the fourth century BCE, to turn up to the assembly to vote on legislation.”

But coins were not used for every occasion of trade. For they were relatively scarce, and relatively high in value. So most items were still only traded on credit, people kept account of what they sold and what they were owed. The coins were minted to collect taxation. Taxation paid for administration, city monuments, and war. It was the citizen army, and the mercenaries, who were paid in coin.

Nevertheless, the Greeks, despite their speedy adoption of metal coinage, treated it with suspicion. For they saw that the exchange of metal coins for goods, services, or loans did not always represent the exchange of actual organic wealth.

To illustrate this, and warn against the error of avarice, the Greeks told the story of the mythical King Midas, who, it was said, asked the gods to grant him the ability to turn everything he touched to gold. The gods agreed, but this was a disaster. For nothing was spared from the gods’ decree. Everything he touched turned to gold. When he touched his daughter, she was turned to gold, and reaching for his food, it turned to lifeless gold. And so, childless, he starved. A cautionary tale, if ever there was one.

Money Tokens Elsewhere

Coins soon spread around the whole Mediterranean, and the Greek idea of coinage travelled as far as India with the conquests of Alexander the Great (356–323 BCE), though some Indian coins have been dated a little earlier, to about 400 BCE.

Every major civilization has invented its own kind of tokens representing money. For instance, the Chinese issued bronze Spade money-tokens about 600 BCE and Sword money-tokens at about 450 BCE. They also used round bronze coins, with a hole in the middle. Later on, in the 10 th  century CE, the Chinese used printed notes on paper made from bark, fiat money, not backed by anything of value.

Even wood was used as money. In England around 1,100 CE, King Henry I, during one of the recurrent gold shortages of the Middle Ages, began using Tally sticks as money, with which his subjects could pay taxes. Squared hazelwood tallies were most common, about eight inches long. These were notched to indicate the amount paid, and then split so that the notches appeared on both pieces, called the stock and the foil. The stock was held by the king as tax money, the foil by the subject as a receipt.

[Money] began as a process of accounting, by relating the value of many different things to a standard one.

When tallies were used to register loans to King John around 1,200 CE, the result was that the money lent was, in effect, doubled. For the king could spend the value of the stock, the half he held, and his subject, who held a foil of the same value, could also trade his foil for other goods. Such tallies were used till 1826.

The Janus Face of Money

Money has always been two-faced, appearing both as a technology, and as an object of value. It began as a process of accounting, by relating the value of many different things to a standard one; to the value of a weight of silver, or a bushel of grain. It later developed into something more abstract, not related to a commodity, but to a universal scale of economic value. However, because people find it easier to think of objects than to think of processes, they  focus on the object , the piece of silver,  and ignore the process  which defines the meaning of the idea .  They mistakenly think of the value  of  money, rather than valuation  by  money.

They mistakenly think of the value of money, rather than valuation by money.

Confusion was compounded with the invention of coins in the 7 th  century BCE. Coins are made from precious metal for very good reasons. Gold and silver are rare and therefore valuable. They are also stable and dense. Their density allows them to be small and portable, unlike the stone disks of Rai. They are also malleable, so can be stamped with images, making it easy to distinguish them.

So, when the idea about the measuring unit of value, money, was turned into something actually valuable, into gold coins, they seemed to be the actual commodity, rather that an intermediate measuring device. Since then, this mistaken idea, that the token for money, the coin, is the actual wealth, has caused much confusion about the nature of real wealth. A confusion at the root of many crises, and a plague on our philosophers, economists, and politicians.

Before coinage there had been systems of accounting for wealth and for debt, and it was quite clear what was going on – there were so many cows, or so many bushels of barley, and one person owned so much, or was in debt for so much to another. It was easy to understand what constituted wealth: it was the strength, skill and knowledge of that society, the land and goods which it controlled.

But coins, once they were invented, were no longer just measuring devices, tokens. They assumed the Janus face of wealth itself. The intrinsic value of the precious metal in them focused everyone’s attention on the tokens. The tokens became the items for which to strive, and blinded us to the real meaning of money, which, in the end, measures and transmits the power that we have over our environment and each other.

This confusion still persists today. Money tokens, even electronic ones, are seen as actual wealth, even when precious metals no longer figure in our money systems. They continue goading us with ever more desire in the commercial dreamworld that we now inhabit. A dreamworld in which debt is misinterpreted as actual wealth, and qualities which do not fit into the realm of property, qualities like care, air purity, or health, are measured, inappropriately, by money, in a vain attempt to make them interchangeable with property. For what is money in our time, but an illusory idea of universal value, a process that aims to reduce all items, acts and qualities down to a single mode of valuation. So long as only a small minority understand all this, the rest of us are open to both moral and financial exploitation.

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A Comparative Chronology of Money

Roy davies and glyn davies.

See a summarized chronology of monetary history from ancient times to the present day.

Essay on Money for Students and Children

500+ words essay on money.

Money is an essential need to survive in the world. In today’s world, almost everything is possible with money. Moreover, you can fulfill any of your dreams by spending money. As a result, people work hard to earn it. Our parents work hard to fulfill our dreams .

Furthermore various businessmen , entrepreneurs have startup businesses to earn profits. They have made use of their skills and intelligence in getting an upper hand in earning. Also, the employee sector works day and night to complete their tasks given to them. But still, there are many people who take shortcuts to success and get involved in corruption.

Black Money

Black money is the money that people earn with corruption . For your information corruption involves the misuse of the power of high posts. For instance, it involves taking bribes, extra money for free services, etc. Corruption is the main cause of the lack of proper growth of the country .

Moreover, money that people having authority earns misusing their powers is black money. Furthermore, these earnings do not have proper documentation. As a result, the people who earn this do not pay income tax . Which is a great offense and the person who does this can be behind bars.

Money Laundering

In simple terms, money laundering is converting black money into white money. Also, this is another illegal offense. Furthermore, money laundering also encourages various crimes. Because it is the only way criminal can use their money from illegal sources. Money laundering is a crime, and the people who practice it are liable to go to jail.

Therefore the Government is taking various preventive measures to abolish money laundering. The government is linking bank accounts to AADHAR Card. To get all the transaction detail of each bank account. As a result, the government comes to know if any transaction is from an illegal source .

Also, every bank account has its own KYC (Know your Customer) this separates different categories of income of people. Businessmen are in the high-risk category. Then comes the people who are on a high post they are in the medium-risk category. Further, the last category is of the Employee sector they are at the lowest risk.

Get the huge list of more than 500 Essay Topics and Ideas

White Money

White money is the money that people earn through legal sources. Moreover, it is the money on which the people have already paid the tax. The employee sector of any company always has white money income.

Because the tax is already levied on their income. Therefore the safest way to earn money is in the employment sector. But your income will be limited here. As a result, many people take a different path and choose entrepreneurship. This helps them in starting their own company and make profitable incomes .

Every person in this world works hard to earn money. People try different methods and set of skills to increase their incomes. But it is always not about earning money, it’s about saving and spending it. People should spend money wisely. Moreover, things should always be bought by judging their worth. Because money is not precious but the efforts you make for it are.

Q1. What is Black Money?

A1. Black money is the money that people earn through illegal ways. It is strictly prohibited in our country. And the people who have it can go to jail.

Q2. What is the difference between Black money and White money?

A2. The difference between black money and white money is, Black money comes from illegal earnings. But white money comes from legal sources with taxation levied on it.

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The Role, Functions and Definition of Money

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• C. A. E. Goodhart 2  

Part of the book series: Other International Economic Association Publications Series ((IEA))

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Money can be and has been defined in many ways. For statistical purposes the stock of money is often defined in terms of certain clearly distinguishable, but analytically arbitrary, 1 institutional dividing lines. Since the dividing line between monetary and non-monetary assets is, perhaps, arbitrary, (e.g., whether or not term deposits at banks, or savings banks, or other financial intermediaries should be included), the choice of assets to be included in the definition of money may be taken on pragmatic and empirical grounds. For example, money might be defined as that set of liquid financial assets which has both a close correlation with the development of the economy, and which is potentially subject to the control of the authorities. Attention then becomes focused on the fluctuations of that set of assets giving the clearest indications of the development of the economy and of the authorities’ efforts to influence that development.

• Transaction Cost
• Monetary Policy
• Time Deposit
• Current Account
• Trade Credit

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Most of this essay is a redraft of Chapter I of my Money, Information and Uncertainty (London: Macmillan, 1975). I am most grateful for comments and suggestions from A. D. Crockett, D. E. W. Laidler, J. Melitz and M. J. Thornton, but neither they, nor the Bank of England, bear any responsibility for the views which I have set out here.

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Goodhart, C.A.E. (1977). The Role, Functions and Definition of Money. In: Harcourt, G.C. (eds) The Microeconomic Foundations of Macroeconomics. Other International Economic Association Publications Series. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-03236-5_8

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Investment Strategy

What is Money, Anyway?

Editor’s Note: This topic is now comprehensively covered in my book, Broken Money .

Money is a surprisingly complex subject.

People spend their lives seeking money, and in some ways it seems so straightforward, and yet what humanity has defined as money has changed significantly over the centuries.

How could something so simple and so universal, take so many different forms?

Source of Icons: Flaticon

It’s an important question to ponder because we basically have four things we can do with our resources: consume, save, invest, or share.

Consume: When we consume, we meet our immediate needs and desires, including shelter, food, and entertainment.

Save: When we save, we store our resources in something that is safe, liquid, and portable, a.k.a. money. This serves as a low-risk battery of future resource consumption across time and space.

Invest: When we invest, we commit resources to a project that has a decent likelihood of multiplying our resources but also comes with a risk of losing them, by trying to provide some new value to ourselves or others. This serves as a higher-risk, less-liquid, and less-portable amplifier of future resource consumption potential compared to money. There are personal investments, like our own business or education, and there are external financial investments in companies or projects led by other people.

Share: When we share, or in other words give to charity and those in our community, we give some portion of our excess resources to those that we deem to be needing and deserving. In many ways, this can be considered a form of investment in the ongoing success and stability of our larger community, which is probably why we are wired to want to do it.

The majority of people in the world don’t invest in financial assets; they are still on the consumption stage (basic necessities and daily entertainment) or the saving stage (money and home equity), either due to income constraints, consumption excesses, or because they live in part of the world that doesn’t have well-developed capital markets. Many of them do, however, invest in expanding a self-owned business or in educating themselves and their children, meaning they invest in their personal lives, and they might share in their community as well, through religious institutions or secular initiatives.

Among the minority that do invest in financial assets, they are generally accustomed to the idea that investments change rapidly over time, and so they have to put a lot of thought into how they invest. They either figure out a strategy themselves and manage that, or they outsource that task to a specialist to do it for them to focus more on the skills that they earn the resources with in the first place.

However, depending on where they live in the world, people are not very accustomed to keeping track of the quality of money itself, or deciding which type of money to hold.

In developed countries in particular, people often just hold the currency of that country. In developing countries that tend to have a more recent and extreme history of currency devaluation, people often put more thought into what type of money they hold. They might try to minimize how much cash they hold and keep it in hard assets, or they might hold foreign currency, for example.

This article looks at the history of money, and examines this rather unusual period in time where we seem to be going through a gradual global transformation of what we define as money, comparable to the turning points of 1971-present (Petrodollar System), 1944-1971 (Bretton Woods System), the 1700s-1944 (Gold Standard System), and various commodity-money transition periods (pre-1700s). This type of occasion happens relatively rarely in history for any given society but has massive implications when it happens, so it’s worth being aware of.

If we condense those stages to the basics, the world has gone through three phases: commodity money, gold standard (the final form of commodity money), and fiat currency.

A fourth phase, digital money, is on the horizon. This includes private digital assets (e.g. bitcoin and stablecoins) and public digital currencies (e.g. central bank digital currencies) that can change how we do banking, and what economic tools policymakers have in terms of fiscal and monetary policy. These assets can be thought of as digital versions of gold, commodities, or fiat currency, but they also have their own unique aspects.

This article walks through the history of monetary transitions from the lenses of a few different schools of thought (often at odds with each other), and then examines the current and near-term situation as it pertains to money and how we might go about investing in it. Start from the beginning or jump to the chapter you want:

• Chapter 1: Commodity Money
• Chapter 2: Fiat Currency
• Chapter 3: Digital Assets
• Chapter 4: Final Thoughts

Some people whose work I’ve drawn from for this article, from the past and present, include Carl Menger, Warren Mosler, Friedrich Hayek, Satoshi Nakamoto, Adam Back, Saifdean Ammous, Vijay Boyapati, Stephanie Kelton, Ibn Battuta, Emil Sandstedt, Robert Breedlove, Ray Dalio, Alex Gladstein, Elizabeth Stark, Barry Eichengreen, Ross Stevens, Luke Gromen, Anita Posch, Jeff Booth, and Thomas Gresham.

Commodity Money

Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state. -Carl Menger, 1840-1921

Humans in tiny groups don’t need money; they can organize resources among themselves manually.

However, groups that reach the Dunbar number or larger usually start identifying and making use of some form of money, which gives them a more liquid, divisible, friction-minimized, and widely-accepted accounting unit for storing and exchanging value with people they don’t know.

The more complex an economy becomes, the greater the number of possible combinations of barter you can have between different types of goods and services providers, so the economy starts requiring some standard unit of account, or money.

Specifically, the society begins requiring something divisible and universally acceptable. An apple farmer, for example, that needs some tools (a blacksmith), meat (a cattle rancher), repair work (a carpenter), and medicine for her children (a doctor), can’t spend the time going around finding individuals that have what she needs, that also happen to want a ton of apples. Instead, she simply needs to be able to sell her highly seasonal apples for some unit, that she can use to save and buy all of those things with over time as she needs them.

Money, especially types of money that take work to produce, often seems arbitrary to outsiders of that culture. But that work ends up paying for itself many times over, because a standardized and credible medium of exchange and store of value makes all other economic transactions more efficient. The apple farmer doesn’t need to find a specific doctor who wants to buy a ton of apples for his expensive services right now.

A number of economists from multiple economic schools have pondered and formulated this concept, but commodity money as a topic tends to come up the most often by those in the school of Austrian Economics, founded by Carl Menger in the 1800s.

In this way of thinking, money should be divisible, portable, durable, fungible, verifiable, and scarce. It also usually (but not always) has some utility in its own right. Different types of money have different “scores” along those metrics.

• Divisible means the money can be sub-divided into various sizes to take into account different sizes of purchases.
• Portable means the money is easy to move across distances, which means it has to pack a lot of value into a small weight.
• Durable means the money is easy to save across time; it does not rot or rust or break easily.
• Fungible means that individual units of the money don’t differ significantly from each other, which allows for fast transactions.
• Verifiable means that the seller of the goods or services for the money can check that the money is what it really appears to be.
• Scarce means that the money supply does not change quickly, since a rapid change in supply would devalue existing units.
• Utility means that the money is intrinsically desirable in some way; it can be consumed or has aesthetic value, for example.

Summing those attributes together, money is the “most salable good” available in a society, meaning it’s the good that is the most capable of being sold. Money is the good that is most universal, in the sense that people want it, or realize they can trade for it and then easily and reliably trade it for something else they do want.

Other definitions consider money to be “that which extinguishes debt”, but debt is generally denominated in units of whatever money is defined to be at the time the debt was issued. In other words, debt is typically denominated in units of the most salable good, rather than the most salable good being defined as what debt is denominated in. Indeed, however, part of the ongoing network effect of what sustains a fiat currency system is the large amount of debt in the economy that creates sustained ongoing demand for those currency units to service those debts.

Back in 1912, Mr. J.P. Morgan testified before Congress and is quoted as having said the famous line:

Gold is money. Everything else is credit.

In other words, although their terms often overlap, currency and money can be thought of as two different things for the purpose of discussion.

We can define currency as a liability of an institution, typically either a commercial bank or a central bank, that is used as a medium of exchange and unit of account. Physical paper dollars are a formal liability of the US Federal Reserve, for example, while consumer bank deposits are a formal liability of that particular commercial bank (which in turn hold their reserves at the Federal Reserve, and those are liabilities of the Federal Reserve as well).

In contrast to currency, we can define money as a liquid and fungible asset that is not also a liability. It’s something intrinsic, like gold. It’s recognized as a highly salable good in and of itself. In some eras, money was held by banks as a reserve asset in order to support the currency that they issue as liabilities. Unlike a dollar, which is an asset to you but a liability of some other entity, you can hold gold which is an asset to you and a liability to nobody else.

Under gold standard systems, currency represented a claim for money. The bank would pay the bearer on demand if they came to redeem their banknote paper currency for its pegged amount of gold.

Scarcity is often what determines the winner between two competing commodity monies. However, it’s not just about how rare the asset is. A good concept to be familiar with here is the stock-to-flow ratio, which measures how much supply there currently exists in the region or world (the stock) divided by how much new supply can be produced in a year (the flow).

For example, gold miners historically add about 1.5% new gold to the estimated existing above-ground gold supply each year, and the vast majority of gold does not get consumed; it gets re-melted and stored in various shapes and places.

Chart Source:  NYDIG

This gives gold a stock to flow ratio of 100/1.5 = 67 on average, which is the highest stock-to-flow ratio of any commodity. The world collectively owns 67 years worth of average annual production, based on World Gold Council estimates . Let’s call it about 60 or 70 since this isn’t exact.

If a money (the most salable good) is easy to create more of, then any rational economic actor would just go out and create more money for herself, diluting the whole supply of it. If an asset has a monetary premium on top of its pure utility value, then it’s strongly incentivizing market participants to try to make more of it, and so only the forms of money that are the most resistant to debasement can withstand this challenge.

On the other hand, if a commodity is so rare that barely anyone has it, then it may be extremely valuable if it has utility, but it has little useful role as money. It’s not liquid and widely-held, and so the frictional costs of buying and selling it are higher. Certain atomic elements like rhodium for example are rarer than gold, but have low stock-to-flow ratios because they are consumed by industry as quickly as they are mined. A rhodium coin or bar can be purchased as a niche collectible or store of value, but it’s not useful as societal money.

So, a long-lasting high stock-to-flow ratio tends to be the best way to measure scarcity for something to be considered money, along with the other attributes on the list above, rather than absolute rarity. A commodity with a high stock-to-flow ratio is hard to produce, and yet a lot of it has already been produced and is widely distributed and held, because it either isn’t rapidly consumed or isn’t consumed at all. That’s a relatively uncommon set of attributes.

Throughout history various stones, beads, feathers, shells, salt, furs, fabrics, sugar, coconuts, livestock, copper, silver, gold, and other things have served as money. They each have different scores for the various attributes of money, and tend to have certain strengths and weaknesses.

Salt for example is divisible, durable, verifiable, fungible, and has important utility, but is not very valuable per unit of weight and not very rare, so doesn’t score very well for portability and scarcity.

Gold is the best among just about every attribute, and is the commodity with by far the highest stock-to-flow ratio. The one weakness it has compared to other commodities is that it’s not very divisible. Even a small gold coin is more valuable than most purchases, and is worth as much as most people make in a week of labor. It’s the king of commodities.

For a large portion of human history, silver has actually been the winner in terms of usage. It has the second-best score after gold across the board for most attributes, and the second highest stock-to-flow ratio, but beats gold in terms of divisibility, since small silver coins can be used for daily transactions. It’s the queen of commodities. And in chess, the king may be the most important piece, but the queen is the most useful piece.

