Money Is A Technological Fiction (The Invention of $$$)

Hey smart people, Joe here. How much money to do you have? Don’t worry, this isn’t a patreon thing…
(but we’re on Patreon now) Anyway, seriously…count your gold. …or your silver, or your Benjamins, or maybe
even your rai stones if we have any fans from the Pacific island of Yap. How much ya got? There’s a lot of ways to store your moolah,
from the mattress to mutual funds, gold bars or Venmo, but I’m willing to bet good money
that your money is just, like, numbers in some computer database. And I recently found myself wondering: who
says those bits and bytes are worth real money? I mean, the Amazons and Walmarts of the world
are perfectly happy when you tell your computer to tell the stores’ computers to tell MasterCard’s
computers to move that so-called “money” around for you. But how did we get from hoarding and exchanging
gold to a world of 0’s and 1’s being shoved around by algorithms? The truth is that money has always been sort
of imaginary—from people agreeing to agree that two lumps of silver are definitely worth
a goat, or some scribbling totally means you’re rich to today’s crypto cyberstacks. And at every step along the way, from clay
tablets to Bitcoin, it turns out that these shared delusions of value didn’t just come
from social and political forces. It was technology that made money possible. [OPEN] Say I’m a Mesopotamian farmer. My wheat crop is kinda wimpy this year, so
my neighbor Inkishush helps me out. He needs some wool, and I owe him a favor,
so I send some over. Everyone’s happy. But that didn’t involve any money. Just the exchange of gifts, or maybe barter. Easy! But say his crop comes a few months before
my sheep get fluffy enough. Tracking who owes you over time is hard! And it’s even harder if Inkishush insists
my wool has to be just as nice as his wheat or he’ll club me. If only there were some technology that could
help you record who owes who what… The earliest forms of writing were all about
accounting. At first, people recorded actual wheat and
wool or whatever, but eventually people started recording all their debts in standardized
units of account. The way we have standard units like meters
or degrees, early accounting used units like cowry shells or shekels of grain. Writing debts down in standard units serves
one of the main functions of money: it lets you store value, or save up favors to cash
in later. And when you do want to cash in, money gives
you a medium of exchange— a convenient way of swapping what you have for something you
want. Just record some new numbers in your ledgers,
and as long as everyone trusts what’s written, now you both agree on a new amount of imaginary
value that each owes the other. Boom! That’s money. And it’s actually why writing was invented! I want to pause to stress how mind-blowing
this is: money literally is accounting! It’s just a way to agree on how much value
someone has stored up and how to exchange it later for actual stuff. Yes, I just called accounting “mind blowing”. Finally, you accountants out there get to
claim some cool points. But when we think of early money, we tend
to think of commodity money—physical objects that are useful, like rice grains, or pretty,
like gold coins. It lets you store value by… literally storing it, and then exchange it
by, well, exchanging the actual physical objects. But using commodity money means you have to
make commodity money, which is solved by production technologies–like smelting. But it also creates a more subtle technological
problem: trust. If your trading partner gives you a payment
object—like, a coin—how can you be sure that it is what they say it is? Sure, it looks shiny, but how do you know
Inkishush or Erasmus or Giovanni didn’t dilute the metal? To solve that problem, people invented touchstones:
chunks of rock on which you’d scrape both real gold and the coin you were offered. The streaks would be different if the coin
was impure. A better solution was minted coins. A government could guarantee a coin’s purity
by stamping their official seal on a lump of metal. And milled or reeded edges—those little
ridges you see on coins? They could prevent anyone from secretly shaving
off some extra gold for themselves. These technologies let people trust money
enough to trade it. But commodity money has a problem: Get too
much, and it’s a pain to carry around. So people started storing their big piles
of heavy metal in temples and banks, which gave them paper receipts that they could cash
in later. It was a form of representative money—written
notes with no intrinsic value promising that whoever held one could exchange it later for
the stuff with actual value. And as far back as 12th century China, some
governments decided they could just declare certain pieces of paper were worth something,
even without shiny, valuable objects in a vault somewhere to back them up. You couldn’t trade them in for gold, but
neither could your neighbor, so everyone just agreed to pretend. It became way more practical to carry these
notes around instead of clay tablets or all that heavy metal, all thanks to technologies
for writing, printing, and making paper. So that’s how old-school technologies made
old-school money possible. But in the 1800’s, new technologies started
to dramatically change how money was stored and exchanged, starting with the telegraph. In 1872, Western Union set up a system where
customers could “wire” money to other offices across the U.S. Your grandma could give money to one office
and that office would send a specially coded message to a district clearing house, which
would verify the money had been handed over, then send a second coded telegram to the receiving
office telling them it was ok to give you your birthday cash. For the first time, money could move faster
than people! Just five years later, more than 38,000 wire
transfers were moving nearly $2.5 million around the country each year. Fast forward to the 1960s and people were
doing way more buying, particularly with these newfangled credit card things, which quickly
tell a merchant who to call to collect your money later. But every time a store needed to check a customer’s
credit card, they had to call on the phone and someone had to manually check paper records. Fortunately, electronic computers were just
becoming a thing. Ledgers could now be read by machines, so
when someone called, banks could now let the computers authorize card payments. And those magnetic strips let the merchant’s
machine automatically call the credit company’s machine, taking more humans out of the process. Fewer people, fewer errors, and faster than
ever. But remember that money is about storing value
too. During the 60’s, banks started installing
other electronic computers that replaced punch cards with magnetic disks or tapes that could
hold tens of megabytes! Which is only a fraction of this video file…
it was a different time. Since the 70’s, computerized financial data
has just kept growing. In 2018 alone, payment networks processed
nearly 370 billion transactions. Instead of finicky phone calls between glorified
calculators, digital networks now whisk transactions to huge farms of mainframe computers that
handle each one in a fraction of a second, essentially 100% of the time. Mainframes are the behemoths of the computer
world. Super-fast input and output, obscene amounts
of disk space, and all sorts of extra machinery for extreme reliability and security. Can’t play Fortnite on ‘em, but they do
have special error-correcting memory chips that can even catch if a random cosmic ray
switches a 0 to a 1 on some chip and changes your $24 into $1048. On top of that, sophisticated machine learning
programs take just milliseconds to compare my purchase against my past behavior and millions
of other people’s, and make sure this purchase was really made by me, and not some Nigerian
prince buying toy ponies with my stolen card number. Because I would never do that. This technology all works so well, we hardly
even think about it anymore. And right about now I know what you’re thinking…
is he gonna talk about cryptocurrencies like Bitcoin because they’re like, the future
of money or something? There’s a lot of videos about the ins and
outs of cryptocurrencies, but one thing that makes them unique is that instead of one ledger
of imaginary money kept by one person or multi-billion-dollar company in one place, everyone using the currency
cooperates to keep one giant ledger of imaginary money that lives somewhere in the cloooouds… But where traditional forms of money work
by everyone trusting everyone else, cryptocurrencies kind of work by no one trusting anyone else? Everyone keeps a copy of tThe ledger of who
has what, and only updates it is only updated after a bunch of computers have competed to
solve really hard math puzzles designed to make sure prove they haven’tno one has messed
around with the records. It’s a new money technology without a middleman,
which has some advantages for… certain things… and also if you don’t trust your government,
but at its heart it’s still aboutit basically serves all the classical functions of money:
storing and exchanging imaginary value via the magic of accounting. Of course, the role of technology is not all
rainbows and ponies. All this “progress” has made it much easier
for someone to do real damage to your imaginary money by hacking into stores’ treasure troves
of credit card numbers and stealing them. On the whole, though, we can safely say technology
is why money exists. Technology and invention, not just psychology
or economic theories, have continuously made our use of money faster, more convenient,
and more trustworthy—, even if it is all completely made up. Stay Curious.

