Seriously, why do we need money?
For thousands and thousands of years, we (the human species) got along just fine without money. But we had a different kind of currency: favors. It’s incredibly difficult for a human being to survive entirely alone. Tom Hanks’ character managed it for several years in Cast Away, but the truth is that most humans in that situation would end up dead. We evolved in small tribes, as social animals who depend on each other. We share our food, and that sharing has deep meaning for us. It is deeply rooted in our instincts to remember who has helped us in the past, to guess who is likely to help us in the future, and to remember who has failed to help us when we needed them. In a tribe of 300, 500, 700 people, our brains can keep up with this information. But put us into a town of 2,000 or 4,000 and it’s simply too much information to fit into our brains.
When towns started appearing, people needed a way to keep track, to keep score, to settle arguments. Various items were used as a kind of money, including teeth and beads. When we started developing metal working skills and saw the value of what you could make with metal (such as knives, for example), we gradually shifted to a global consensus that metal itself was good for money. At first, you negotiated every purchase based on an agreed size chunk of metal, breaking off as much or as little as you needed. But people argued about whether one lump of metal was the same size as another, and scales were not easy to come by, so a few countries started measuring out lumps of metal that were all the same size, with the official seal stamped right on it, and these became the first coins.
If I wanted your help raising a barn, I could ask you to do me this favor and promise that I’d owe you a favor in return. Or I might call in a previous favor that you already owed me. But now with money I could offer you two coins, or three, and you could use those coins to extract a favor from me later, or (and here’s the amazing part) you could use the coins to extract a favor from another person altogether, someone I might have never met! Suddenly, favors had become transferable. This great feature transformed the whole idea of commerce. It was a game changer, and it seemed like a wonderful advantage. But it also had a down side.
Consider this. All these people trading coins back and forth for food or favors or whatever, now they no longer have to be nice to each other! If I want your help building a barn, I don’t have to remind you of how close we were as children. I don’t have to be friendly and cheerful, promising that the work will be fun. I don’t have to assure you that I’ll remember the favor in years to come. All I have to do is trade you some coins. I can be the biggest jerk in the whole village and I have very little incentive to cultivate friendships and use my sense of empathy, or even have one. All I need is a big bag of coins and I can get all the food I want.
In fact, if you were shrewd about it, you wouldn’t even have to work to get coins. If you have one coin and you convince someone to trade a sheep for that coin, then you find someone else and convince them to buy the same sheep for three coins, now you have two extra coins. If you hone your skills of persuasion, you could eventually accumulate so many coins that there’s no way you could possibly eat all the food that it would buy you in all the years of your life. You never have to work again and you still have money left over! So what can you do with this money? You can give it to your children. And then your children never have to work at all. Ever.
Think for a minute how crazy this sounds. Imagine someone who did a huge favor for the tribe, like they chased away a bear and the bear bit off his hand or something. Imagine we, the tribe, were so grateful that we promised this person that they can have free food for the rest of their life, with absolutely no need to ever do any more favors for us. That would have to be an amazing favor they did. Incredible. Now imagine that this person is dead and gone and we meet their child. We would naturally have some kind feelings for the child, remembering that the parent did. But it wouldn’t be nearly as much as the gratitude we felt to the parent. Can you possibly imagine the tribe deciding that the child should never have to work at all, never once be expected to do any favors for anyone, and get free food their entire lives? Now imagine that the “brave” deed which caused such gratitude was nothing more than the ability to simultaneously convince one person that a sheep is worth three coins and another person that the same sheep is only worth one coin. In other words, the child’s parent was a liar. And for this we reward the child by saying they never have to do any work. I’d call that crazy.
I can easily imagine resentment beginning to creep in. Now I see why they say the love of money is the root of all evil. But we’re just getting started here. The worst is yet to come.
As the agricultural revolution spread slowly across the globe, many tribes looked at domesticated animals as a form of wealth and used them for money. The funny thing about animals compared to beads or coins is that animals reproduce. If you have 100 sheep and I persuade you to let me borrow 40 of them for a year, at the end of that year you expect to get 42 sheep back. If they are well cared for, the herd keeps growing year after year. Then we started applying that concept to coins also. If I loan you 40 coins, I expect to get 42 coins back.
Now you don’t even need the power of persuasion to get money without doing work. If you already have money, you can loan it out at interest, over and over again. Compound interest can turn a moderate pile of coins into a huge pile of coins.
Another way to make money from nothing is to trade different kinds of money back and forth, like coins from one country traded for coins from another country. Like the sheep selling story above, this works best if you can simultaneously convince one person that the rate should be low and another person that the rate should be high. The better a liar you are, the more successful you will be as a money changer. BTW, It’s a common belief that Jesus drove the “money lenders” from the temple, but the story actually says “money changers”.
Eventually we started printing paper money, with the understanding that the paper was a promise given in lieu of the coins, which is rather odd considering that the coins themselves were only a promise for favors. Eventually we dropped that idea and started thinking of the paper itself as money, and then we shifted to things like banks accounts, checks, and credit cards, which were yet another level of abstraction away from what the money really is.
So, let’s review. For the vast majority of the time our species has been on this planet, the way it has always worked was that we lived in small tribes where individuals cooperated with each other in order to survive. If you wanted to have something to eat or a place to sleep, you either had to work for it or you had to be nice to the people around you, usually both. This method worked successfully for thousands and thousands of years. But in modern civilization, thanks to money, you can be a total jerk who treats everyone badly, never do an honest day’s work in your whole life, and still have lots to eat and a nice place to sleep, if your parents gave you money and/or you learn how to be a good liar. It remains to be seen how this recent innovation will affect our survival.