In other words, gold was often held by the wealthy as a long-term store (and display) of value, and as a medium of exchange for very large purchases, while silver was the more tactical money, used as a medium of exchange and store of value by far more people. A bimetallic money system was common in many regions of the world for that reason until relatively recently, despite the challenges that come with that.

The scarcity of some of the other commodities have more specific weaknesses as it relates to technology. Here are two examples:

Inhabitants of a south-Pacific island called Yap used enormous stones as money. These “rai stones” or “fei stones” as they were called were circular discs of stone with a hole in the center, and came in various sizes, ranging from a few inches in diameter to over ten feet in diameter. Many of them were at least a couple feet across, and thus weighed hundreds of pounds. The biggest were over ten feet across and weighed several thousands of pounds.

Interestingly, I’ve seen this example used by both an Austrian economist (Saifedean Ammous) and an MMT economist (Warren Mosler). The reason that’s interesting is because those two schools of thought have very different conceptions of what money is.

Anyway, what made these stones unique was that they were made from a special type of limestone that was not found in abundance on the island. Yap islanders would travel 250 miles to a neighboring island called Palau to quarry the limestone and bring it back to Yap.

They would send a team of many people to that far island, quarry the rock in giant slabs, and bring it back on wooden boats. Imagine bringing a multi-thousand pound stone across 250 miles of open ocean on a wooden boat. People died in this process over the years.

Once made into rai stones on Yap, the big ones wouldn’t move. This is a small island, and all of the stones were catalogued by oral tradition. An owner could trade one for some other important goods and services, and rather than moving the stone, this would take the form of announcing to the community that this other person owned the stone now.

In that sense, rai stones were a ledger system, not that different than our current monetary system. The ledger keeps track of who owns what, and this particular ledger happened to be orally distributed, which of course can only work in a small geography.

By the time this was documented by Europeans, there were thousands of rai stones on Yap, representing centuries of quarrying, transporting, and making them. Rai stones thus had a high stock-to-flow ratio, which is a main reason for why they could be used as money.

In the late 1800s, an Irishman named David O’Keefe came across the island and figured this out. And, with his better technology, he could easily quarry stone from Palau and bring it to Yap to make rai stones, and thus could become the richest man on the island, able to get locals to work for him and trade him various goods.

As the Irishman got to know Yap better, he realized that there was one commodity, and only one, that the local people coveted—the “stone money” for which the island was renowned and that was used in almost all high-value transactions on Yap. These coins were quarried from aragonite, a special sort of limestone that glistens in the light and was valuable because it was not found on the island. O’Keefe’s genius was to recognize that, by importing the stones for his new friends, he could exchange them for labor on Yap’s coconut plantations. The Yapese were not much interested in sweating for the trader’s trinkets that were common currency elsewhere in the Pacific (nor should they have been, a visitor conceded, when “all food, drink and clothing is readily available, so there is no barter and no debt” ), but they would work like demons for stone money. -Smithsonian Magazine, “David O’Keefe: the King of Hard Currency”

In essence, better technology eventually broke the stock-to-flow ratio of rai stones by dramatically increasing the flow. Foreigners with more advanced technology could bring any number of them to the island, become the wealthiest people on the island, and therefore increase the supply and reduce the value of the stones over time.

However, locals were smart too, and they eventually mitigated that process. They began to assign more value to older stones (ones that were verifiably quarried by hand decades or centuries ago), because they exclude the new abundant stones by definition and thus maintain their scarcity. Nonetheless, the writing was on the wall; this wasn’t a great system anymore.

Things then took a darker turn. As described in that Smithsonian piece:

With O’Keefe dead and the Germans thoroughly entrenched, things began to go badly for the Yapese after 1901. The new rulers conscripted the islanders to dig a canal across the archipelago, and, when the Yapese proved unwilling, began commandeering their stone money, defacing the coins with black painted crosses and telling their subjects that they could only be redeemed through labor. Worst of all, the Germans introduced a law forbidding the Yapese from traveling more than 200 miles from their island. This put an immediate halt to the quarrying of fei  , though the currency continued to be used even after the islands were seized by the Japanese, and then occupied by the United States in 1945.

Many of the stones were taken and used as makeshift anchors or building materials during World War II by the Japanese, reducing the number of stones on the island.

Rai stones were a notable form of money while they lasted because they had no utility. They were a way to display and record wealth, and little else. In essence, it was one of the earliest versions of a public ledger, since the stones didn’t move and only oral records (or later, physical marks by Germans) dictated who owned them.

African Beads

As another example, trade beads were used in parts of west Africa as money for many centuries, stretching back at least to the 1300s and prior as documented by ancient travelers at the time, as recorded by Emil Sandstedt . Various rare materials could be used, such as coral, amber, and glass. Venetian glass beads gradually made their way across the Sahara over time as well.

To quote Ibn Battatu, from his travels in the 14th century (from Sandstedt’s article):

A traveler in this country carries no provisions, whether plain food or seasonings, and neither gold nor silver. He takes nothing but pieces of salt and glass ornaments, which the people call beads, and some aromatic goods.

These were pastoral societies, often on the move, and the ability to wear your money in the form of strands of beautiful beads was useful. These beads maintained a high stock-to-flow ratio because they were kept and traded as money, while being hard to produce with their level of technology.

Eventually, Europeans began traveling and accessing west Africa more frequently, noticed this usage of trade beads, and exploited them. Europeans had glass-making technology, and could produce beautiful beads with modest effort. So, they could trade tons of these beads for commodities and other goods (and unfortunately for human slaves as well).

Due to this technological asymmetry, they devalued these glass beads by increasing their supply throughout west Africa, and extracted a lot of value from those societies in the process. Locals kept trading scarce local “goods”, ranging from important commodities to invaluable human lives, for glass beads that had far more abundance than they realized. As a result, they traded away their real valuables for fake valuables. Picking the wrong type of money can have dire consequences.

It wasn’t as easy as one might suspect for the Europeans to accomplish, however, because the Africans’ preferences for certain types of beads would change over time, and different tribes had different preferences. This seemed to be similar to the rai stones, where once new supplies of rai stones started coming in faster due to European technology, the people of Yap began wisely valuing old ones more than new ones. Essentially, the west African tastes seemed to change base on aesthetics/fashion and on scarcity. This, however, also gave that form of money a low score for fungibility, which reduced its reliability as money even for the pastoral west Africans who were using them.

Like rai stones ultimately, trade beads couldn’t maintain their high stock-to-flow ratio in the face of technological progress, and therefore eventually were displaced as money.

Japanese Invasion Money

Although it’s not a commodity money, the Japanese Empire used the same tactic on southeast Asians as the Europeans did on Africans.

During World War II, when the Japanese Empire invaded regions throughout Asia, they would confiscate hard currency from the locals and issue their own paper currency in its place, which is referred to as “ invasion money “. These conquered peoples would be forced to save and use a currency that had no backing and ultimately lost all of its value over time, and this was a way for Japan to extract their savings while maintaining a temporary unit of account in those regions.

To a less extreme extent, this is what happens throughout many developing countries today; people constantly save in their local currency that, every generation or so, gets dramatically debased.

Other Types of Commodity Money

Emil Sandstedt’s book, Money Dethroned: A Historical Journey , catalogs the various types of money used over the past thousand years or so. The book often references the writings of Ibn Battuta, the 14th century Moroccan explorer across multiple continents, who may have been the furthest traveler of pre-modern times.

Central Asians at the time of Battuta, as a nomadic culture, used livestock as money. The unit of account was a sheep, and larger types of livestock would be worth a certain multiple of sheep. As they settled into towns, however, the storage costs of livestock became too high. They eat a lot, they need space, and they’re messy.

Russians had a history of using furs as a monetary good. There are even referenced instances of using a bank-like entity that would hold furs and issue paper claims against them. Parts of the American frontier later turned to furs as money for brief periods of time as well.

Seashells were used by a few different regions as money, and in some sense were like gold and beads in the sense that they were for both money and fashion.

In addition to beads, certain regions in Africa used fine fabric as money. Sometimes it wasn’t even cut into usable shapes or meant to ever be worn; it would be held and exchanged purely for its monetary value as a salable good that could be stored for quite a while.

Another great example is the idea of using blocks of high-quality Parmesan cheese as bank collateral. Since Parmesan cheese requires 18-36 months to mature, and is relatively expensive per unit of weight in block form, niche banks in Italy are able to accept it as collateral , as a form of attractive commodity money:

MONTECAVOLO, ITALY (Bloomberg News) — The vaults of the regional bank Credito Emiliano hold a pungent gold prized by gourmands around the world — 17,000 tons of parmesan cheese. The bank accepts parmesan as collateral for loans, helping it to keep financing cheese makers in northern Italy even during the worst recession since World War II. Credito Emiliano’s two climate-controlled warehouses hold about 440,000 wheels worth €132 million, or $187.5 million. “This mechanism is our life blood,” said Giuseppe Montanari, a cheese producer and dealer who uses the loans to buy milk. “It’s a great way to finance our expenses at convenient rates, and the bank doesn’t risk much because they can always sell the cheese.”

The Gold Standard

After thousands of years, two commodities beat all of the others in terms of maintaining their monetary attributes across multiple geographies; gold and silver. Only they were able to retain a high enough stock-to-flow ratio to serve as money, despite civilizations constantly improving their technological capabilities throughout the world over the ages.

Humans figured out how to make or acquire basically all of the beads, shells, stones, feathers, salt, furs, livestock, and industrial metals we need with our improved tools, and so we reduced their stock-to-flow ratios and they all fell out of use as money.

However, despite all of our technological progress, we still can’t reduce the stock-to-flow ratios of gold and silver by any meaningful degree, except for rare instances in which the developed world found new continents to draw from. Gold has maintained a stock-to-flow ratio averaging between 50 and 100 throughout modern history, meaning we can’t increase the existing supply by more than about 2% per year, even when the price goes up more than 10x in a decade. Silver generally has a stock-to-flow ratio of 10 to 20 or more.

Most other commodities are below 1 for the stock-to-flow ratio, or are very flexible. Even the other rare elements, like platinum and rhodium, have very low stock-to-flow ratios due to how rapidly they are consumed by industry.

We’ve gotten better at mining gold with new technologies, but it’s inherently rare and we’ve already tapped into the “easy” surface deposits. Only the deep and hard-to-reach deposits remain, which acts like an ongoing difficulty adjustment against our technological progress. One day we could eventually break this cycle with drone-based asteroid mining or ocean floor mining or something crazy like that, but until that day (if it ever comes), gold retains its high stock-to-flow ratio. Those environments are so inhospitable that the expense to acquire gold there would likely be extraordinarily high.

Basically, whenever any commodity money came into contact with gold and silver as money, it was always gold and silver that won. Between those two finalists, gold eventually beat silver for more monetary use-cases, particularly in the 19th century.

Improvements in communication and custody services eventually led to the abstraction of gold. People could deposit their gold into banks and receive paper credit representing redeemable claims on that gold. Banks, knowing that not everyone would redeem their gold at once, went ahead and issued more claims than the gold they held, beginning the practice of fractional reserve banking. The banking system then consolidated into central banking over time in various countries, with nationwide slips of paper representing a claim to a certain amount of gold.

Barry Eichengreen’s explanation for why gold beat silver, in his book Globalizing Capital: A History of the International Monetary System , is that the gold standard won out over the bimetallic standard mostly by accident. In 1717, England’s Master of the Mint (who was none other than Sir Isaac Newton himself) set the official ratio of gold and silver as it relates to money, and according to Eichengreen he set silver too low compared to gold. As a result, most silver coins went out of circulation (as they were hoarded rather than spent, as per Gresham’s law).

Then, with the UK rising to dominance as the strongest empire of the era, the network effect of the gold standard, rather than the silver standard, spread around the world, with the vast majority of countries putting their currencies in a gold standard. Countries that stuck to the silver standard for too long, like India and China, saw their currency weaken as demand for the metal dropped in North America and Europe, resulting in negative economic consequences.

On the other hand, Saifadean Ammous, in his book The Bitcoin Standard , focuses on the improved divisibility of gold due to banking technology. As previously mentioned, gold scores equal or higher than silver in most of the attributes of money, except for divisibility. Silver is better than gold for divisibility, which made silver the more “day to day” money for thousands of years while gold was best left for kings and merchants to keep in their vaults or use as ornamentation, which are stores and displays of value respectively.

However, the technology of paper banknotes in various denominations backed by gold improved gold’s divisibility. And then, in addition to exchanging paper, we could eventually “send” money over telecommunications lines to other parts of the world, using banks and their ledgers as custodial intermediaries. This was the gold standard- the backing of paper currencies and financial communication systems with gold. There was less reason to use silver at that point, with gold being the much scarcer metal, and now basically just as divisible and even more portable thanks to the paper/telco abstraction.

I think there is an element of truth in both explanations, although I consider the explanation of Ammous to be more complete, starting with a deeper axiom regarding the nature of money itself. Banknotes made gold more divisible and thus the harder money won out over time, but network effects from political decisions can impact the timing of these sorts of changes.

Central banks around the world still hold gold in their vaults, and many of them still buy more gold each year to this day as part of their foreign-exchange reserves. It’s classified as a tier one asset in the global banking system, under modern banking regulations. Thus, although government-issued currency is no longer backed by a certain amount of gold, it remains an indirect and important piece of the global monetary system as a reserve asset. There is so far no better naturally-occurring commodity to replace it.

Gold used to trade at a 10x to 20x multiple of silver’s value for thousands of years in multiple different geographies. Over the past century, however, the gold-to-silver price ratio has averaged over 50x. Silver seems to have structurally lost a lot of its historical monetary premium relative to gold over the past century. Chart via Longtermtrends.net :

If you prefer listening to reading for this section, I had a February 2022 discussion with Stig Brodersen about the history of gold and commodities.

Fiat Currency

Historically, a number of cultures have attempted periods of paper currency, issued by the government and backed by nothing.

Often it was the result of currency that was once backed (a gold standard or silver standard), but the government created too much of the paper due to war or other issues, and had to default on the metal backing by eliminating its ability to be converted back into the metal upon request. In that sense, currency devaluation becomes a form of tax and/or wealth confiscation. The public holds their savings in the paper currency, and then the rug is pulled out from under them.

The general argument for why fiat currencies exist, is that most governments, if possible, do not want to be constrained by gold or other scarce monies, and instead want to have more flexibility with their spending.

The earliest identified use of paper currency was in China over a thousand years ago, which makes sense considering that paper was invented in that region. They eventually shifted towards government monopoly on paper currency, and combined with an elimination of its ability to be converted back into silver, resulted in the first fiat currency, along with the inflation that comes with that. It didn’t last very long.

Fiat currency is interesting, because unlike the history of commodity money, it’s a step down in terms of scarcity. Gold beat out all of the other commodity monies over centuries of globalization and technological development, and then gold itself was defeated by… pieces of paper?

This is generally attributed to technology and government power. As clans became kingdoms, and as kingdoms became nation states, along with the creation of banking systems and improvements in communication systems, governments could become a larger part of everyday life. Once gold became sufficiently centralized in the vaults of banks and central banks, and paper claims were issued against it, the only remaining step was to end the redeemability of that paper and enforce its continued usage through legal obligation.

Debasing Currency and Empowering Wars

Currency debasement often happened gradually under metallic and bimetallic currency regimes, with history of it going back three or four thousand years. It took the form of reducing the amount of the valuable metal (such as gold or silver) and either adding base metal or putting decorative holes through the center of it to reduce the weight.

In other words, a ruler often found himself faced with budget deficits, and having to make the difficult choice between cutting spending or raising taxes. Finding both to be politically challenging, he would sometimes resort to keeping taxes the same, diluting the content of gold or silver in the coins, and spending more coins with less precious metal in each coin, while expecting it to still be treated with the same purchasing power per coin.

For example, a king can collect a 1,000 gold coins in taxes, melt them down and make new coins that are each 90% gold (with the other 10% made from some cheap filler metal), and spend 1,111 gold coins back into the economy with the same amount of gold. They do look pretty similar to most people, but some discerning people will notice. Years later, if that’s not enough, he could re-melt them and make them 80% gold, and spend 1,250 of them into the economy…

At first, these slightly-debased coins would be treated as how they were before, but as the coins are increasingly debased, it would become obvious. Peoples’ savings would decline in value, as they found over time that their stash of gold and silver was only fractional gold and silver. Foreign merchants in particular would be quick to demand more of these debased gold coins in exchange for their goods and services.

Gold-backed paper currencies and fiat currencies are the modern version of that, and so the debasement can happen much faster.

At first, fiat currencies were created temporarily, in times of war. After the shift from commodity money to gold-backed paper, the gold-backing would be briefly suspended as an emergency action for a number of years, and then re-instated (usually with a significant devaluation, to a lower amount of gold per unit of currency, since a lot of currency was issued during the emergency period).

This is a faster and more efficient way to devalue a currency than to actually debase the metal. The government doesn’t have to collect everyone’s coins and re-melt them. Instead, everybody is holding paper money that they trust to be redeemable for a certain amount of gold, and the government can break that trust, suspend that redeemability, print a ton of paper money, and then re-peg that paper money such that each unit of paper currency is redeemable for a much smaller amount of gold, before people realize what is happening to their savings.

That method instantly debases peoples’ money while they continue to hold it, and can be done overnight with the stroke of a pen.

Throughout the 20th century, this tactic spread around the world like a virus. Prior to paper currencies, governments would run out of fighting capability if they ran low on gold. Governments would use up their gold reserves and raise additional war taxes, but there were limits in terms of how much gold they had and how much they could realistically tax for unpopular wars before the population would rebel. However, by having all of their citizens on a gold-backed paper currency, they could devalue everyone’s savings for the war without an official tax, by printing a lot of money, spending it into the economy, and then eliminating or reducing the gold peg before people knew what was happening to their money.

This allowed governments to fight much larger wars by extracting more savings from their citizens, which led their international opponents to debase their currencies with similar tactics as well if they wanted to win.

Ironically, the fact that fiat currencies have no cost to produce, is what gave them the biggest cost of all.

Bretton Woods and the Petrodollar

After World War I, and throughout the tariff wars and World War II period thereafter, many countries went off the gold standard or devalued their currencies relative to gold.

John Maynard Keynes, the famous economist, said in 1924:

In truth, the gold standard is already a barbarous relic.

By 1934, gold was made illegal to own. It was punishable by up to 10 years in prison for Americans to own it. The dollar was no longer redeemable for gold by American citizens, although it was still redeemable for official foreign creditors, which was an important part of maintaining the dollar’s credibility.

Shortly after Americans were forced to sell their gold to the government in exchange for dollars, the dollar was devalued relative to gold, which benefited the government at the expense of those who were forced to sell it.

It remained illegal for Americans to own gold for about four decades until the mid-1970s. Interestingly enough, that overlapped quite cleanly with the period where US Treasuries underperformed inflation. Basically, the main release valve that people could turn to instead of cash or Treasuries as savings assets, was made illegal to them:

It’s rather ironic- gold was a “barbarous relic” and yet apparently had to be confiscated and pushed out of use by the threat of imprisonment, and hoarded only by the government during a period of intentional currency devaluation. If it were truly such a relic, it would have fallen out of usage on its own and the government would have had little need to own any.

