It is closest to our life, we use it daily, we die for it, we live for it, we hoard it, it is our "precious". We all know having money is a great thing as it buys you life's pleasures and it gives you power - purchasing power. Yet, most of us do not know what is money, how it is created, who controls its creation and destruction, and how money is distributed. We, as a society, are indeed blinded by money.

Ask 9 person what is money and you get 10 different answers. Textbook talk about money being durable, a store of value, unit of account are just characteristics of one aspect of money. It doesn't tell us what is the core nature of money. Every child knows something is wrong with modern money, try explaining to a child why his piggy bank money buys less and less things every year. The more you explain the more confuse you becomes.

After many books and studying economics at university you still feel that you do not know what is money. M1, M2, velocity of money, complex curves and equations just served to further confuse our fundamental understanding of money.

Because people do not know what is money, when new forms of money such as cryptocurrency comes into the market, people try to discuss and measure it against their own understanding of money. Everyone is using their broken ruler to measure the value of something. In order to have proper discussion and evaluation of this new form of money, we need to first understand - what is money?

Let's jump into it. This is my understanding after unlearning what I have previously learnt.

Money is a socially constructed and accepted system to represent value and to exchange value. The system consist of an agreed unit of account and a trusted and enforceable record book, it may also include a physical representations of the agreed unit of account.

To make understanding simple, let's break them down.

1. Socially constructed and accepted system.
Imagine you are a shopkeeper in a small town with regular customers. Some customers buy your goods but they will pay later in the month. You create a record book where you record what they owe you, and customers sign on it as evidence of agreement. This simple act of recording what your customer owes you is basically creating money. It is a social construct between you and your customer as it records an exchange of value. The social aspect is important, as the record book only has value within the community. Bring this record book to a town faraway and it loses its value.

Whatever money system created has to be agreed to be used by a community. You cannot use US dollars in another country even though US dollar is the reigning global reserve currency. The community decides what is money. Money that is not accepted by that community is not money in that community.

2. Trusted record book.
The shopkeeper accounting book records the value of goods that your customers need to pay you back in time. As he is the only shopkeeper in town, everyone trust his records. That record book of who owes who how much is, in essence, money. The paper and ink in the records is worth a thousand times the value of the paper and ink. This shopkeeper has captured value in paper and ink and can sell this value to the next shopkeeper. If the record book is burnt, the recorded value is lost as well.

The community will trust the most reliable, wealthy shopkeeper in town. Historically, that shop happens to be the goldsmith where he keeps your gold bars safe as well.

3. Enforceable record book.

If someone doesn't pay according to the shopkeeper records, the local town ruffians is going to come after him. The record book value comes from it being enforceable. So record books must be enforceable and you need force to enforce. Two shopkeeper books, one shop is partly owned by the town mayor. Who do you think the town mayor is going to go after if both shopkeeper's customers default? The bigger the value of your record book, the bigger the guns needed to support it.

It is no coincident that the global reserve currency is always backed by the largest military, since the times of Portugal, Spain and Britain. USA is not the first and will not be the last country to own both the global reserve and the largest military.

Gold used to be a form of non-record book physical money that is not backed by force. Today, gold's value stands at less than 4% of total money supply found in record books. Gold's practical role as money has long since been threatened by the shopkeepers and their ruffians.

4. Agreed unit of account.

Never believe the textbook barter trade economic theory. Imagine that a community does not have an agreed unit of account and does barter trade. The prices listed in the market place are as follows: 3 coconuts trade for 5 fishes, and 4 fishes trade for 7 eggs, 11 eggs trade for 4 kilogram of rice, and 19 kilogram of rice trades for 1 chicken. The question is: how many coconuts can be exchanged for 1 chicken? Try to answer this question in 5 minutes without using calculator and without using a paper and pen.

How many ancient people do you think can solve this question. After 1 day of market trading, everyone goes crazy with the mathematics and the merchant with the smallest, most useful and easiest to split unit (i.e. rice) will suggest to price everything in rice. It is still barter trade, but very quickly, everything in the market will be priced in rice and rice will quickly become the agreed unit of account.

Human minds are good at find shortcuts, efficient routes. Bartering is too mentally taxing and complicated for the ancient human mind.