Making gold illegal to own was hard to enforce though. There were not many prosecutions for it, and it’s not as though authorities went door-to-door looking for it.

By 1944 towards the end of World War II after most currencies were sharply devalued, the Bretton Woods agreement was reached. Most countries pegged their currency to the dollar, and the United States dollar remained pegged to gold (but only redeemable to large foreign creditors, not American citizens). By extension, a pseudo gold standard was temporarily re-established.

This lasted only 27 years until 1971, when the United States no longer had enough gold to maintain redemption for its dollars, and thus ended the gold standard for itself and most of the world. There were too many dollar claims compared to how much gold the US had:

Chart Source:  BIS Working Papers No 684

The Bretton Woods system was poorly-constructed from the beginning, because domestic and foreign banks could lend dollars into existence without having to maintain a certain amount of gold to back those dollars. The mechanism for dollar creation and gold were completely decoupled from each other, in other words, and so it was inevitable that the quantity of dollars in existence would quickly outpace how much gold the US Treasury had in its vaults. As the amount of dollars multiplied and the amount of available gold did not, any smart foreign creditor would begin redeeming dollars for gold and draining the Treasury’s vaults. The Treasury would be quickly drained of its gold until they either sharply devalued the dollar peg or ended the peg altogether, which they did.

Since that time, over 50 years now, virtually all countries in the world have been on a fiat currency system, which is the first time in history this has happened. Switzerland was an exception that kept their gold standard until 1999, but for most countries it has been over 50 years since they were on it.

However, the US dollar still has a vestige of commodity-backing, which is part of what kept this system together for so long. In the 1970s, the US made a deal with Saudi Arabia and other OPEC countries to only sell their oil in dollars, regardless of which country was buying. In return, the US would provide military protection and trade deals. And thus the petrodollar system was born. We’ve had to deal with the consequences of this awkward relationship ever since.

While the dollar was not pegged to any specific price of oil in this system, this petrodollar system made it so that any country in the world that needed to import oil, needed dollars to do so. Thus, universal demand for dollars was established, as long as the US had enough military might and influence in the Middle East to maintain the agreement with the oil exporting nations.

Other countries continued to issue their own currencies but held gold, dollars (mainly in the form of US Treasuries), and other foreign currency assets as reserves to back up their currencies. Most of their currencies were not pegged to any specific dollar, oil, or gold value during this time, but having a large reserve that they could use to actively maintain the strength of their currency was a key part of why global creditors would accept their currency.

The biggest benefit from the petrodollar system, as analyst Luke Gromen has argued, is that it contributed to the US’s Cold War victory over the Soviet Union during the 1970s and 1980s. The petrodollar agreement and associated military buildup to enforce it was a strong chess move by the US to gain influence over the Middle East and its resources. However, Gromen also argues that when the Soviet Union fell in the early 1990s, the US should have pivoted and given up this system to avoid ongoing structural trade deficits, but did not, and so its industrial base was aggressively hollowed out. Since then, China and other countries have used the system against the US, and the US also bled out tremendous resources trying to maintain its hegemony in the Middle East with its wars in Afghanistan and Iraq.

An international gold standard looks like this, with each major country pegging its own currency to a fixed amount of gold and holding gold in reserve, for which it was redeemable to its citizens and foreign creditors:

The Bretton Woods pseudo gold standard involved the dollar being backed by gold, but only redeemable to foreign creditors in limited amounts. Foreign currencies pegged themselves to the dollar, and held dollars/Treasuries and gold in reserve:

The petrodollar system made it so that only dollars could buy oil imports around the world, and so countries globally hold a combination of dollars, gold, and other major currencies as reserves, with an emphasis on dollars. If countries want to strengthen their currencies, they can sell some reserves and buy back their own currency. If countries want to weaken their currencies, they can print more of their currency and buy more reserve assets.

Over time, that demand for dollars was broadened via trade and debt. If two countries trade goods or services, they often do so in dollars. When loans are made internationally, they are often done so in dollars, and the world now has over $13 trillion in dollar-denominated debt , owed to all sorts of places including lenders in Europe and China. All of that dollar-denominated debt represents additional demand for dollars, since dollars are required to service that debt. Basically, the petrodollar deal helped initiate and maintain the network effect at a critical time, until it became rather self-sustaining.

This system gives the United States considerable geopolitical influence, because it can sanction any country and cut it off from the dollar-based system.

One of the key flaws of the petrodollar system, however, is that all of this demand for the dollar makes US exports more expensive (less competitive) and makes imports less expensive, and so the US began running structural trade deficits once we established the system, totaling over $14 trillion in cumulative deficits as of this writing. From 1944-1971 the US drew down its gold reserves in order to maintain the Bretton Woods dollar system, whereas from 1974-present, the US instead drew down its industrial base to maintain the petrodollar system.

Chart Source:  Trading Economics

As the FT described in a  clever article back in 2019 , this petrodollar system ironically gave the United States a form of Dutch Disease. For those who aren’t familiar with the term, Investopedia has a  good article on Dutch Disease . Here’s a summary:

The term Dutch disease was coined by The Economist magazine in 1977 when the publication analyzed a crisis that occurred in the Netherlands after the discovery of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil caused the value of the Dutch guilder to rise sharply, making Dutch exports of all non-oil products less competitive on the world market. Unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped. Dutch disease became widely used in economic circles as a shorthand way of describing the paradoxical situation in which seemingly good news, such as the discovery of large oil reserves, negatively impacts a country’s broader economy.

As the FT argues (correctly in my view), making virtually all global oil priced in dollars basically gave the United States a form of Dutch Disease. Except instead of finding oil or gas, we engineered a system so that every country needs dollars, and so we need to export a lot of dollars via a structural trade deficit (and thus, the dollar as a global reserve asset basically served the role of a big oil/gas discovery).

This system, much like the Netherlands’ natural gas discovery, kept US currency persistently stronger at any given time than it should be on a trade balance basis. This made actual US exports rather uncompetitive, boosted our import power (especially for the upper classes) and prevented the US balance of trade from ever normalizing for decades.

Japan and Germany became major exporters at our expense, and for example, their auto industries thrived globally while the US auto industry faltered and led to the creation of the “ Rust Belt ” across the midwestern and northeast part of the country. And then China grew and did the same thing to the United States over the past twenty years; they ate our manufacturing lunch. Meanwhile, Taiwan and South Korea became the hubs of the global semiconductor market, rather than the United States.

That petrodollar system is starting to crack under its own weight, as trade deficits have collected into a massively negative net international investment position for the US, and the US has more wealth concentration than the rest of the developed world because we hollowed out a lot of our blue collar workforce specifically. This causes rising political tensions and desires (so far unsuccessful) to reduce the trade deficit and rebuild our industrial base. Foreigners take their persistent dollar surpluses and buy productive US assets with them like stocks, real estate, and land. In other words, the US sells its appreciating financial assets in exchange for depreciating consumer goods:

My article on the petrodollar system went into additional detail on the history of the US dollar as the global reserve currency, from the pre-Bretton Woods era to the petrodollar system.

Potential Post-Petrodollar Designs

There are proposals by policymakers and analysts to rebalance the global payments system, and the changing nature of geopolitics is pointing in that direction as well.

For example, Russia began pricing its oil partly in euros over the past few years, and China has put considerable work into launching a digital currency that may expand their global reach, at least with some of their most dependent trade partners. The United States is no longer the biggest commodity importer, and its share of global GDP continues to decrease, which makes the existing petrodollar system less tenable.

If several large fiat currencies can be used to buy oil, then the model looks more like this (and many tertiary currencies would manage themselves relative to these main currencies that have the scale and influence to buy oil and other foreign goods):

If a major scarce neutral reserve asset (e.g. gold or bitcoin or digital SDRs or something along these lines, depending on your conception of where trends are going over the next decade or two) is used as a globally-recognized form of money, then a decentralized model can also look like this:

Overall, it’s clear that the trend in global payments is towards digitization and decentralization away from one single country’s currency, but it’s unclear precisely how the next system will turn out and on what timeline it will change. It continues to be a subject that I analyze closely for news and data.

Price Inflation from a Negative Baseline

The long arc of human history is deflationary. As our technology improves over time, we become more productive, which reduces the labor/resource cost of most goods and services. This is particularly true over the past couple centuries as humanity exponentially tapped into dense forms of energy. Prior to that, our rate of productivity growth was much slower.

For an example of productivity, people used to farm by hand. By harnessing the utility of work horses and simple equipment, it empowered one person to do the work of several people. Then, the invention of the tractor and similar advanced equipment empowered one person to do the work of ten or more people. As tractor technology got bigger and better, this figure probably jumped to thirty or more people. And then, we can imagine a fleet of self-driving farming equipment allowing one person to do the work of a hundred people. As a result, a smaller and smaller percentage of the population needs to work in agriculture in order to feed the whole population. This makes food less expensive and frees up everyone else for other productive pursuits.

Gold has historically appreciated against most other commodities over time, like an upward sine wave. Alternatively, we can say that most commodities depreciated in price against gold like a downward sine wave. For example, there are inflationary cycles where copper increases in price compared to gold, but over multiple decades of cycles, gold has steadily appreciated against copper. For agricultural commodities that are less scarce, the trend is even stronger.

Here’s a chart of the copper-to-gold ratio showing its structural decline and cyclical exceptions since 1850, for example:

Chart Source: Long Term Trends

And here’s wheat priced in gold since 1910:

Chart Source: Priced in Gold

This is because over time, our advancing technology has made us more efficient at harvesting those other commodities. However, gold’s extreme scarcity and rather strict stock-to-flow ratio of over 50x has made it so that our technology advancements in finding and mining gold are offset by the fact that we’ve already mined the “easy” gold deposits and the remaining deposits are getting deeper and harder. We never truly get more efficient at retrieving gold, in that sense. It’s a built-in ongoing difficulty adjustment.

During the late 1800s and early 1900s USA, which is when the country became a rising power globally, the country was on a gold standard and in a period of structural deflation. Prices of most things went down because land was abundant and huge advancements in technology during the industrial age made people far more productive.

An even more extreme example would be television prices over the past five decades. Moore’s law, industrial automation, and labor offshoring has made televisions exponentially better and cheaper over time, especially when priced in gold. Similarly, cell phones decades ago were very large, basic, and expensive toys for the wealthy. Now, many people in the poorest regions of the world have powerful smartphones as a normal course of life. They have supercomputers in their pockets.

Overall, we can say that the baseline inflation rate is some negative number (aka deflation), and how negative it is at any given time depends on the pace of technological advancement. Baseline inflation only becomes a positive number if we are backtracking in some way, and thus encountering more scarcity and less abundance. This could be due to malinvestment or war, for example.

By holding the most salable good (such as gold, historically), your purchasing power gradually appreciates over time because the labor/resource cost of most other things goes down whereas that salable good retains most or all of its scarcity and value. The vast majority of commodities, products, and services structurally decrease in price gradually relative to your strong store of value.

One way to measure this is by looking at the broad money supply per capita over time relative to the consumer price index. Here’s a chart of their 5-year rolling average growth rates for the United Kingdom:

We can see that there is usually a positive gap between broad money supply growth per capita, and consumer prices. Broad money supply per capita increased by an average of 5.3% per year during this 150+ year period, while a basket of goods and services increased by an average of only 3.1%. In other words, monetary inflation is usually a bit faster than price inflation.

In a very rough sense by this way of looking at it, real productivity growth was about 2.2% per year, which is the difference between these figures. What this means is that in any given year, the resource/labor costs of a broad basket of goods and services goes down by an average of 2.2% due to technological progress, but the amount of money that people have goes up by 5.3%, and as such, actual prices go up by only 3.1%.

So, price inflation is not 3.1% from a baseline of zero; it’s 5.3% from a baseline of -2.2%. Actual resource costs for goods and services go down most years rather than stay flat, but due to our inflationary monetary framework, they go up in price anyway.

The reason this is only a rough measure is because 1) the CPI basket changes over time and may not be fully representative and 2) money supply can become more concentrated or less concentrated over time and thus does not always reflect the buying power of the median person. There is no way to directly measure technological deflation; it can only be estimated.

Another way to check this is to simply see to what extent gold appreciated in price against the British pound , and the answer is about 4.0% per year over this same 150+ year time period. Gold appreciated in price faster than the CPI basket inflation rate by about 0.9% per year (the difference between 4.0% and 3.1%, which compounds quite a bit over a century), and can buy you a bit more copper, oil, wheat, or many other goods and services than it could 50, 100, or 150 years ago, unlike the British pound which buys you a lot less than it used to. Higher-quality and scarcer goods like meat have roughly kept up with the price of gold (although you can’t store meat for very long), and select few assets like the absolute best/scarcest UK property locations may have appreciated a bit faster than gold (although they required continued maintenance costs along the way which makes up for that difference).

The takeaway from this section is that the growth in the broad money supply per capita is the “true” inflation rate. However, the baseline that we measure it against is not zero; it’s a mildly negative number which we can’t precisely measure, but that we can estimate and infer, that represents ongoing increases in productivity due to technology. Prices of most things stay relatively stable or preferably keep going down as priced in the most salable good (such as gold, historically) over the long run, but go up in most years when measured in a depreciating and weaker unit of account such as the British pound.

The MMT Description of Fiat Currency

Some economists disagree with the commodity view of money, and argue that money originates with the government. This is called Chartalism , and its origins go back more than a century.

Decades ago, Warren Mosler and others resurfaced this idea, into what is now popularly known as Modern Monetary Theory or MMT.

I have often felt that Mosler describes the case for that school of thought well. He doesn’t sugar-coat things, and instead speaks very directly:

Start with the government trying to provision itself and how does it do it. There are different ways to do it throughout history. One way is just to go out and take slaves. Another way the British did is they provisioned their navy by going to bars late at night and dragging them onto ships. It’s called impressing sailors . We pretend to be more civilized as I like to say, and we use a monetary system. So how does a government do it? Clean sheet of paper, what you do, is you establish a tax that is payable in something that people don’t have. So what you want to do is transfer resources from the private sector to the public sector. You want people who are out there doing whatever they are doing, to suddenly be working for the government. You need soldiers, you need police, you need health workers, you need people in education. How do you get these people out of the private sector and into the public sector? First thing you do is you levy a tax. You need a tax liability, and it has to be coercive. And for this example I’ll use a property tax. You put a tax on everybody’s house, and you make it payable in your new unit of account, your new unit, your thing, your tax credit, the thing that is used to pay the tax. The dollar, the yen, or the euro- they are all tax credits. What has happened is, you’ve created sellers of real goods and services who now need your tax credit, or they’re going to lose their house. You’ve created unemployment- people looking for paid work. Unemployment is not about people looking to volunteer at the American Cancer Society; it’s about people looking for work because they need or want the money. And the problem with government when you want to provision yourself is that there’s no unemployment. No unemployment in terms of your currency; there may be people willing to work for other things but not for your currency. You need unemployment in terms of your currency, looking to earn your unit of account. So you levy a tax, now people need your unit of account, all of these people show up looking for work, all of those people are unemployed. You now hire the unemployed that your tax created, and they are now provisioning your government. -Warren Mosler, 2017 MMT Conference

I also liked this description, where he explained his view in an economic debate:

The way we do it, is we slap on a tax for something that nobody has, and in order to get the funds to pay that tax, you have to come to the government for it, and so that way the government can spend its otherwise worthless currency and provision itself. Now the way I like to explain that, is I’ll take out my business card here. Now I’ll ask this room does anybody want to buy- and this is called “how to turn litter into money”- does anybody want to buy one of these cards for a hundred dollars? No? Okay. Does anybody want to stay after hours and help vacuum the floor and clean the room and I’ll give you my cards? No? Alright. Oh by the way there’s only one door out of here and my guy is out there with a 9mm (handgun) and you can’t get out of here without one of these cards. Can you feel the pressure now? You’re now unemployed! In terms of my cards, you were not unemployed before. You were not looking for a job that paid in my cards. Now you’re looking for a job that pays in my cards, or you’re looking to buy them from someone else that will take a job that pays in my cards. […] The difference between money and litter is whether there’s a tax man [outside that door]. The guy with the 9mm is the tax man. If he can’t enforce tax collection, the value of the dollar goes to zero. -Warren Mosler, 2013 MMT vs Austrian Debate

Nobel-laureate economist Paul Krugman put it rather similarly back in 2013:

Fiat money, if you like, is backed by men with guns.

Of course, we could just as easily ask, since the government is using force to collect taxes to provision itself, why can’t it just collect commodity money like gold with a tax, and then spend that gold to acquire its necessary provisions? Why does it need to issue its own paper currency and then tax it back?

The answer is that it doesn’t have to, but it wants to. By issuing its own currency, it profits from seigniorage , which is the difference between the face value of the money and the cost to produce and distribute it. It is, basically, a subtle inflation tax that compounds over time.

A weak government, with an economy that can’t provision most of its needs, often fails to maintain a workable fiat currency for very long. People start using alternative monies out of necessity even if the government supposedly disallows them from doing so. This happens to many developing countries. Billions of people in the world today have experienced the effects of hyperinflation or near-hyperinflation within the past generation. It’s unfortunately quite common.

However, developed countries have been more successful at maintaining seigniorage over the past five decades of the fiat system. Their currencies all lost 95% to 99% of their purchasing power over time, but it was usually gradual rather than abrupt. The system is not without its cracks as previously-discussed, but it’s certainly the most comprehensive fiat currency system ever constructed.

When optimized skillfully, a fiat currency has low volatility year-to-year, in exchange for gradually losing value over the long run. By being actively managed with taxes, spending, and central bank reserve management (creating or destroying currency in exchange for reserve assets), policymakers try to maintain a low and steady inflation rate, meaning a mild and persistent decline in the purchasing power of their currency.

A strong government can force the use of its currency over all other types of monies within its borders, at least for a medium of exchange (not necessarily a store of value), by taxing other types of transactions, and by only accepting its fiat currency as a form of payment for taxes. They can make things like gold, silver, and bitcoin less convenient as money, for example, by making each transaction with it a taxable event in terms of capital gains. If push comes to shove, they can also try to ban those things with threat of force.

The Monetization of Other Assets

Although most of us today are used to it, fiat currency has been a polarizing and inherently political subject ever since the world went onto this petrodollar standard five decades ago.

Mainstream media and economists, however, quickly adopted it as canon and rather unquestionable. For decades now, it has been the case that if someone thinks money shouldn’t be fiat currency, they’re kind of considered a kook and not taken seriously. This kind of vibe:

But when you step back and think about it from first principles, this period in history is really unusual. It’s a historical aberration, and like a fish in water doesn’t even notice the water, the monetary system we operate with now seems totally normal to us.

Never before, in thousands of years of human history, has the entire world been using a money that has no resource cost or constraint. It’s an experiment, in other words, and we’re five decades into it. Many would consider it a good experiment, while others consider it a bad one, but it’s not as though it is inevitable, or the only possible outcome from here. It’s simply what we have now, and who knows what things will look like in another five decades.

To put it into perspective, this international monetary system based around centrally-managed fiat currency is only 16 years older than me. My father was 36 when the US went off the gold standard. When I grew up, after a period of financial hardship, I began collecting gold and silver coins as a kid; my father gave me silver coins as savings each year.

The Swiss dropped their gold standard when I was twelve years old, which was six years after Amazon was founded, and three years before Tesla was founded. The fiat/petrodollar standard is only four times older than bitcoin, and only two times older than the first internet browser. That’s pretty recent when you think about it like that.

Ever since the world has been on the fiat/petrodollar standard, debt as a percentage of GDP has skyrocketed to record levels and seems to be getting unstable. Considering where we are in the long-term debt cycle, investors would do well to be creative with how they envision the future. Don’t take the past 40-50 years for granted and assume that’s how it’ll always be, whether for money or anything else. We don’t know what money will look like 50 years from now.

The last time we were in a similar debt and monetary policy situation was the 1930s and 1940s, where currency devaluations and war occurred. That doesn’t mean those things have to happen, but basically, we’re in a very macro-heavy environment where structural currency changes tend to occur.

One of the results of fiat currency, especially towards the later stages of this five decade experiment since the 1970s, is that more people have begun to treat cash like a hot potato. We instinctively monetize other things, like art, stocks, home equity, or gold. The ratio of home prices to median income has gone up a lot, as well as the ratio of the S&P 500 to median income, or a top-notch piece of art to median income.

This chart shows the loss of purchasing power of the U.S. dollar since the Coinage Act of 1792, which is when the US dollar and the US Mint were created:

Chart Source: Ian Webster , annotated by Lyn Alden

It currently takes nearly $3,000 to have as much purchasing power as $100 bought in 1792. From 1792 to 1913, the dollar’s purchasing power oscillated mildly around the same value, with over 120 years of relative stability. From 1913 onward, the policy changed and the dollar has been in perpetual decline, especially after it completely dropped the gold peg in 1971.

And it’s actually worse today than during most of this 1971-2022 fiat/petrodollar period, because interest rates aren’t keeping up with inflation rates anymore. The fiat system is getting less stable due to so much debt being in the system, which disallows policymakers from raising interest rates higher than the prevailing inflation rate.

Basically, for lack of good money in this fiat currency petrodollar era, especially in the post-2009 era with interest rates below inflation rates, we monetize other things with higher stock-to-flow ratios and treat them as stores of value.

In China, consumers aggressively monetize real estate. It became normal for families to own multiple homes. In the United States, consumers aggressively monetize stocks. We plow a percentage of each paycheck into broad equity indices without analyzing companies or doing any sort of due diligence, treating that basket of stocks as simply a better store of value than cash regardless of what is inside.

We can ask, for example, would we rather own dollars that went from 10 trillion in quantity ten years ago to 22 trillion today and pay basically no yield to own them, or Apple shares that went from 26 million shares ten years ago to 16 million shares today and also pay basically no yield to own it? Is the dollar better money, or is a diverse collection of fungible corporate shares better money, when it comes to storing value with a 5+ year time horizon?

This monetization of non-money securities and property opens us up to more volatility, more leverage, less liquidity, less fungibility, and more taxable events. Basically, rather than investments being special things we make with careful consideration, we shovel most of our free capital into hundreds of index investments that we don’t even analyze, since who would hold currency for any significant length of time? Fungible pieces of corporations become our money, at least for the “store of value” portion of what money is, in large part because they pay higher earnings/dividend yields than bank/bond yields and many of them decrease in quantity (deflationary) rather than constantly increase in quantity.

Some technologists, like Jeff Booth, have argued that this system of perpetual currency debasement has a negative impact on the environment because it encourages us to spend and consume on short-sighted depreciating trinkets and malinvestment more than we would if our money appreciated in value over time like it used to. With appreciating money, we would be more selective with our purchases.

Proponents of the fiat system argue that it smooths out economic downturns and allows for counter-cyclical investment and stimulus. By having a flexible monetary base, policymakers can increase or decrease the supply of money in order to provide a balancing force against credit cycles and industrial output capacity. In exchange for a persistently declining value of currency, we get a more stable currency on a year-to-year basis.

In addition, proponents of the system also argue that the system encourages more consumption and consider that to be a good thing because it keeps GDP up. By keeping people on a constant treadmill of currency debasement, it forces them to spend and invest rather than to save. If people begin to save, these policymakers often view it as “hoarding” or a “ global savings glut ” and consider it to be a problem. Monetary policy then is adjusted to convince people to save less, spend more, and borrow more.

From a developing market standpoint, the fiat/petrodollar standard contributes to massive booms and busts because a lot of their debt is denominated in dollars, and that debt fluctuates wildly in strength depending on the actions of US policymakers. Developing countries are often forced to tighten their monetary policy during a recession in order to defend their currency, and thus while the US gets to provide counter-cyclical support for its own economy, developing countries are forced to be pro-cyclical, contributing to a vicious cycle in their economies during recessions. In this view, the fiat/petrodollar system can be considered a form of neocolonialism; we push most of the costs of the system out into the developing countries in order to maximize the stability for the developed world.

Overall, the fiat system is showing more instability lately, and investors have to navigate a challenging environment of structurally negative inflation-adjusted cash and bond yields, along with many high asset valuations in equities and real estate.

Sovereign International Reserves

As countries accumulate trade surpluses, they keep those gains in sovereign international reserves. This represents the pool of assets that a country’s central bank can draw upon to defend the country’s currency if needed. The more reserves a country has relative to its GDP and money supply, the more defense it has against a meltdown in its fiat currency. The country can sell these reserves and buy back its own currency to support its currency per-unit value. The currency may not be backed up by gold at a redeemable rate, but it’s backed up by diverse assets as needed if its starts to rapidly lose value.

The world collectively has about $15 trillion USD-equivalents worth of official sovereign reserves. Less than $2.5 trillion of that is gold, with more than $12.5 trillion held as fiat reserves (dollars, euros, yen, francs, etc). Fiat reserves consist of government bonds and bank deposits, and can be easily frozen by the countries that issue them. In addition, many gold holdings are not held within the country, but instead are held in New York or London on their behalf.

Thus, the vast majority of sovereign official reserves, are permissioned assets rather than permissionless assets. They are non-sovereign; able to be frozen by foreign nations. War crystalizes this fact.

In February 2022, Russia invaded Ukraine. Russia had $630 billion USD-equivalents of sovereign international reserves prior to the war, representing decades of accumulated trade surpluses as sovereign savings to underpin their currency. Of this $630 billion, $130 billion consisted of gold, and the other $500 billion consisted of fiat currency and bonds. Of that $500 billion, maybe $70-$80 billion consisted of Chinese fiat assets, and the other $400+ billion consisted of European and other fiat assets. Europe subsequently froze that $400+ billion in Russian fiat assets in response to Russia’s invasion of Ukraine, which is equivalent to over 20% of Russian GDP and over five years of Russian military spending; an utterly massive economic confiscation. Russia is currently in a financial crisis, and it remains to be seen if they can exert enough commodity/military pressure to have their reserves unfrozen.

Some could argue that it’s a good thing that countries hold their reserves in each other’s assets and thus can be frozen. Along with trade sanctions, this practice gives countries another lever with which to control each others’ behavior away from extremes (such as war). We’re all interdependent to one degree or another anyway. But from a pragmatic point of view, countries tend to want to reduce their vulnerabilities and external risks where possible, and that can include minimizing the ability of their stored-up central bank reserves to be confiscated or frozen by other countries.

I began writing this longform article months ago, in late 2021. Things have accelerated since then, and for example the WSJ ran an article in early March 2022 called “ If Russian Currency Reserves Aren’t Really Money, the World is in for a Shock. ” Here’s the opening paragraph:

“What is money?” is a question that economists have pondered for centuries, but the blocking of Russia’s central-bank reserves has revived its relevance for the world’s biggest nations—particularly China. In a world in which accumulating foreign assets is seen as risky, military and economic blocs are set to drift farther apart.

What is money?

Well, the answer to that question ties into the difference between currency and money. Currency is some other entity’s liability, and they can choose whether or not to honor that particular liability. Money is something that is intrinsically valuable in its own right to other entities, and that has no counterparty risk if you custody it yourself (although it may have pricing risk related to supply and demand). In other words, Russia’s gold is money; their FX reserves are currency. The same is true for other countries.

Fiat currency and government bonds have no intrinsic value; they represent indirect claims of value that can be blocked and confiscated. Gold has value; it’s sufficiently fungible and due to its physical properties, various entities would accept gold at the current market value. It can be self-custodied and no external nation can shut it off.

Currency acts like money most of the time until, one day, it doesn’t.

Fiat Summarized

Overall, the key feature or bug of fiat currency (depending on how you look at it) is its flexible supply and its ability to be diluted. It allows governments to spend more than they tax, by diluting peoples’ existing holdings. With this feature, it can be used to re-liquify seized-up financial situations, and stimulate an economy in a counter-cyclical way. In addition, its volatility can be minimized compared to commodity monies most of the time through active management, in exchange for ensuring gradual devaluation over time.

When things go wrong, however, fiat currency can lose value explosively. Fiat currency tends to incentivize running bigger deficits (since spending doesn’t necessarily need to be taxed for), and generally requires some degree of hard or soft coercion in order to get people to use it over harder monies, although that coercion is often rather invisible to most people most of the time, until things go wrong. And its ability to be diluted can allow for longer wars, selective bailouts for influential groups, and other forms of government spending that aren’t always transparent to citizens.

Digital Assets

With the development of the internet and cryptography in the 1980s and 1990s, many people began working on internet-native money systems. Hash Cash, Bit Gold, and B-Money were some early examples.

Some of these early pioneers wanted to be able to easily pay on the internet, which wasn’t quite as easy back then. Others were part of the cypherpunk movement: people who responded to the information age and the lack of privacy it would increasingly bring, by advocating for transactional privacy through encryption.

Freedom House , a nonprofit organization founded in 1941 and originally chaired by Eleanor Roosevelt, has indeed noted that authoritarianism has been on the rise in recent decades. More than half the world’s population lives in an authoritarian or semi-authoritarian country. People in privileged areas often fail to recognize this trend.

Chart Source: Freedom House

The world became more free in the 1980s and 1990s as China and the Soviet Union opened up, but then the world increasingly began chipping away at that freedom in the 2000s and 2010s, at least as far as Freedom House and various other sources measure it. China in particular is a huge surveillance and control state now, with transactions and online behavior monitored and organized, social credit scores determined from the data, and consequently near-complete control over their citizens’ behavior.

Even the developed world began introducing policies that chipped away at certain freedoms, and so Freedom House’s scores for many developed countries mildly declined over time as well. For example, the United States was ranked 94 for its freedom score back in 2010, but as of 2020 was ranked only 83. It has been reported for over a decade now, with increasing revelations over time, that the CIA and NSA have large spying operations on Americans.

The more digital the world is, the more authoritarian regimes, semi-authoritarian regimes, or would-be-authoritarian regimes are able to monitor and intervene in their subjects’ lives. Authoritarianism combined with 21st century digital surveillance technology and Big Data to organize it all, is a rather frightening prospect for a lot of people. This combination has been predicted by science fiction books for decades.

The Discovery of Digital Scarcity and the Invention of Bitcoin

The ability to transact with others is a key part of individual liberty. The more that authoritarian regimes can control that, the more power they have over their citizens’ lives.

Nobel-laureate economist Friedrich Hayek once gave an interesting statement on the subject of money:

I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop. -Friedrich Hayek, 1899-1992

Satoshi Nakamoto’s answer to that riddle in 2008 was to avoid a centralized cluster and make a peer-to-peer money system based on a distributed ledger.

I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party. Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own. -Satoshi Nakamoto, two separate quotes from 2008

Nakamoto’s invention of bitcoin in 2008, which cited a number of projects, indeed became the first widely successful and credibly-decentralized internet money after it was launched in early 2009. In the genesis block, he referenced a topical newspaper headline about British bank bailouts, during the heart of the global financial crisis.

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks -Bitcoin Genesis Block

The Bitcoin network is a distributed database, also known as a public ledger or “triple entry bookkeeping”. It’s a system that allows all participants around the world to come to a consensus on the state of the ledger every ten minutes on average. Because it’s highly distributed and relatively small in terms of data, participants can store a full copy of it and reconcile it constantly with the rest of the network, with a specific protocol for determining the consensus state of the ledger. In addition to storing the whole database, participants can store their own private keys, which allow them to move coins (or fractional coins) around to different public addresses on the ledger.

If participants hold their own private keys, then their bitcoins represent assets that are not also someone’s liability. In other words, like gold, they are money rather than currency, as long as other people recognize them as having value.

Chart Source: LookIntoBitcoin.com

After Nakamoto showed the way, there have been over fifteen thousand other cryptocurrencies created. Some of them are competitors to the bitcoin network, while others are smart contract platforms to serve other purposes. So far, all of the ones directly trying to be money have not been able to gain any traction against the bitcoin network (with none of them sustaining above 5% of the network value of bitcoin), while a select few that aim to be used as smart contract utility tokens instead have retained rather large network valuations for longer periods of time.

Many people argue that bitcoin has achieved critical mass in terms of its network effect, security, immutability, and decentralization, such that while other digital assets may persist to fulfill other use-cases, none of them have a reasonable chance of competing with bitcoin in terms of being hard money. Fidelity published a good paper on this topic called Bitcoin First . Here’s the summary:

In this paper we propose: -Bitcoin is best understood as a monetary good, and one of the primary investment theses for bitcoin is as the store of value asset in an increasingly digital world. -Bitcoin is fundamentally different from any other digital asset. No other digital asset is likely to improve upon bitcoin as a monetary good because bitcoin is the most (relative to other digital assets) secure, decentralized, sound digital money and any “improvement” will necessarily face tradeoffs. -There is not necessarily mutual exclusivity between the success of the Bitcoin network and all other digital asset networks. Rather, the rest of the digital asset ecosystem can fulfill different needs or solve other problems that bitcoin simply does not. -Other non-bitcoin projects should be evaluated from a different perspective than bitcoin. -Bitcoin should be considered an entry point for traditional allocators looking to gain exposure to digital assets. -Investors should hold two distinctly separate frameworks for considering investment in this digital asset ecosystem. The first framework examines the inclusion of bitcoin as an emerging monetary good, and the second considers the addition of other digital assets that exhibit venture capital-like properties.

Other blockchains that attempt to increase transaction throughput on the base layer or add more computational functionality on the base layer, generally sacrifice some degree of decentralization and security to do so. Blockchains that attempt to have more privacy on the base layer generally sacrifice some degree of supply auditability.

Bitcoin is updated slowly over time via optional soft forks, but the underlying foundation is maximized towards decentralization and hardness, more so than throughput or additional functionality. Layers built on top of it can increase throughput, privacy, and functionality.

The discovery of a credible way to maintain digital scarcity, and an invention of a peer-to-peer money based on that discovery, was in some ways inevitable, although the specific form that it first appeared in could have been designed in a number of ways. The foundations of the internet were put forth in the 1970s, and so was the concept of a Merkle tree. Throughout the 1980s and 1990s the internet as we know it came into being, as more and more of the world’s computers were networked together. Proof-of-work using computer systems was invented in the 1990s, and the SHA-256 encryption was published in the early 2000s. Nakamoto put a bunch of these concepts together in a novel way in 2008, and had the right macroeconomic backdrop and right design decisions to have it succeed for well over a decade and counting.

Bitcoin’s Bottom-Up Monetization

If we go back to the gold standard for a moment, the key reason why paper claims were built on gold was to improve its medium-of-exchange capabilities. Ray Dalio described it well:

Because carrying a lot of metal money around is risky and inconvenient and creating credit is attractive to both lenders and borrowers, credible parties arise that put the hard money in a safe place and issue paper claims on it. These parties came to be known as “banks” though they initially included all sorts of institutions that people trusted, such as temples in China. Soon people treat these paper “claims on money” as if they are money itself. -Ray Dalio, The Changing World Order

Bitcoin on the other hand is a bearer asset that is safe to self-custody in large amounts and can be sent peer-to-peer around the world over the internet. Therefore, it removes the need for paper abstraction. Some holders will still prefer custodians to hold it for them, but it’s not necessary like it is with large amounts of gold, and thus the units of the network are less prone to centralization. Unlike gold, bitcoin in large quantities is easy to transfer globally, and take custody of.

From the start, the bitcoin network was designed as a peer-to-peer network for the purpose of being a self-custodial medium of exchange. It’s not the most efficient way to exchange value, but it’s the most unstoppable way to do so online. It has no centralized third parties, no centralized attack surfaces, and sophisticated ways of running it can even get around rather hostile networks. Compared to altcoins, it is far harder to attack due to its bigger network effect and larger hash rate.

For example, one of the early use cases for bitcoin back in 2010/2011 was that Wikileaks was dropped by PayPal and other payment providers, so it began accepting bitcoin donations instead. Satoshi himself expressed concern about this on the forum at the time, due to bitcoin still being in its infancy back then relative to the amount of attention this would bring.

Kind of like how a tank is designed to get from point A to point B through resistance, but is not well-suited for commuting to work everyday, the base layer of the bitcoin network is designed to make global payments through resistance, but is not well-suited for buying coffee on the way to work.

In that sense, the bitcoin network has utility, for both ethical and unethical participants (just like any powerful technology). And because it is broken up into 21 million units (each with eight decimal places, resulting in 2.1 quadrillion sub-units), it is a finite digital commodity.

And that’s how Satoshi described it:

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: – boring grey in colour – not a good conductor of electricity – not particularly strong, but not ductile or easily malleable either – not useful for any practical or ornamental purpose and one special, magical property: – can be transported over a communications channel If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it. -Satoshi Nakamoto, 2010

In addition to sending them online, bitcoins in the form of private keys can be physically brought with you globally. You can’t bring a lot of physical cash or gold through an airport and across borders. Banks can block wire transfers out of their country, or even within the country. But if you have bitcoins, you can bring an unlimited amount of value globally, either on your phone, or on a USB stick, or stored elsewhere on some cloud drive you can access from anywhere, or simply by memorizing a twelve-word seed phrase (which is an indirect way of memorizing a private key). It’s challenging for governments to prevent that without extremely draconian surveillance and control, especially for technically-savvy citizens.

This utility combined with an auditable and finite number of coins eventually attracted attention for its monetary properties, and so bitcoins acquired a monetary premium. When you hold bitcoins, especially in self-custody, what you are holding is the stored-up ability to perform global payments that are hard to block, and the stored-up ability to transfer your value globally if you want to. You are holding your slot on a global ledger, similar to holding valuable domain names, except that unlike domain names, bitcoins are decentralized, fungible, liquid, and self-custodial. It could be an insurance policy for yourself one day, or you could simply hold it because you recognize that capability to be valuable to others, and that you could sell that capability to someone else in the future.

Bitcoin is becoming a rather salable good, in other words. And with a higher stock-to-flow ratio than gold.

It’s volatile, but that’s in large part because it monetized from zero to a trillion-dollar market capitalization in twelve years. The market is exploring this technology and trying to determine its total addressable market as more and more people buy into it over time. It’s an asset that is still only held by about 2% of the global population, and it’s a tiny fraction of global financial assets.

Censorship-resistance is a significant feature when it comes to payments, and self-custodying money that cannot be diluted with more supply is a significant feature when it comes to savings.