5. Physical representation of agreed unit of account.
The nature of money is so nebulous. People in the know sees money as a record book. People not in the know sees money as notes, gold or other physical representation. No one has seen money before, just like no one has seen a metre or a kilogram before. You can feel the weight of a kilogram but you cannot see a kilogram. You know what a dollar can buy and how a dollar note looks like, but these are just physical representation of the dollar. Just like words, the meaning of words is what the society give it. All the ink on this article has totally no meaning in a Chinese society. Similarly, a North Korean Won has no value in other societies, although people in North Korean can die for their Won.

Society needs a physical representation for money, similar to a metre-rule for length, for people to hold on to the otherwise very difficult concept of money. However, unlike a metre-rule, it is impossible to create a physical object that has a constant economic value. Historically, attempts at this physical representation of unit of account include items that are rare including gold, silver, seashells.

A key concept of this physical representation is that it must be suitable for that community. It is usually misunderstood that gold/silver must be the universally the best option. In a Pacific island community with no gold mines, the community will never use gold as the unit of account. Similarly, if human race is to colonize planet Mars and there is no gold on Mars, another better physical representation that is rare for Mars' geographic and mineral reserves may appear. In many Hollywood movies, e.g. Waterworld, the story is set in a world where drinking water is the physical representation of money. This is entirely possible.

In modern society, the physical representation of the unit of account are mostly physical notes and coins. On the surface, they are just worthless pieces of paper. However, their value comes from the law. The law (with the blessing and agreement of the society) says that these notes have value and one must accept these notes as value or else face the penalties of the law. The money creators have long understood the basics of money. As long as you are able to force a society to accept it, anything can be money, including cow dung.

6. How to get the community to use fiat money.
The community is smart and always want to use a physical representation of unit of account that has the best characteristics among the available alternatives, that is, if they have the choice. Only through a treat of force can a King gets his people to use his coins in ancient times. In modern times, similar money system is forced upon most communities by law (a polite word for force). This is called the fiat system, in which the government forces its people to accept its printed pieces of paper as representation of value.

It is not uncommon to find communities that reject mismanaged fiat currency that their government imposes on them. In such communities, alternative black market money systems are used to resolve their value exchange problems. In our history of fiat money creation, more than 590 fiat currencies have failed. Yet people have no alternative to the money system.

7. Master record book.

After a while, this shopkeeper does not want to take the risk of his book being lost or the customer not repaying him. So he goes to a special kind of shopkeeper whose main job is to ensure the book's safety and in collecting outstanding value from customer. This shopkeeper becomes a middleman of value, lending value to people in need and helping all shopkeepers maintain their accounting books. In no time, this special shopkeeper of value has a master record book that contains the books of every shopkeeper and everyone in town.

Controlling the "value" book records of everyone gives the master shopkeeper great powers, as he realised that he can, with a stroke on pen, create value, lend value and extract value from everyone, without having to sell any goods. Those who did not repay value according to what the shopkeeper's master record book, has their property confiscated or goes to jail.

8. One book to rule them all.

The ability to create value with a stroke of pen (or in short, the modern money system) is so powerful that all the richest and most powerful fought to have control over it. After a while, no one cares about gold anymore as the value it represent was so small, gold is totally powerless in the face of the pen ink on the record books. It was so settled that both the bankers and sovereign governments will have shared control of this money system. With governments giving license to the banks and in return, the banks have to support the governments through lending to the governments, and to support their directions on who to open their record book system to. This money system, co-owned and co-managed by government and banks, is the most powerful control tool ever to have conceived by the human mind to control everyone and everything on earth.

It is not uncommon news to heard of someone's bank account being frozen, or some countries being financially sanctioned. It doesn't matter if you have billions of dollars in the record books, it is technically just a record book entry. It amounts to nothing as this record can be totally switched off tomorrow. The global shopkeeper can refuse to do business with you, or remove your records from his book. The act of refusing to accept your records has been used over and over again in sanctions against selective countries, communities, business, and persons.

https://imgsafe.org/image/49cb934c13

Conclusion

The global community is now slowly waking up to the true nature of the money system, and opening up one by one to a money system alternative that has eluded the community for all of human history - in the form of cryptocurrencies.

A treasure chest from the 1800s.
If you find a treasure chest left by your great-great-great grandfather from the 1800s in your old house storage. In the chest, a letter wrote, "dear descendents, this box of money represents my life savings for the next generation." What kind of money would you like it see inside? Legal tender notes from his time, his old bank account records or gold pieces? (Note: My grandparents indeed left us some Straits Settlement notes that are from the British empire pre-world war II.)

A treasure chest for 2100s.
If you want to put some money in a treasure chest for your great-great-great-grand descendents, to be opened in the year 2100. What kind of money will you put inside today?