To many people in developed countries, those features might not seem important, because we are privileged and take our freedom and comfort for granted. But for a large portion of the world, being able to bring self-custodied wealth with you if you have to leave your country is immeasurably valuable. When Jews fled Nazi-controlled Europe, they had trouble bringing any valuables with them. When people left the failing Soviet Union, they could only bring the equivalent of $100 USD with them. When people today want to leave Venezuela, Syria, Iran, Nigeria, China, eastern Ukraine, or any number of countries, they sometimes have a rough time bringing a lot of value with them, unless they have self-custodied bitcoins. Millions (and arguably billions) of people today can understand the value of this feature.

Reuters has documented Putin’s domestic political opposition using bitcoins as Putin’s establishment cuts them off from their banking relationships. The Guardian has documented Nigerians using bitcoins as they protested their government against police violence and had their bank accounts frozen. Chinese people have used it to transfer value through capital controls. Venezuelans have used it to escape hyperinflation and transfer value out of their failed state. One of the earliest use-cases for it was to pay Afghani girls with a type of money that their male relatives could not confiscate, and that they could bring with them out of the country when they leave. I’ll dive more into these examples later. In 2022, Canada used emergency powers to freeze financial accounts of protestors, and people who donated to protestors, before charging them with any crimes.

The limited scalability of bitcoin’s base layer has not been an issue so far, because there is only so much demand for tank-like censorship-resistant payments. And as development has continued since bitcoin’s launch, the network has branched into layers just like any other financial system. The Lightning network, for example, is a series of smart contracts that run on top of the bitcoin network base layer and allow for custodial or non-custodial rapid payments online or in person with a mobile phone, to the point where they can easily be used to buy coffee, and with practically no limitation on transactions per second. The Liquid network, as another example, is a side chain that wraps bitcoins into a federated network for rapid transfers, better privacy, and additional features as well, in exchange for some security trade-offs.

In that sense, bitcoins began as digital commodities that had utility value as an internet-native and censorship-resistant medium of exchange for people that need that capability. Bitcoins eventually acquired a monetary premium as an emergent and volatile store of value (an increasingly salable good), and began to be held more-so for their scarcity than for their medium-of-exchange capabilities. And then over time, the network developed additional ways to enhance the network’s medium-of-exchange capabilities beyond their initial limitations.

Too many people look at bitcoin and say, “the base layer can’t scale so that everyone in the world can make all of their transactions with it”, but that’s not the point of what it’s for. The base layer is a censorship-resistant payments and settlement network with an auditable supply cap that has the capacity to handle hundreds of thousands of transactions per day, and layers built on top of it can be used for more frequent transactions than that if desired.

Kind of like how we don’t use Fedwire transfers to buy coffee, bitcoin base layer transactions are not well-suited to buying coffee. Visa transactions that run on top of Fedwire, or lightning transactions that run on top of bitcoin, can be used to efficiently buy coffee. Or even custodial payment methods like Cash App and Strike that run on top of the bitcoin/lightning network can be used if censorship-resistance is not needed. The base layer of the bitcoin network is not competing with things like Visa; it is competing with central bank settlements; the root of the global financial system. It’s an entirely separate root layer, built on computer networking technologies and internet protocols rather than channels between central banks and commercial banks.

It’s also worth understanding Gresham’s law , which proposes that “bad money drives out good”. Given the choice between two currencies, most people spend the weaker one and hoard the stronger one. Bitcoin’s low current usage as a medium of exchange is not a bug; it’s a feature of a system with low supply issuance and a hard cap at 21 million units, especially in places where it is not legal tender and so every transaction is a taxable event. When a tank-like medium of exchange is needed, or for certain other niche use-cases, bitcoin is useful for its payment utility. Otherwise, it’s most often held for its monetary premium as a scarcer asset than dollars and other fiat currencies, and represents the stored-up ability to perform tank-like payments in the future.

Bitcoin as a network and surrounding ecosystem went through multiple boom/bust cycles so far, and in each one, larger pools of capital became interested in it. In the first era, the user experience was challenging and required technical understanding, so it was mainly computer scientists and enthusiasts building and exploring the technology. In the second era, bitcoin became a bit easier to use and reached enough liquidity to have a quoted price in dollars and other fiat currencies, and so it became noticed by early speculators as well as dark net buyers/sellers. In the third era, it reached early mainstream adoption, in the sense that exchanges with proper security protocols could operate with bank connections, provide more liquidity to the market, and improve the user experience so that everyday people could more easily buy some. In the fourth era, institutional-grade custodians entered the market, which allowed pensions, insurance companies, hedge funds, family offices, and sovereign wealth funds to safely allocate capital to it.

It’ll be interesting to watch how the bitcoin ecosystem develops going forward. Will it remain rather decentralized, or will it eventually become more clustered to the point of having transactions easy to censor? Will it continue to maintain robust market share of the digital asset ecosystem, against thousands or tens of thousands of competitors that dilute each other and try to take some of bitcoin’s monetary premium? I’m bullish and optimistic on the network but it’s not without challenges and risks.

Corporate Stablecoins

Corporate custodial stablecoins were created via smart contracts to apply blockchain technology to fiat currency. With these systems, a custodian of dollars could issue tokens on a smart contract blockchain, and each of those tokens is redeemable 1-for-1 from the custodian for dollars.

To create custodial stablecoins, a client deposits dollars with the issuer, and is issued stablecoins in return. To redeem stablecoins, a client deposits stablecoins and is issued dollars in return. Different custodians have different track records for how securely they hold the collateral in dollars; users have to trust the custodian not to gamble away the funds on bad investments or fraud. Attestations and/or audits by third party accounting firms can add assurances about the safety of the collateral.

Once stablecoins are issued, people can then use whichever blockchain they are issued on to send and receive stablecoin payments between themselves, peer-to-peer, with no additional centralized third party. From a user perspective, stablecoins are a significant technological leap over existing bank payment systems, especially for international payments, or large domestic payments. You can send someone on another continent a million dollars at 2am on a Sunday night and they can receive it in minutes, and both sides can verify the transaction on the blockchain in real time.

They will naturally face ongoing government regulation and be controlled and surveilled as part of the banking system in many cases, but it’s clear that they have utility for actual payments and will probably get increasingly incorporated into financial systems, either in the form of central bank digital currencies or private-but-highly-regulated stablecoin issuers.

This is simply due to automation and superior technology. When you send a wire transfer, the bank has to actively do something to process that transaction. And wires often get delayed or blocked or run into other problems as they flow between banks. From the users’ perspective, it’s often unclear which bank it got stuck in or who to call, and thus it sometimes takes days to resolve. With stablecoins, it’s the opposite. The automatic nature of the blockchain allows for peer-to-peer transactions handled by software, including internationally and including with large amounts of money. The custodians are passive in that regard and let the technology work for them, and only act in the event that they want to blacklist some of their tokens for some reason that they detected.

Anyone who does a lot of international wire transfers, and then has used stablecoins, will generally say that stablecoins are way better to use.

In other words, regulated stablecoins allow for an automated peer-to-peer international payment system, but that has an overlay of control based on know-your-customer and anti-money-laundering “KYC AML” laws, as well as a significant element of custodial trust.

Central Bank Digital Currencies

Some countries want to take the stablecoin concept further, and completely nationalize it within their jurisdiction. This uses similar technology to stablecoins but doesn’t need a blockchain, because it’s not decentralized.

Starting with China studying and learning from bitcoin and stablecoins for over five years now, these technologies are now being used to create central bank digital currencies. These are central-bank issued fiat currencies that are digitally-native, able to operate over the internet rather than going through the historic global banking system “pipes”.

From the government perspective, the usefulness of a pure central bank digital currency is that the government can:

• send international payments without the SWIFT system
• try to give banking access to the non-banked or under-banked populations
• track and surveil any transaction, including with Big Data/AI technologies
• blacklist or block certain transactions that violate their rules
• add expiration dates or jurisdiction limitations to currency
• take away money from citizen wallets for various violations
• give money to citizen wallets for stimulus or rewards
• impose deeply negative interest rates on citizen account balances
• program money to have different rules for different groups
• reduce the control and fee pressure that commercial banks have over the system

In other words, a central bank digital currency can be more efficient, cheaper, and easier to use than many existing payment systems. However, in such a system, your currency can also be surveilled, given, taken, and/or programmed by the issuer to only work in authorized situations.

Agustin Carstens, head of the Switzerland-based Bank for International Settlements (basically the central bank of central banks) had an interesting quote on CBDCs last year:

For our analysis on CBDC in particular for general use, we tend to establish the equivalence with cash, and there is a huge difference there. For example in cash, we don’t know for example who is using a hundred dollar bill today, we don’t know who is using a one thousand peso bill today. A key difference with a CBDC is that central bank will have absolute control on the rules and regulations that determine the use of that expression of central bank liability. And also, we will have the technology to enforce that. Those two issues are extremely important, and that makes a huge difference with respect to what cash is.

A Spectrum of Control

From the summaries of the sections above, there are multiple types of digital assets. There are decentralized bearer assets like bitcoins, and there are digital representations of fiat currency like corporate stablecoins and central bank digital currencies. There are also other private blockchain monies, such as utility tokens or gaming tokens.

Some digital assets, like bitcoins, reduce the government’s ability to interfere with your money, since you can self-custody it and send it to whoever you want. As the Guardian covered back in July , when Nigerans began protesting their government for police violence, and found their bank accounts frozen for doing so, many of them turned to using bitcoins to remain operational.

Last October, Nigeria was rocked by the largest protests in decades, as many thousands marched against police brutality, and the infamous Sars police unit. The “EndSars” protests saw abuses by security forces, who beat demonstrators, and used water cannon and teargas on them. More than 50 protesters were killed, at least 12 of them shot dead at the Lekki tollgate in Lagos on 20 October The clampdown was financial too. Civil society organisations, protest groups and individuals in favour of the demonstrations who were raising funds to free protesters or supply demonstrators with first aid and food had their bank accounts suddenly suspended. Feminist Coalition, a collective of 13 young women founded during the demonstrations, came to national attention as they raised funds for protest groups and supported demonstration efforts. When the women’s accounts were also suspended, the group began taking bitcoin donations, eventually raising $150,000 for its fighting fund through cryptocurrency.

And many merchants, facing sanctions, used bitcoins to trade internationally (also from the Guardian article):

His business – importing woven shoes from Guangzhou, China, to sell in the northern city of Kano and his home state of Abia, further south – had been suffering along with the country’s economy. The ban threatened to tip it over the edge. “It was a serious crisis: I had to act fast,” Awa says. He turned to his younger brother, Osy, who had begun trading bitcoins. “He was just accumulating, accumulating crypto, saying that at some point years down the line it could be a great investment. When the forex ban happened, he showed me how much I needed it, too. I could pay my suppliers in bitcoins if they accepted – and they did.”

Similarly, Reuters has been reporting on a number of occasions that Russian opposition leader and anti-corruption lawyer Alexei Navalny uses bitcoins in his organization to get around government blockades:

Russian authorities periodically block the bank accounts of Navalny’s Anti-Corruption Foundation, a separate organisation he founded which conducts investigations into official corruption. “They are always trying to close down our bank accounts – but we always find some kind of workaround,” said Volkov. “We use bitcoin because it’s a good legal means of payment. The fact that we have bitcoin payments as an alternative helps to defend us from the Russian authorities. They see if they close down other more traditional channels, we will still have bitcoin. It’s like insurance.”

One of the most touching stories was reported by Reuters as well. In the early years of bitcoin, an Afghan woman paid many girls with bitcoins, because they were otherwise unbanked and their male relatives would often try to steal from them, since they didn’t necessarily have much of a right to their own property. The self-custodied aspects of bitcoin then allowed many of the girls over the years to leave the country with their funds, which would be impossible with most other assets:

When Roya Mahboob began paying her staff and freelancers in Afghanistan in bitcoin nearly 10 years ago, little did she know that for some of these women the digital currency would be their ticket out of the country after the fall of Kabul in August. Mahboob, a founder of the non-profit Digital Citizen Fund along with her sister, taught thousands of girls and women basic computer skills in their centres in Herat and Kabul. Women also wrote blogs and made videos for which they were paid in cash. Most girls and women did not have a bank account because they were not allowed to, or because they lacked the documentation for one, so Mahboob used the informal hawala broker system to send money – until she discovered bitcoin.

Alex Gladstein has a massive archive of articles reporting on the various emerging market use-cases for bitcoin over the past several years, ranging from Sudan to Palestine to Cuba to Iran to Venezuela and more.

Anita Posch also has a great interview series called Bitcoin in Africa that explores these use-cases in that region. Bitcoin is a tool that tech-savvy people often use as defense against either double digit currency inflation or authoritarian financial system control.

We’re even seeing this topic pop up in developed markets. Truckers in Canada protested the government and occupied and disrupted the capitol, and received donations from supporters on crowdfunding sites. Those crowdfunding sites ended up freezing and reversing the payments, so many of the participants turned to bitcoin as peer-to-peer money. The government then invoked the 1988 Emergencies act to freeze bank accounts of certain protestors and donors, and to try to blacklist certain bitcoin addresses to being brought to exchanges for conversion back into Canadian dollars.

People may agree or disagree with aspects of those protests but the pragmatic point about money in this context is, those who had their money entirely in banks were indeed frozen. Those who self-custodied their own digital assets, such as bitcoins, had certain conveniences removed from them but could still hold, move, and transfer their money in various ways.

In the broadest sense applying internationally (especially for developing markets with weaker rule of law where the majority of people live), I described the issue here:

Other digital assets, like CBDCs, are the opposite of this type of asset, and give the government more ability to surveil and censor your money, and in reality, it’s not even your money. It’s a liability of your country’s central bank, and as Carstens eloquently articulated, each central bank wants to be able to determine how you can use their liabilities. The full ramifications of that statement can mean very different things depending on whether you live in a place like Norway or a place like China.

The European Central Bank published a working paper on CBDCs in early 2020 called “ Tiered CBDC and the Financial System ” where they outlined the ability of CBDCs to better control illicit payments and to allow for deeper negative interest rate policy, especially if physical banknotes are removed from circulation. This effectively corrals public savings into a digital money that the government can more easily debase and control as desired and gain more seigniorage from:

Source: Tiered CBDC and the Financial System, ECB, January 2020

This becomes particularly relevant when we consider that the government can always try to broaden its scope of what is “illicit”, particularly in regards to protests and things of that nature. Basically, we have to ask ourselves not what the current political leadership would do with this technology, but also what all future political leadership who we don’t know yet would do with this technology. What would Norway do with this technology, compared to what China would do with this technology?

Although bitcoin has thus far been somewhat more appreciated by libertarian and fiscally conservative people on average, this feature is why there are also some progressive/left voices out there that identify bitcoin as a tool for their goals as well. At the end of the day, bitcoin is more of an anti-authoritarian monetary technology than it is a “left” or “right” monetary technology. The Human Rights Foundation in particular has made extensive use of it for their international activities.

Critics of bitcoin often leave these humanitarian or anti-authoritarian use-cases out (or don’t even realize them), and instead refer to bitcoin as being primarily used to buy drugs or ransomware or money laundering, which is a really outdated (or deliberately misleading) view at this point. Firms such as Chainalysis that perform blockchain analysis for law enforcement and other clients have found that bitcoin and overall cryptocurrency usage for illicit activities involves less than 1.5% of bitcoin/crypto transaction volume over the past several years, which is less than the percentage of fiat transactions used for illicit activities.

Bitcoin went through an early phase in 2011 through 2013 where it was used for online drug purchases and such, until authorities responded with a crackdown on that usage by going after the centralized marketplaces that enabled it. Just like how the invention of the pager was used by both drug dealers and doctors in the 1970s and 1980s, bitcoin has gone through phases where criminals used it and humanitarians used it for their purposes. Both of those groups in particular have an incentive to quickly adopt to new technologies to stay ahead of their state-sponsored competition, and it’s important for western media to keep in mind that “illegal activities” in some countries includes protesting the government and other forms of free speech and expression and political opposition.

Like any powerful technology, bitcoin can be used for good or ill. As proponents of the technology like to say, bitcoin is “money for enemies” because it’s a bearer asset that can be verified rather than trusted, and it’s hard to block payments for anyone. It’s like a commodity; something that can be partially regulated within certain jurisdictions but that in the holistic sense, exists outside of anyone’s control.

If we take a step back, we can catalogue the history of financial surveillance. For most of human history, financial transactions were rather private from the perspective of the government, because transactions mainly involved handing over physical money, which is hard to track. With the invention of modern banking, and then especially modern computer databases and electronic payments, transactions could be more easily tracked and surveilled. The Bank Secrecy Act of 1970 required financial institutions to report transactions over $10k USD to the government, which back then was the equivalent of about $75k USD in today’s dollars. They never raised the threshold despite five decades of inflation, so over time without further laws being passed, their surveillance reporting requirements became applicable to smaller and smaller transactions.

When people use banks to send or receive money, it is easy for governments to impose restrictions on what sort of payments are allowed, which banks can then enforce. And some governments can even block other foreign governments from using the primary existing international payment methods. Bitcoin threatens that surveillance and control model because it empowers peer-to-peer transactions. The bitcoin network consists of people using free open source software to update a public ledger between themselves. It’s basically just a sophisticated way of updating the equivalent of a distributed Google Spreadsheet with each other, without a centralized server. Governments trying to ban people from doing that is tantamount to banning the spread of information, and is therefore a lot harder to do than telling banks to report or block certain types of transactions.

Governments will be challenged by this technology, and many of them have, and will, push back against it. They can allocate law enforcement resources to go after truly illegal activities (tracking down major cryptocurrency payments involved with serious crime), but will likely have trouble trying to retain control over benign transactions. They can use on-chain analysis to try to track transactions, they can enforce surveillance checkpoints around cryptocurrency exchanges, they can block banks in their jurisdiction from interfacing with any cryptocurrency exchanges, and at the extreme end they can put draconian punishments on people for using open source software to update a public ledger between each other. Meanwhile, developers continue to find ways to make the bitcoin network more private and to route around some of the challenges that can be put in its way. There are also some privacy-specific coins that people can resort to as well.

One way or another, these various types of digital money or currency are clearly in our future in some form or another. Depending on where we live and choices we make, we are more likely to experience some than others, ranging from bitcoins to corporate stablecoins to central bank digital currencies.

Proof-of-Something

A topic popularized by bitcoin is the term “proof-of-work”.

The concept was invented in various ways by cryptographers in the late 1990s, including notably by Dr. Adam Back in the form of “Hashcash”- a money-like mechanism to reduce email spam and denial-of-service attacks by making them have a small computational cost.

Satoshi Nakamoto’s bitcoin white paper referenced Back’s work, and used proof-of-work as one of its core aspects.

Nowadays, various digital assets have expanded on this concept in the form of “proof-of-stake”, “proof-of-history”, “proof-of-transfer”, “proof-of-burn”, “proof-of-space” and so forth. There are multiple attempts at maintaining scarcity of digital networks.

In any form, money is proof of something . This section explores three popular examples of proof-of-work, proof-of-stake, and proof-of-force.

Proof-of-work assets are created or harvested from mining activities. Proof-of-stake assets are created by breaking a project into pieces and selling some of those pieces to others. Proof-of-force assets, or fiat currency, is created by governments and their designated commercial parties (holders of banking licenses).

Proof-of-Work

When we go back and look at the example of rai stones, they were well-understood among their users to be a powerful proof-of-work mechanism. In addition to having a high stock-to-flow ratio until modern technology interfered with that, each stone is an undeniable proof that a massive amount of work occurred to create it and put it where it is.

A team of young men had to travel hundreds of miles to another island, quarry for the stone with ancient tools, bring a multi-ton stone block back on their wooden boats, and then carve it and move it into place on their home island. The amount of work that was required to do this is what limited the flow (new annual supply), and maintained the high stock to flow ratio for a long time. The bigger the stone, the more work it took to produce it and get it there.

Gold, of course, is historically the best example of proof-of-work, and it has stood the test of time unlike anything else. After painstakingly searching for gold deposits, it takes a tremendous amount of mechanical effort to move tons of earth for grams of gold, and then it has to be refined into its pure form. Each gold coin or gold bar represents literally tons of rock moved and sorted through, and gold resists degradation better than other elements. The Earth’s crust consists of less than 0.0000004% gold, compared to over 28% for silicon, over 8% aluminum, and over 5% iron. Even as our technology improves and we get better at finding and retrieving gold, we run out of the easiest deposits, and so it keeps getting harder, which offsets our improving technology.

Basically, proof-of-work is just that: proof that work was done. Since work is inherently scarce, we tend to recognize proof-of-work as being evidence of value, but only if the finished good in question has properties of money . And that’s an important distinction; we don’t pay for non-monetary goods or services based on how much work went into them; we pay for them based on how much utility they provide to us.

In other words, something akin to the Labor Theory of Value doesn’t apply to utility goods, but does apply to monetary goods.

This is because market participants will naturally try to arbitrage any good that acquires a monetary premium above what it offers in terms of its utility value. Monetary goods that don’t require work inevitably get reproduced and devalued (thus leaving only those that do require work as proper monies), whereas goods with no monetary premium are not worth reproducing endlessly. Basically, when it comes to money, a large amount of work to produce a unit, and a persistently high stock-to-flow ratio, are essentially the same thing. That work requirement is what keeps a commodity’s stock-to-flow ratio high, and any commodity that can’t maintain a high stock-to-flow ratio in the face of ever-advancing technology eventually fails as money. Only the scarcest of monies can maintain a persistent monetary premium over its utility value, because that monetary premium continually invites attempts at debasement.

For bitcoin, a new block of transactions is produced every ten minutes on average, and contains a cryptographic hash of the block before it, which connects the blocks to form a chain. It takes work (computer processing power) to solve that puzzle and find the new block that fits. The blockchain ends up being a long stretch of blocks hashed onto prior blocks, which is proof that a large amount of work was done. Copies of the blockchain are distributed and continually updated across tens or hundreds of thousands of computers worldwide.

A transaction recognized by the chain becomes essentially unchangeable, as it is buried under thousands of hashed blocks and widely distributed on those global computers.

And because bitcoin has a much larger network effect than most other cryptocurrencies, it is far more costly to attack the network than it is to attack most other cryptocurrencies. This, along with the fact that the node network is sufficiently decentralized and the monetary policy (or more accurately, initial coin distribution policy) can’t realistically be changed, is what has made bitcoin able to accumulate a persistent hard money premium that other cryptocurrencies have had trouble maintaining. However, in the grand scheme of things, it’s still only thirteen years old.

I have a longform research piece on bitcoin’s proof of work and energy consumption here .

Proof-of-Stake

Proof-of-stake is an equity-like system whereby holders of an asset determine how that asset functions. In other words, each coin can serve as a vote for the network.

Much like proof-of-work, we can translate it back into analog examples. In particular, proof-of-stake is commonly used in corporate ownership. The larger the number of shares of a company you own, the more say you have in terms of electing board members to run the company, and supporting or denying shareholder proposals. If you, or a group of entities that follow you, can control 51% of the shares, you effectively control the entire company.

Similarly, some blockchains have used this approach. Rather than mining for coins with real-world resources, users create new coins by signing transactions as a validator. In order to be a validator, users have to prove that they have a certain number of coins. Some of the pre-bitcoin attempts at digital money used strategies like this, and many of the post-bitcoin attempts use it in blockchain form.

However, unlike corporations, proof-of-stake blockchains require circular logic. Corporations use an external entity (a transfer agent and registrar) to keep track of who owns each share. In proof-of-stake blockchains, it’s like a corporation acting as its own transfer agent and registrar; the coinholders determine the state of the ledger, and the ledger is what says who the coinholders are.

Therefore, proof-of-stake systems need to be “always on” to function, and are highly complex. They have no inherent disaster recovery potential if the blockchain goes offline, because making alternative copies of the blockchain has no cost, and there’s no way to determine the “real” blockchain other than via agreement of major parties (a.k.a. a form of governance) if it is recovering from that offline state.

In contrast, proof-of-work systems are ledgers with decentralized and automated transfer agents and registrars. The coinholders do not determine the state of the ledger, the miners do, via energy expenditure. A proof-of-work system is not based on circular logic; even if the entire blockchain goes offline, it can be restarted because the longest chain can be identified and continued.

In other words, a proof-of-work blockchain is like non-volatile memory and a proof-of-stake blockchain is like volatile memory.

Another risk with proof-of-stake systems in both the analog and digital world is that they tend to centralize over time into an oligopoly. Since it doesn’t require ongoing resource inputs to maintain your stake and to grow it over time, wealth tends to compound into more wealth, which they can then use to influence the system to give themselves even more wealth, and so on.

Adam Back  described  this succinctly a while ago:

You see that with other commodity money, like physical gold. It’s a system that works because money has a cost. I think money that doesn’t have a cost ultimately ends up being political in nature. So people closer to the money, the so-called Cantillon Effect, are going to be advantaged.

In digital systems specifically, another challenge is that proof-of-stake as a consensus model is a lot more complex than proof-of-work and prone to more attack surfaces. If a proof-of-stake chain gets split or maliciously copied, it’s not self-evident which chain is the real one, and it becomes a human/political decision among oligopolistic participants to canonize a chain. However, in a proof-of-work system, the real chain is instantly verifiable, because by definition the chain that follows the node-consensus ruleset and that has more work is the real one.

In other words, what makes proof-of-stake blockchains inherently equity-like is that they require some form of ongoing governance, whereas proof-of-work blockchains (especially ones decentralized enough that they can’t really change their monetary policies) are more commodity-like. These differences can be benefits or drawbacks depending on what participants want out of the system. The collective existence of both digital commodities and digital equities in my view represents a novel new era for asset classes, and we’ll see where they may be successfully applied.

I have a longform research piece that includes an overview of proof-of-stake here .

Proof-of-Force

As described by Warren Mosler, a founder of the MMT school of economic thought mentioned earlier in this article, fiat currency is basically proof-of-force, which is why it can win out over proof-of-work money for long stretches of time.

Demand for government paper (or digital equivalents) is created by the government’s taxes on the population, which can only be paid in units of that paper. Failure to pay taxes results in losing assets, going to jail, or if resisting those prior consequences, getting shot by police. Proof-of-force systems convince or coerce people in their jurisdiction to use a softer/devaluing money, by placing taxes, frictions, and other obstacles on any money that is harder than their own, or in some cases outright banning competing monies by making it a felony to use them.

Of course, proof-of-force has existed for thousands of years, prior to the invention of fiat currency. Any warlord, kingdom, or empire that demanded some tribute from the peoples of the land it ruled were familiar with the concept of proof-of-force. The purpose could be for malevolent ends, or it could be for benevolent purposes to provide order for society, and collect some percentage of resources into the common good. Even democracies use proof-of-force as an organizational method. Nature abhors a vacuum, and humans consistently congregate into hierarchies and societal structures. In other words, not every political leader was like Caligula; some of them were more like Marcus Aurelius, or were democratically elected.

In most eras, that tribute took the form of commodity monies, such as gold or other loot that was already recognized as money via proof-of-work. However, in the modern era, governments have eliminated the proof-of-work component from the equation via technology (banking systems and efficient nationwide communication systems) and so when we think of the dollar, the euro, the yen, and other fiat currencies, they basically represent just proof-of-force. When we say that the dollar is “backed up by the full faith and credit of the U.S. Government”, what we are really saying is that the dollar is backed up by the ability of that government to collect taxes by any means necessary including force (and backed up by the petrodollar system; the ability of the US government to maintain a currency monopoly on energy pricing worldwide).

That sounds like hyperbole, so we can put it in context and dial it back a bit. Even Switzerland, well-known for its hundreds of years of geopolitical neutrality in the face of war, inherently uses proof-of-force to collect taxes in its fiat currency. So, even the most benign and nonviolent society, for the least belligerent purposes possible, still uses this proof-of-force mechanism to ensure the societal usage of its government-issued money, as a way to provision the government. In benign environments, force is sharply minimized by the fact that people vote for the government, or can leave the country and renounce citizenship if they do not wish to play by these rules, and thus can choose another country’s ruleset if that other country will let them in.

To put it bluntly, if you don’t pay your taxes, and in a form of legal tender accepted by the government , you eventually get a knock on your door from people with guns, and/or you’ll have to leave and go somewhere else. That remains the case unless or until the country’s legal tender breaks down enough that the majority of people can’t/won’t use it and the government is unable to enforce its use with that level of currency rebellion, which happens during hyperinflations and near-hyperinflations, including in many developing countries in modern times.

With a stock-to-flow ratio averaging somewhere between 5x to 20x in most cases, major fiat currencies have higher stock-to-flow ratios than most commodities, but lower stock-to-flow ratios than bitcoin and gold. However, in addition to having a moderately high stock-to-flow ratio, fiat currency benefits from the unique backing by the government, including active stabilization to try to reduce volatility, which is what gives it a degree of staying power.

I have a longform piece that describes the process of how fiat currency is created and destroyed here .

Final Thoughts: Think Outside of the Box

When money changes in a society, it always feels weird for people who go through it.

Imagine being someone who used shells for money their whole life, like your mother and your grandmother and your great-grandmother before you. And then, due to interactions with a foreign people, shiny yellow and gray metal circles with pictures of faces on them are starting to be used as money instead and seem to be displacing your shells. The foreigners, with better technology, can seemingly produce all the shells they want (which devalues them), but their shiny metal circles are harder to make and thus seem invulnerable to devaluation.

Or imagine using gold and silver coins as money your whole life, like your father and your grandfather and your great-grandfather, after thousands of years of global history of these things being used as money. And then, due to changing technology and government mandates, you’re supposed to use pieces of paper that are backed by gold instead and treat them the same way, and it’s illegal to actually own gold. And then, they take away the peg to gold and you’re still supposed to keep using these papers for the same value anyway, even as the quantity of these papers seems to keep increasing. The successful papers, being actively managed, tend to be rather stable most of the time even though they degrade in value over time.

And lastly, imagine using these unbacked papers as money your whole life. The interest rates on those papers at first are higher than price inflation and they’re rather stable in terms of purchasing power from year to year, but over time the interest rates keep going down until they are well below the prevailing inflation rate, meaning you lose purchasing power over time by holding those papers. And then some anonymous entity comes along and creates internet money that works via encryption and algorithms that you don’t fully understand, but it seems to keep growing in users and value compared to other assets for over a decade. Nobody can make more than the pre-programmed amount of it, it can be used for peer-to-peer domestic or international payments, and it can be self-custodied and transferred more easily and more securely than any prior money. But then we have questions about its technical risks, questions about whether governments can successfully prevent it from spreading, questions about its volatility, and other challenges along those lines that could cause it to stagnate or fail.

What do we do in these situations?

Well, I think the first rational thing is to be skeptical. We can’t just dive all-in to anything new that people claim is money.

In fact, honestly at first we can probably ignore it, since the probability of any given new thing becoming money is low. It’s pretty rare in human history that a serious new form of money emerges. But then if it doesn’t go away, and indeed keeps surviving from multiple 80%+ drawdowns over more than a decade to greater and greater heights of increasing monetization, then realistically we need to research it, test its hardness, and envision all the ways it could conceivably fail.

If we happen to have expertise or interest in that field for one reason or another we might jump onto it quicker, or we might go about our lives and let it continue growing, so that we learn more about it and then maybe buy a little bit and get to understand it. If competitors spring up, we probably should investigate some of those as well, and watch how they behave, and understand the differences. And then over time, we can mostly let the market answer our questions for us. We can hold an amount of this new money that makes sense for our risk profile, and let it appreciate (or not) over time.

If it does not appreciate, then that answers a set of questions, and we risked very little. If it does appreciate, then we continue to watch this asset gain a larger and larger monetary premium. It then generally becomes owned by more people and becomes a larger percentage of what we own because it grows in value faster than our other assets. Due to Gresham’s law, it won’t be readily spent too often, and will instead have a tendency to be hoarded, and only spent when necessary or in niche circumstances for its tank-like payment properties. The vast majority of participants will treat it as a long-term financial asset. It if becomes very large and dominant and its volatility goes down over time, its usage in spending will likely go up.

Looking out over the long run, it’s clear that money will become increasingly digital. The question is, will stateless peer-to-peer bearer assets like bitcoin become a persistently important version of money, worth trillions of dollars in market capitalization, or will state-created CBDCs or state-regulated corporate stablecoins be the main path forward instead? And to the extent that they coexist with each other, how much market share can we expect each one to take? That’s a topic I’ll continue to analyze over time.

As I close out this article, I’ll circle back to an earlier example of bitcoins being used as confiscation-resistant self-custodied payment for Afghani women and girls nearly a decade ago. Alex Gladstein documented what became of some of them:

A few of the women did keep their bitcoin from 2013. One of them was Laleh Farzan. Mahboob told me that Farzan worked for her as a network manager, and in her time at Citadel Software earned 2.5 BTC. At today’s exchange rate, Farzan’s earnings would now be worth more than 100 times  the average Afghan annual income. In 2016, Farzan received threats from the Taliban and other conservatives in Afghanistan because of her work with computers. When they attacked her house, she decided to escape, leaving with her family and selling their home and assets to pay brokers to take them on the treacherous road to Europe. Like thousands of other Afghan refugees, Farzan and her family traveled by foot, car and train thousands of miles through Iran and Turkey, finally making it to Germany in 2017. Along the way, dishonest middlemen and common thieves stole everything they brought with them, including their jewelry and cash. At one point, their boat crashed, and more belongings sank to the bottom of the Mediterranean. It’s a tragic story familiar to so many refugees. But in this case, something was different. Through it all, Farzan was able to keep her bitcoin, because she hid the seed to her bitcoin wallet on a piece of tiny, innocuous-looking paper. Thieves could not take what they could not find.

That’s an example of bitcoin transporting value across borders in a circumstance where gold and cash would have failed. It can be done through a mobile phone, USB stick, piece of paper, cloud storage, or even just by memorizing a twelve-word seed phrase.

Whether the bitcoin network ultimately succeeds or fails in the long run, this global distributed ledger backed up by proof-of-work is clearly a form of money, and one that is worth understanding.

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Essay on Money

Money is a significant part of human civilisation. It is difficult to think about the world without money. Everybody needs money for various purposes, starting from day-to-day transactions to savings for the future. But if we go back to history, we will find that before money came into existence, there was a barter system to facilitate transactions among individuals in society. With the development of civilisation over time, the barter system lost its ground and was replaced by money. This essay on money will provide ideas to students so they can effectively write essays on this topic. They can also check out the list of CBSE Essays to practise more essays on different topics and boost their writing skills.

500+ Words Essay on Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts which also acts as a standard of deferred payments. The main functions of money are distinguished as: a medium of exchange, a unit of account and a store of value. The money supply of a country consists of currency (banknotes and coins) and bank money. Bank money usually forms the largest part of the money supply.

With the help of money, we can fulfil our dream. We can go on trips to various places, eat tasty food, buy a beautiful house and can buy any luxury items. Many businessmen earn a lot of money by making profits from their businesses. They provide services or make products that people need and make money from them. Now, there are many industries and startups which have set up their business and gained success. But still, there are many people who use illegal modes to earn money and become a part of corruption.

Significance of Money in Economy

Money plays an important role in shaping the economy of any country. Money can stimulate or even hamper economic progress. Money affects the income, output, employment, consumption and economic welfare of the community at large. Money through its purchasing power increases consumption and, as a store of value, increases investment, and employment and leads to economic development.

Demonetisation in India

The Prime Minister of India, Narendra Modi, announced demonetisation on 8th November 2016, where Rs 500 and Rs 1000 notes were withdrawn from circulation. It was a major event of the year 2016. The demonetisation decision was taken by the Government in consultation with the RBI. The action was taken to tackle Black Money which is available in various forms like cash, investment in property and real estate, luxury goods like jewellery or with foreign currency dealers and private financiers. The target was to curb the use of black money.

The other motto of demonetisation was to reduce corruption. With demonetisation, the cash in the hands of corrupt people becomes useless, and if the same is deposited in the banks, it loses anonymity, and the person has to pay taxes on the said amount.

The demonetisation also helped in promoting digitalisation through online transactions. A large section of the Indian economy was being run on the cash system, which does not get captured by the tax department as it does not leave any trail. So, the Government thought about promoting digitisation and formalisation of the economy through online transactions, e-wallets, and various payment instruments like Paytm, Rupay cards, the BHIM app etc. The beauty of these instruments is that the entire economic activity gets captured. It reduces tax evasion and improves tax collection.

Students must have found this essay on money useful for improving their essay-writing skills. They can get the study material and the latest updates on CBSE/ICSE/State Board/Competitive Exams, at BYJU’S.

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The power of money.

ARTICLE | October 24, 2012 | BY Garry Jacobs , Ivo Šlaus

This is Part 1 in the Money Series. Part 2 "Multiplying Money" is available here .

Although we all use money every day, the nature and functioning of money seem shrouded in commonplace myths and ancient mysteries. Money plays a central role in economics today, yet rarely do we come across a serious, informed discussion of what money really is and what role it plays in the development of society. Money is a remarkable human invention, a mental symbol, a social organization and a means for the application and transfer of social power for accomplishment. This article is the first in a series of articles exploring the origins, nature and functioning of money and its creative power by comparing money with two other pre-eminent social institutions – language and the Internet.

Money, according to the adage, makes the world go round. And just now the world appears to be spinning wildly out of control, escaping from its traditional orbit and raising the specter of a head-on collision with economy, democracy and the welfare of humanity. Concern with the prevailing monetary system has given rise to calls for abolition of the current system of national currencies, a return to the gold standard, elimination of debt money and interest, reversion to local currencies that were prevalent in earlier centuries, and invention of new forms of money such as energy currency or earth currency linked to productive capacities and natural resources. The plethora of ideas floating around suggest that there is widespread discontent and confusion intermixed with a good dose of myth and superstition regarding the origin, nature and role of money in society.

Rather than hastening to contribute one more solution to the mountain that has been proposed, we may do well to first inquire into the fundamental principles on which money is based and the process by which it has evolved with the development of society. This may help us identify the precise points at which the global monetary system has become vitiated and ensure that any changes we propose are in line with humanity’s evolutionary advance.

1. What is Money?

Money, according to economists, is a medium of exchange, store of value, unit of account. To which other social sciences might add, it is a source of status and social prestige, a provider of physical and psychological security, a contributing factor to human welfare and well-being, a basis for military strength, a source of public influence and political power. But these terms merely describe its major functions without really explaining what money is.

Money is an evolving symbol of economic value and social power. Over the past two thousand years, it has undergone numerous changes in form, content and the source of the value it seeks to represent. In early times, money took the form of objects of intrinsic value such as cows, tobacco, furs, grain, and various metals. It later took the form of intrinsically or ornamentally valuable objects such as precious metals, which acquired symbolic value as a representative for many other objects. It was also standardized in the form of coins minted from precious metals, whose value was linked to their metallic content.

The introduction of purely symbolic money as a substitute for material objects marked an important stage in social development. Symbolic money was created based on trust in an issuing institution, such as the receipts issued for grain on deposit in the Pharaoh’s warehouses or gold on deposit with London goldsmiths, and the myriad bank notes issued by literally thousands of American banks during the 19 th century.

Originally intended to reflect existing material assets, money also gradually evolved to represent future intention and purchasing capacity. Promissory notes indicating an intention to pay in future became a powerful stimulus to trade in Renaissance Italy. Wooden tallies issued by the British treasury became prevalent around the same time to represent the Treasury’s future tax receipts. The government bonds so prevalent today constituted an essential foundation for the rise of modern nation-states. Ultimately, this led to the issuance of purely fiat currencies, backed only partially by precious metals and anticipated tax revenues. The real backing for national currencies is trust in national institutions of governance supported by the physical assets and productive capacities of the nation issuing them.

The progressive etherealization of money has given rise to endless suspicions, cries of outrage and conspiracy theories, under the assumption that money is, in essence, a physical thing (like the cows and gold nuggets) which has been corrupted and perverted by evil minds. But the etherealization of money has also taken place during the most remarkable period of development in human history and has been associated with a seven-fold rise in real global per capita GDP, so we are advised to seek to fully understand its contribution to human development before condemning and rejecting it wholesale. Closer analysis will show that the growing power of money has always arisen from its symbolic value. Still we are describing only types of money without yet inquiring into what money truly is. We can better understand the power of money by conceiving of it as a purely human creation.

2. Language as a Social Organization

Throughout history, human beings have striven to develop capacities to enhance their power of individual and collective accomplishment. Some capacities are primarily powers of the individual, such as skill in running, climbing, shooting, fire making, cooking.  Other powers, such as language, family and government, can only develop and be expressed in relationship with other people. Money is one of the primary collective powers developed by humanity for social accomplishment. Like language, money is an instrument to promote productive, cooperative human social relationships.

Money is one of the greatest inventions of all time. Like language, money is not a thing in itself but rather a social organization designed to promote and facilitate interaction and interchange between human beings over space and time. Language consists of symbolic sounds and images in the form of words, but those words are meaningless objects until assigned a standardized value by members of the community, so they are commonly accepted to represent the same thing to different people. Language is an arrangement and organization of sounds, signs, letters, figures and words in a sequence according to rules of grammar and diction, standardized forms and established conventions, which facilitate communication of ideas, intentions, feelings, sensations and physical facts.

Language has made possible the evolution of Homo sapiens from merely gregarious social animals through civilization and culture into creative, inventive, thinking, learning human beings governed by values, ideals, ideas, prevailing beliefs, customs, laws and a huge body of facts and knowledge derived from past experience. Language is the foundation and medium for interpersonal relationships, family, community, civilization, culture and all higher human attainments. Language makes possible the preservation of past experience, discovery and accumulated knowledge on which civilization is based; the sharing of experiences, ideas and feelings over vast intervals of time and distances in space; the communication of our deeper emotions on which intimate human relationships are founded; and the formulation of dreams, aspirations and ideals which direct our energies for future progress.

The social organization we refer to as language has endowed humanity with a power for individual and collective accomplishment unimaginable for other species. Language generates power and is a form of power – power for communication, knowledge, relationship, production and exchange, war and negotiated peace, governance, education, scientific and technological development, intellectual inquiry and artistic creativity, recreation and entertainment, romance, religious worship and spiritual enlightenment.

3. Money as Social Organization

Money is also a social organization based on generally accepted symbols, set rules, standardized forms and established conventions. Money too depends on acceptance of common standards for form, unit, value and recording. It is a social organization which includes institutions related to minting, issuing, banking, transmission, accounting, taxation, etc. Though originally assuming the form of objects of intrinsic value, the time is long past since the institution of money evolved more symbolic forms which were easier to transport, store and innovatively adapt to represent non-material forms of value.

As language promotes exchange of ideas, information and intentions, money facilitates the exchange between human beings of goods, services and other things of perceived value. Exchange is the social and economic basis for the evolution of society. Without exchange, each human being must rely solely on his own energies to produce all that he desires or on his capacity to take by force that which is possessed by others. Exchange replaces physical violence and war. It makes possible division of labor, specialization and conversion of one type of good or service into any other type. Exchange is possible without money, just as communication is possible without spoken or written language, but in both cases, they are severely constrained in utility, scope, space, time and effective power without the aid of higher symbolic forms.

The evolution from barter exchange to monetary exchange has resulted in enormous social progress – from isolated rural communities into regions organized around urban centers, city states and eventually kingdoms, nation-states and the emerging global community. The evolution of money has facilitated the growth and development of production, commerce, armies, governments, education, science, technology, urbanization and all forms of art.

4. Evolution of Social Power

When human beings exist at subsistence level, money has little utility, since each person produces just sufficient for self-consumption. At the time of Adam Smith only about 15-20% of production passed through monetarized exchange. Initially, money represented the added value of a commodity when a producer employed his surplus production for trade rather than for self-consumption. As production and trade expanded, money came to represent the power of the society for production and exchange of a wide range of products and services. As society became more complex and integrated, money came to represent the conversion value of one form of social power (productive, political, educational, social, transport, communication, entertainment) into another form. Thus, it evolved into a generalized symbol for all forms of social power and a medium for transfers from one form to another. Production, trade, money, banking, finance, governance, transport, communication, education all form elements of the integrated social organization which is the source of all wealth and power. As recent experience illustrates, the attempt to separate economy or banking from governance shows just how interdependent economy and politics have become. The political power of money in modern democracy is their relationship and interconvertibility.

Society has become a seamlessly integrated whole. All forms of social power contribute to the collective capacity of society to accomplish that underlies the value of money. In the measure that an ordinary bag of grain can now be converted into more education, medical care, entertainment, travel, etc., it has acquired far greater value than the original bag of grain produced by the subsistence farmer in the distant past. Money is a means for multiplying the value of every human attribute and capacity.

5. Internet

A comparison of money and the Internet may more clearly place money in its evolutionary context. The Internet is the first truly global social organization functioning ubiquitously in space and instantaneously in time. It capitalizes on the powers created by all previous organizations, most especially the communication powers of language and exchange power of money, to generate an unlimited power for collective social accomplishment. As an instrument for personal and social communication, it dwarves the power of all the mechanisms previously devised through history from the newspaper to the telephone and television. As an instrument for education, it makes conceivable the delivery of the highest level and quality of education to all human beings in the near future. As an instrument for governance, it makes feasible, if not yet actual, the participation of all citizens in the process of law making. Humanity, which was just a few millennia ago dependent on the beat of the drum for conveying messages quickly through space and rock paintings to record events for posterity, now depends on the Internet, which provides it with the capacity to communicate, exchange and unite as a single social body globally.

6. Sources of Social Power

The extraordinary and unique social power of money arises from multiple sources:

Exchange : Money facilitates exchange, so valueless surplus acquires value. (An isolated French village around 1900 fed its surplus grape production to the pigs since it had no way to exchange grapes for other things of value. A year after a road and bridge connected the village to the nearest town, it began exporting wine. Like roads, money facilitates exchange).

Efficiency : The advantages of money over barter, which requires the double coincidence between buyer and seller, are well documented. As the introduction of Hindu/Arab numerals and double entry book-keeping vastly facilitated the growth of commerce in Italy during the late Middle Ages (imagine trying to multiply and divide with Roman numerals! or to calculate profit from a cash ledger), money vastly facilitated exchange in terms of the variety of products, number of transactions, extended over space and time.

Energy : Money is a catalyst for transactions. Exchange energizes people to take greater effort. It provides an incentive for producers to produce more than they can consume and to also produce things of which they have no need, but, which have value to others.

Trust : By promoting exchange, money fosters cooperative human relationships for mutual benefit, even among those who do not know each other personally. It promotes trust in others. Each successful transaction increases confidence between buyer and seller and augments the propensity for further transactions. Thus, money encourages the extension of trust which is essential for cooperation and expanding human relationships. Initially, trust is personal in someone we know. Personal trust in known individuals is extended to strangers through the medium of money. At a subsequent stage, trust in individuals and transactions grows into trust in the system for exchange and the institutions that facilitate that exchange (middlemen, processors, distributors, warehouses, retailers, financiers, and customers). Human and institutional relationships expand. Society grows more sophisticated and complex. The individual participates in a widening social network and progressively universalizes his capabilities, similar to the way internet expands the reach of each individual human being.

Inter-convertibility : As already discussed, money fosters the formation of complex, integrated societies by facilitating the exchange of one form of social power into other forms. The power to produce crops can ensure protection from famine. The power of a strong military can defend against invasion. Good roads facilitate transportation. Schools and scholars promote advancement of education and knowledge. Political institutions promote effective governance. Each can develop independently, to a certain extent. But in order for society to emerge as a cohesive unit, they need to be integrated. Money makes possible that integration by facilitating inter-convertibility of one form of social power into all other forms.

Society : Ultimately, money comes to represent the overall power of society to achieve its varied goals in all spheres of life. Without money, modern society is inconceivable. Without society, money has no value.

7. Myths about Money

Money is subject to a range of myths and superstitions that pose serious obstacles to its further evolution. Our notion of money as a thing gives credence to the superstition that it must necessarily be scarce in the same way land and precious metals are scarce resources. But understanding money as a social organization, we perceive that it is capable of infinite multiplication, the same way information, knowledge, law, education and other social institutions can and do multiply. As humanity now possesses the capacity to produce sufficient food, clothing, housing, education and medical care to meet the needs of all human beings, it also has the capacity to create sufficient money to ensure effective distribution of those necessities.

The evolution of money is a key to universalizing prosperity through peaceful social evolution. The opening up of commercial relations between China and USA in the 1970s is a dramatic example of the power of money to channel human energies from destructive violence to peaceful cooperation. Today, we live in a world with unprecedented productive capacity. Yet, it is also a world in which precious human, social and productive capacities remain underemployed or unutilized. The problem we face today is not incapacity to meet human needs, but incapacity to fully utilize our productive capacities for the benefit of all humanity. Understanding and attitudes toward money constitute a central part of the problem.

So too, the social status traditionally acquired and still enjoyed by the wealthy also supports the myth that scarcity of money is essential for social welfare, the same way feudal aristocracy believed that limiting status and privilege to a rare few – 10,000 families in 18 th century England – was essential for social stability and preservation of culture. The prevailing ideals and values of the 21 st century compel us to multiply and distribute the privileges of freedom, equality and social security to all humanity.

The times of scarcity are drawing to an end. Ushering in abundance of freedom, rights, education, wealth and power-sharing will necessitate a breaking of established privileges and entrenched power structures. In the past, this has almost always been accomplished by violent revolution. Today, we have the means to make the transition by peaceful evolution rather than violent revolution. As in the past this process will be driven, not by the permission of the privileged, but by the idealism, aspirations, demands and actions of humanity.

Attacks on the prevailing system of money are an encouraging indication of a growing social awareness and aspiration for a more effective and equitable organization of social power. An impartial, objective inquiry into the social origins, power and evolution of money is the right starting place and essential condition for fashioning a better future for humanity.

The problems the world faces today are because human attitudes have not evolved to keep pace with advances in technology and social institutions. Liberating ourselves from allegiance to outdated attitudes is the essential condition for converting the current crises into evolutionary opportunities.

About the Author(s)

• Economic Theory
• Money & Finance

Issue 5 Part 1

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Seed-Idea: Recognizing Unrecognized Genius - Ivo Šlaus & Garry Jacobs

Seed-Idea: Counter-Aging in the Post-Industrial Society - Orio Giarini

Seed-Idea: Seeding Intrinsic Values: How a Law of Ecocide will Shift our Consciousness - Polly Higgins

Crises and Opportunities: A Manifesto for Change - Ian Johnson & Garry Jacobs

Double Factor Ten: Responsibility and Growth in the 21st Century - F. J. Radermacher

Rio +20 - Robert Horn

The Future of the Arctic: A Key to Global Sustainability - Francesco Stipo et al

Book Review - 2052: A Global Forecast for the Next Forty Years - Michael Marien

Issue 5 Part 2

Editorial: Call for a Revolution in Economics

Money, Debt, People and Planet - Jakob von Uexkull

On the Need for New Economic Foundations: A Critique on Mainstream Macroeconomics - Robert Hoffman

The Power of Money - Garry Jacobs & Ivo Šlaus

New and Appropriate Economics for the 21st Century: A Survey of Critical Books, 1978-2013 - Michael Marien

Book Review - Money and Sustainability: The Missing Link - Ivo Šlaus & Garry Jacobs

Book Review — Resilient People, Resilient Planet: A Future Worth Choosing - Michael Marien

Issue 5 Part 3

Sovereignty and Nuclear Weapons - Winston P. Nagan & Garry Jacobs

World Peace Through Law: Rethinking an Old Theory - James T. Ranney

Federalism and Global Governance - John Scales Avery

Myth, Hiroshima and Fear: How We Overestimated the Usefulness of the Bomb - Ward Wilson

How Reliance on Nuclear Weapons Erodes and Distorts International Law and Global Order - John Burroughs

Re-Examining the 1996 ICJ Advisory Opinion: Concerning the Legality of Nuclear Weapons - Jasjit Singh

India's Disarmament Initiative 1988: Continuing Relevance, Valid Pointers for an NWFW - Manpreet Sethi

Nuclear Threats and Security - Garry Jacobs & Winston P. Nagan

An Arctic Nuclear-Weapon-Free Zone - Needed Now - Adele Buckley

ACTIVITIES & EVENTS

Report on Recent Events

Declaration of the Split Conference

Report on Pugwash Conference in Nova Scotia

Stop the Insanity - Report on Astana Conference

The ATOM Project

The Power of Mind - Report on the Club of Rome Annual Conference in Bucharest

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Definition of money

 (Entry 1 of 2)

Definition of money  (Entry 2 of 2)

Frequently Asked Questions

What is the plural of money ?

In its most common uses, money has no plural . We say "some money," not "a money" or "many moneys/monies." But when money refers to discrete sums of money obtained from a particular source or allocated to a particular cause, the word can be pluralized as moneys or monies , with monies being the more common spelling.

Is it 'how much money' or 'how many money'?

When we want to know an amount of money, we say "how much money," not "how many money."

What does 'money is no object' mean?

If money is no object, the price or cost of something does not matter.

• bread [ slang ]
• cabbage [ slang ]
• jack [ slang ]
• kale [ slang ]
• legal tender
• lolly [ British ]
• long green [ slang ]
• moola [ slang ]
• moolah
• scratch [ slang ]
• sheqels
• shekelim
• shekalim
• sheqalim

Examples of money in a Sentence

These examples are programmatically compiled from various online sources to illustrate current usage of the word 'money.' Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Send us feedback about these examples.

Word History

Noun and Adjective

Middle English moneye , from Anglo-French moneie , from Latin moneta mint, money — more at mint

14th century, in the meaning defined at sense 1

circa 1934, in the meaning defined above

Phrases Containing money

• a license to print money
• front money
• danger money
• marry money
• marry into money
• money of account
• money - back guarantee
• paper money
• money to burn
• waste of money
• the money supply
• Chinese money plant
• blood money
• for love or money
• give (someone) a run for his / her / your / their money
• for love nor money
• come from money
• a fool and his money are soon parted
• money plant
• money for jam
• dirty money
• conscience money
• in the money
• funny money
• folding money
• money - spinner
• money riding
• money is no object
• money market
• made of money
• for one's money
• money order
• money - grubber
• plastic money
• get his money's worth
• money changer
• money supply
• money talks
• money for old rope
• throw money around
• put (one's) money on
• pay good money
• token money
• prize money
• money - back
• value for money
• pocket money
• someone's money's worth
• time is money
• spending money
• throw money at
• run for one's money
• on the money
• smart money
• put one's money where one's mouth is
• pouring your money down the plughole

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Cite this entry.

“Money.” Merriam-Webster.com Dictionary , Merriam-Webster, https://www.merriam-webster.com/dictionary/money. Accessed 31 Mar. 2024.

Kids Definition

Kids definition of money.

Middle English moneye "money," from early French moneie (same meaning), from Latin moneta "coin, place where coins are made," from Moneta "a special name for the goddess Juno"; so called because the ancient Romans made coins at the temple of Juno Moneta — related to mint entry 2

Legal Definition

Legal definition of money, more from merriam-webster on money.

Nglish: Translation of money for Spanish Speakers

Britannica English: Translation of money for Arabic Speakers

Britannica.com: Encyclopedia article about money

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From the Heart to Higher Education: The 2021 College Essays on Money

Each year, we ask high school seniors to send us college application essays that touch on money, work or social class. Here are five from this year’s incoming college freshmen.

Credit... Robert Neubecker

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By Ron Lieber

• June 18, 2021

When the most selective — or, even better, rejective — schools in the United States are accepting under 10 percent of the people pleading for a spot in the next freshman class, it eventually becomes impossible to know why any one person receives an offer, or why a student chooses a particular school.

So in this particularly unpredictable season — as we publish a selection of application essays about money, work or social class for the ninth time — we’ve made one small but permanent change: We (and they) are going to tell you where the writers come from, but not where they are headed.

Our overarching point in publishing their essays isn’t to crack the code on writing one’s way into Yale or Michigan, as if that were even possible. Instead, it’s to celebrate how meaningful it can be to talk openly about money and write about it in a way that makes a reader stop and wonder about someone else’s life and, just maybe, offers a momentary bit of enlightenment and delight.

One writer this year helps her mother find a new way of bringing joy into the world, while another discovers the cost of merely showing up if you’re a female employee. A young man reflects on his own thrift, while a young woman accepts a gift of ice cream and pays a price for it. Finally, caregiving becomes a source of pride for someone young enough to need supervision herself.

Each of the writers will make you smile, eventually. And this year in particular, we — and they — deserve to.

“She began to cry and told me it was too late for her. I could not bear to watch her struggle between ambition and doubt.”

New York — Bronx High School of Science

My mom finds a baffling delight from drinking from glass, hotel-grade water dispensers. Even when three-day-old lemon rinds float in stale water, drinking from the dispenser remains luxurious. Last year for her birthday, I saved enough to buy a water dispenser for our kitchen counter. However, instead of water, I filled it with handwritten notes encouraging her to chase her dreams of a career.

As I grew older, I noticed that my mom yearned to pursue her passions and to make her own money. She spent years as a stay-at-home mom and limited our household chores as much as she could, taking the burden upon herself so that my brothers and I could focus on our education. However, I could tell from her curiosity of and attitudes toward working women that she envied their financial freedom and the self-esteem that must come with it. When I asked her about working again, she would tell me to focus on achieving the American dream that I knew she had once dreamed for herself.

For years, I watched her effortlessly light up conversations with both strangers and family. Her empathy and ability to understand the needs, wants and struggles of a diverse group of people empowered her to reach the hearts of every person at a dinner table, even when the story itself did not apply to them at all. She could make anyone laugh, and I wanted her to be paid for it. “Mom, have you ever thought about being a stand-up comedian?”

She laughed at the idea, but then she started wondering aloud about what she would joke about and how comedy shows were booked. As she began dreaming of a comedy career, the reality of her current life as a stay-at-home mom sank in. She began to cry and told me it was too late for her. I could not bear to watch her struggle between ambition and doubt.

Her birthday was coming up. Although I had already bought her a present, I realized what I actually wanted to give her was the strength to finally put herself first and to take a chance. I placed little notes of encouragement inside the water dispenser. I asked my family and her closest friends to do the same. These friends told her other friends, and eventually I had grown a network of supporters who emailed me their admiration for my mom. From these emails, I hand wrote 146 notes, crediting all of these supporters that also believed in my mom. Some provided me with sentences, others with five-paragraph-long essays. Yet, each note was an iteration of the same sentiment: “You are hilarious, full of life, and ready to take on the stage.”

On the day of her birthday, my mom unwrapped my oddly shaped present and saw the water dispenser I bought her. She was not surprised, as she had hinted at it for many years. But then as she kept unwrapping, she saw that inside the dispenser there were these little notes that filled the whole thing. As she kept picking out and reading the notes, I could tell she was starting to believe what they said. She started to weep with her hands full of notes. She could not believe the support was real, that everyone knew she had a special gift and believed in her.

Within two months, my mom performed her first set in a New York comedy club. Within a year, my mom booked a monthly headlining show at the nation’s premier comedy club.

I am not sure what happened to the water dispenser. But I have read the notes with my mom countless times. They are framed and line the walls of her new office space that she rented with the profits she made from working as a professional comedian . For many parents, their children’s careers are their greatest accomplishment, but for me my mom’s is mine.

Adrienne Coleman

“The intense Saturday night crucible of the restaurant, with all the unwanted phone numbers, catcalls and wandering hands, jolted me into an unavoidable reckoning with feminism in a professional world.”

Locust Valley, N.Y. — Friends Academy

“Pull down your mask, sweetheart, so I can see that pretty smile.”

I returned a well-practiced smile with just my eyes, as the eight guys started their sixth bottle of Brunello di Montalcino. Their carefree banter bordered on heckling. Ignoring their comments, I stacked dishes heavy with half-eaten rib-eye steaks and truffle risotto. As I brought their plates to the dish pit, I warned my female co-workers about the increasingly drunken rowdiness at Table 44.

This was not the first time I’d felt uncomfortable at work. When I initially presented my résumé to the restaurant manager, he scanned me up and down, barely glancing at the piece of paper. “Well, you’ve got no restaurant experience, but you know, you package well. When can you start?” I felt his eyes burn through me. That’s it? No pretense of a proper interview? “Great,” I said, thrilled at the prospect of earning good money. At the same time, reduced to the way I “package,” I felt degraded.

I thought back to my impassioned feminist speech that won the eighth-grade speech contest. I lingered on the moments that, as the leader of my high school’s F-Word Club, I had redefined feminism for my friends who initially rejected the word as radical. But in these instances, I realized how my notions of equality had been somewhat theoretical — a passion inspired by the words of Malala and R.B.G. — but not yet lived or compromised.

The restaurant has become my real-world classroom, the pecking order transparent and immutable. All the managers, the decision makers, are men. They set the schedules, determine the tip pool, hire pretty young women to serve and hostess, and brazenly berate those below them. The V.I.P. customers are overwhelmingly men, the high rollers who drop thousands of dollars on drinks, and feel entitled to palm me, a 17-year-old, their phone numbers rolled inside a wad of cash.

Angry customers, furious they had mistakenly received penne instead of pane, initially rattled me. I have since learned to assuage and soothe. I’ve developed the confidence to be firm with those who won’t wear a mask or are breathtakingly rude. I take pride in controlling my tables, working 13-hour shifts and earning my own money. At the same time, I’ve struggled to navigate the boundaries of what to accept and where to draw the line. When a staff member continued to inappropriately touch me, I had to summon the courage to address the issue with my male supervisor. Then, it took weeks for the harasser to get fired, only to return to his job a few days later.

When I received my first paycheck, accompanied by a stack of cash tips, I questioned the compromises I was making. In this physical and mental space, I searched for my identity. It was simple to explore gender roles in a classroom or through complex characters in a Kate Chopin novel. My heroes, trailblazing women such as Simone de Beauvoir and Gloria Steinem, had paved the road for me. In my textbooks, their crusading is history. But the intense Saturday night crucible of the restaurant, with all the unwanted phone numbers, catcalls and wandering hands, jolted me into an unavoidable reckoning with feminism in a professional world.

Often, I’ve felt shame; shame that I wasn’t as vocal as my heroes; shame that I feigned smiles and silently pocketed the cash handed to me. Yet, these experiences have been a catalyst for personal and intellectual growth. I am learning how to set boundaries and to use my professional skills as a means of empowerment.

Constantly re-evaluating my definition of feminism, I am inspired to dive deeply into gender studies and philosophy to better pursue social justice. I want to use politics as a forum for activism. Like my female icons, I want to stop the burden of sexism from falling on young women. In this way, I will smile fully — for myself.

Hoseong Nam

“I feel haunted, cursed by the compulsion to diligently subtract pennies from purchases hoping it will eventually pile up into a mere dollar.”

Hanoi, Vietnam — British Vietnamese International School

Despite the loud busking music, arcade lights and swarms of people, it was hard to be distracted from the corner street stall serving steaming cupfuls of tteokbokki — a medley of rice cake and fish cake covered in a concoction of hot sweet sauce. I gulped when I felt my friend tugging on the sleeve of my jacket, anticipating that he wanted to try it. After all, I promised to treat him out if he visited me in Korea over winter break.

The cups of tteokbokki, garnished with sesame leaves and tempura, was a high-end variant of the street food, nothing like the kind from my childhood. Its price of 3,500 Korean won was also nothing like I recalled, either, simply charged more for being sold on a busy street. If I denied the purchase, I could console my friend and brother by purchasing more substantial meals elsewhere. Or we could spend on overpriced food now to indulge in the immediate gratification of a convenient but ephemeral snack.

At every seemingly inconsequential expenditure, I weigh the pros and cons of possible purchases as if I held my entire fate in my hands. To be generously hospitable, but recklessly drain the travel allowance we needed to stretch across two weeks? Or to be budgetarily shrewd, but possibly risk being classified as stingy? That is the question, and a calculus I so dearly detest.

Unable to secure subsequent employment and saddled by alimony complications, there was no room in my dad’s household to be embarrassed by austerity or scraping for crumbs. Ever since I was taught to dilute shampoo with water, I’ve revised my formula to reduce irritation to the eye. Every visit to a fast-food chain included asking for a sheet of discount coupons — the parameters of all future menu choice — and a past receipt containing the code of a completed survey to redeem for a free cheeseburger. Exploiting combinations of multiple promotions to maximize savings at such establishments felt as thrilling as cracking war cryptography, critical for minimizing cash casualties.

However, while disciplined restriction of expenses may be virtuous in private, at outings, even those amongst friends, spending less — when it comes to status — paradoxically costs more. In Asian family-style eating customs, a dish ordered is typically available to everyone, and the total bill, regardless of what you did or did not consume, is divided evenly. Too ashamed to ask for myself to be excluded from paying for dishes I did not order or partake in, I’ve opted out of invitations to meals altogether. I am wary even of meals where the inviting host has offered to treat everyone, fearful that if I only attended “free meals” I would be pinned as a parasite.

Although I can now conduct t-tests to extract correlations between multiple variables, calculate marginal propensities to import and assess whether a developing country elsewhere in the world is at risk of becoming stuck in the middle-income trap, my day-to-day decisions still revolve around elementary arithmetic. I feel haunted, cursed by the compulsion to diligently subtract pennies from purchases hoping it will eventually pile up into a mere dollar, as if the slightest misjudgment in a single buy would tip my family’s balance sheet into irrecoverable poverty.

Will I ever stop stressing over overspending?

I’m not sure I ever will.

But I do know this. As I handed over 7,000 won in exchange for two cups of tteokbokki to share amongst the three of us — my friend, my brother and myself — I am reminded that even if we are not swimming in splendor, we can still uphold our dignity through the generosity of sharing. Restricting one’s conscience only around ruminating which roads will lead to riches risks blindness toward rarer wealth: friends and family who do not measure one’s worth based on their net worth. Maybe one day, such rigorous monitoring of financial activity won’t be necessary, but even if not, this is still enough.

Neeya Hamed

“In America, we possess all the tangible resources. Why is it, then, that we fruitlessly struggle to connect with one another?”

New York — Brooklyn Friends School

Sitting on monobloc chairs of various colors, the Tea Ladies offer healing. Henna-garnished hands deliver four cups of tea, each selling for no more than 10 cents. You may see them as refugees who fled the conflict in western Sudan, passionately working to make ends meet by selling tea. I see them as messengers bearing the secret ingredients necessary to truly welcome others.

On virtually every corner in Sudan, you can find these Tea Ladies. They greet you with open hearts and colorful traditional Sudanese robes while incense fills the air, singing songs of ancient ritual. Their dexterous ability to touch people’s lives starts with the ingredients behind the tea stand: homegrown cardamom, mint and cloves. As they skillfully prepare the best handmade tea in the world, I look around me. Melodies of spirited laughter embrace me, smiles as bright as the afternoon sun. They have a superpower. They create a naturally inviting space where boundless hospitality thrives.

These humble spaces are created by people who do not have much. Meanwhile, in America, we possess all the tangible resources. Why is it, then, that we fruitlessly struggle to connect with one another? On some corners of Mill Basin, Brooklyn, I discovered that some people don’t lead their lives as selflessly.

I never imagined that the monobloc chair in my very own neighborhood would be pulled out from under me. Behind this stand, the ingredients necessary to touch my life were none but one: a friendly encounter gone wrong. While waiting for ice cream, a neighbor offered to pay for me. This deeply offended the shop owner glaring behind the glass; he resented my neighbor’s compassion because his kindness is reserved for those who do not look like me. The encounter was potent enough to extract the resentment brewing within him and compelled him to project that onto me.

“I guess Black lives do matter then,” he snarked.

His unmistakably self-righteous smirk was enough to deny my place in my community. It was enough to turn a beautiful sentiment of kindness into a painfully retentive memory; a constant reminder of what is to come.

Six thousand three hundred and fifty-eight miles away, Sudan suddenly felt closer to me than the ice cream shop around the corner. As I walked home, completely shaken and wondering what I did to provoke him, I struggled to conceptualize the seemingly irrelevant comment. When I walk into spaces, be it my school, the bodega or an ice cream shop, I am conscious of the cardamom mint, and cloves that reside within me; the ingredients, traits and culmination of thoughts that make up who I am, not what I was reduced to by that man. I learned, however, that sometimes the color of my skin speaks before I can.

I realized that the connotations of ignorance in his words weren’t what solely bothered me. My confusion stemmed more from the complete lack of care toward others in his community, a notion completely detached from everything I believe in. For the Tea Ladies and the Sudanese people, it isn’t about whether or not people know their story. It isn’t about solidarity in uniformity, but rather seeing others for who they truly are.

Back in Khartoum, Sudan, I looked at the talents of the Tea Ladies in awe. They didn’t necessarily transform people with their tea, they did something better. Every cup was a silent nod to each person’s dignity.

To the left of me sat a husband and father, complaining about the ridiculous bread prices. To the right of me sat a younger worker who spent his days sweeping the quarters of the water company next door. Independent of who you were or what you knew before you got there, their tea was bridging the gap between lives and empowering true companionship, all within the setting of four chairs and a small plastic table.

Sometimes, that is all it takes.

“I was the memory keeper, privy to the smallest snippets that go forgotten in a lifetime.”

Lafayette, Calif. — Miramonte High School

I was the ultimate day care kid — I never left.

From before I could walk to the start of middle school, Kimmy’s day care was my second home. While my classmates at school went home with stay-at-home moms to swim team and Girl Scouts, I traveled to the town next door where the houses are smaller, the parched lawns crunchy under my feet from the drought.

At school, I stuck out. I was one of the few brown kids on campus. Both of my parents worked full time. We didn’t spend money on tutors when I got a poor test score. I’d never owned a pair of Lululemon leggings, and my mom was not versed in the art of Zumba, Jazzercise or goat yoga. At school, I was a blade of green grass in a California lawn, but at day care, I blended in.

The kids ranged from infants to toddlers. I was the oldest by a long shot, but I liked it that way. As an only child, this was my window into a sibling relationship — well, seven sibling relationships. I played with them till we dropped, held them when they cried, got annoyed when they took my things. And the kids did the same for me. They helped as I sat at the counter drawing, and starred in every play I put on. They watched enviously as I climbed to the top of the plum tree in the backyard.

Kimmy called herself “the substitute mother,” but she never gave herself enough credit. She listened while I gushed about my day, held me when I had a fever and came running when I fell out of the tree. From her, I learned to feed a baby a bottle, and recognize when a child was about to walk. I saw dozens of first steps, heard hundreds of first words, celebrated countless birthdays. Most importantly, I learned to let the bottle go when the baby could feed herself.

And I collected all the firsts, all the memories and stories of each kid, spinning elaborate tales to the parents who walked through the door at the end of the day. I was the memory keeper, privy to the smallest snippets that go forgotten in a lifetime.

I remember when Alyssa asked me to put plum tree flowers in her pigtails, and the time Arlo fell into the toilet. I remember the babies we bathed in the kitchen sink, and how Kimmy saved Gussie’s life with the Heimlich maneuver. I remember the tears at “graduation,” when children left for preschool, and each time our broken family mended itself when new kids arrived.

When I got home, I wrote everything down in my pink notebook. Jackson’s first words, the time Lolly fell off the couch belting “Let It Go.” Each page titled with a child’s name and the moments I was afraid they wouldn’t remember.

I don’t go to day care anymore. Children don’t hide under the table, keeping me company while I do homework. Nursing a baby to sleep is no longer part of my everyday routine, and running feet don’t greet me when I return from school. But day care is infused in me. I can clean a room in five minutes, and whip up lunch for seven. I remain calm in the midst of chaos. After taming countless temper tantrums, I can work with anyone. I continue to be a storyteller.

When I look back, I remember peering down from the top of the plum tree. I see a tiny backyard with patches of dead grass. But I also see Kimmy and my seven “siblings.” I see the beginnings of lives, and a place that quietly shapes the children who run across the lawn below. The baby stares curiously up at me from the patio, bouncing in her seat. She will be walking soon, Kimmy says. As will I.

Ron Lieber has been the Your Money columnist since 2008 and has written five books, most recently “The Price You Pay for College.” More about Ron Lieber

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What Is Money Management?

Understanding money management, top money managers by assets, the bottom line.

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Money Management: Definition and Top Money Managers by Assets

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Money management refers to the processes of budgeting, saving, investing, spending, or otherwise overseeing the capital usage of an individual or group. The term can also refer more narrowly to investment management and portfolio management.

The predominant use of the phrase in financial markets is that of an investment professional making investment decisions for large pools of funds, such as mutual funds or pension plans .

Key Takeaways

• Money management broadly refers to the processes utilized to record and administer an individual’s, household’s, or organization’s finances.
• The term also refers more narrowly to investment and portfolio management.
• Financial advisors and personal finance platforms such as mobile apps are increasingly common in helping individuals manage their money better.
• Poor money management can lead to cycles of debt and financial strain.
• The biggest money managers by assets under management (AUM) are BlackRock, Vanguard, and Fidelity.

Money management is a broad term that involves and incorporates services and solutions across the entire investment industry.

Consumers have access to a wide range of resources and applications that allow them to individually manage nearly every aspect of their personal finances . As investors increase their net worth, they also often seek the services of financial advisors for professional money management. Financial advisors are typically associated with private banking and brokerage services, offering support for holistic money management plans that can involve estate planning, retirement, and more.

In the growing financial technology market, personal finance apps exist to help consumers with nearly every aspect of their finances.

Investment company money management is also a central aspect of the investment industry. Investment company money management offers individual consumers investment fund options that encompass all investable asset classes in the financial market.

Investment company money managers also support the capital management of institutional clients, with investment solutions for institutional retirement plans, endowments , foundations, and more.

Global investment managers offer retail and institutional investment management funds and services that encompass every investment asset class in the industry. Two of the most popular types of funds include actively managed funds and passively managed funds. Passively managed funds replicate specified indexes and usually charge low management fees.

The list below shows the top global money managers by assets under management (AUM) :

BlackRock Inc.

In 1988, BlackRock Inc. was launched as a $1 division of the BlackRock Group. By the end of 1993, it boasted $17 billion in AUM, and, by 2022, that number swelled to a whopping $8.6 trillion.

BlackRock’s exchange-traded fund (ETF) division, called iShares, has about $2.5 trillion in AUM globally, amounting to roughly 29% of the group’s total assets . Overall, the firm employs approximately 13,000 professionals and maintains offices in more than 30 countries around the world.

The Vanguard Group

The Vanguard Group is one of the most well-known investment management companies, catering to more than 30 million clients across 170 countries. Vanguard was founded by John C. Bogle in 1975 in Valley Forge, Pennsylvania, as a division of Wellington Management Co., where Bogle was previously chair.

Since its launch, Vanguard has grown its total assets to beyond $8 trillion, becoming the world’s second-largest asset manager thanks to the popularity of its low-cost investment funds.

Fidelity Investments

Fidelity Management & Research Co. was founded in 1946 by Edward C. Johnson II. As of Dec. 31, 2022, Fidelity had more than 40 million customers with $10.3 trillion in total assets and $3.9 trillion in AUM.

The firm offers hundreds of mutual funds, including domestic equity , foreign equity, sector -specific, fixed-income , index , money market , and asset allocation funds.

What is the difference between a money manager and an asset manager?

As implied in their respective names, money managers manage money and asset managers manage assets. However, as assets essentially represent money, the two can largely be considered the same thing.

What are the main principles of money management?

The main principles of money management are generally income, investing, savings, and spending. With the right balance, these principles can help individuals to maximize their financial well-being.

What is the goal of money management?

The ultimate goal of money management is to maximize wealth.

Money management is precisely that: the management of money. When people talk about money management, they may be referring to how an individual or company handles their finances, whether that be budgeting, saving, investing, or spending. Alternatively, they could be referring to the companies that many people count on to manage their capital.

In financial markets, the term “money management” is generally synonymous with big investment firms, or asset managers, taking people’s money and investing it. The biggest money managers in the world are BlackRock, Vanguard, and Fidelity. Among them, they oversee many of the largest, most well-known mutual funds and pension plans.

Sovereign Wealth Fund Institute. “ Rankings by Total Managed AUM .”

BlackRock. “ Introduction to BlackRock .”

iShares. “ Who We Are .”

Vanguard, via Internet Archive. “ Fast Facts About Vanguard .”

Fidelity. “ We Are Fidelity .”

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