54 thoughts on “Money Is A Technological Fiction (The Invention of $$$)

  1. The history of money isn't just a history of economics. It's a history of technology. Doing a history of technology video was a lot of fun. Let me know what you think!

  2. John Searle has a book called "The Construction of Social Reality" that talks about the kinds of things that are "true" only because humans agree that they are true. Money is one of them. Also laws, governments, sports rules, units of measurement, and more.

  3. <Insert comment about Bitcoin here>
    Also, learn the difference between money and currency. See the excellent "Hidden Secrets of Money" series here on YouTube for a more detailed explanation.

  4. So, if you don't trust your government you must be depicted as someone wearing a foil hat?

    Did I get it right?

  5. Money is a form of credit. It has value as credit, but has no intrinsic value like the goods and services that you buy with money. Goods and services are real value and the production of goods and services is what determines the wealth of a nation, not money. Money is a tool for making an economy function better. It has no value outside of an economy.

  6. Why say that cryptocurrency can be used for illegal transactions, when literally all form of money mentioned here can be used illegally, you can pay for a crime even with wheat… It has as much sense as if you say that you can hit-and-run with electric car…

  7. Not mentioned: loan interest, debt as an asset, and inflation. Those are hugely important/horrific for our current situation, even if it's a bit off topic.

  8. The ledger of cryptocurrencies isn’t “somewhere in the clouds,” it’s stored on every computer that runs a node in the network.

  9. Governments did not invent paper money because it was "convenient." Paper money removed a check on their power. They could not conjure gold out of nothing. But they could print unlimited paper. This has made money less trustworthy, not more. The Federal Reserve constantly redistributes the wealth of the American people to bankers and politicians.

  10. That’s why I believe that if an apocalyptic world was to ever come, money would be seen the same as it is now. People would still decide it is of value and trade it for goods in the zombie apocalypse. The Mad Max world. People wouldn’t one day just say it’s worthless. At one point in the past we of course had gold behind it but that proves my point. We, long ago, decided a stupid rock was of value. Of course because it was more rare. But in an apocalypse so would printed cash be rare. Actually more rare than you obtaining real gold. So it would be valuable and since the world already got used to that I think they would continue to use it. One could argue that water and food would be the currency of the apocalypse but isn’t that how it is today anyways? We don’t care about the money itself we just care about what it can get us for survival. A note saying we are worth this many good etc. any thoughts?

  11. You just skipped through a major phase in past "economics", didn't you?
    (I just know how we call it in portuguese, but I'll try a free translation, the "reciprocity-friendship pacts phase". We didn't need to know exactly how "good the wool was" because of cultural rules of respect and reciprocity. If you didn't help your neighbour today, he wouldn't help you in the future, simple.)

    Plus, the story of how we come to accept gold/metals as currency is WAAAAAY more complicated. Ties with religiosity and oppressive kings, and salt and whatnot. It wasn't, by far, just a "wow this is great" moment.

    Plus the origins of writing are also contestable. First inscriptions ever found were sets of rules being imposed by a ruler/king. It might also might have been first invented by kings and generals trying to convey orders at a distance via code (like army movement orders), and later used to express written laws. And THEN , accounting. (I wager numbers came after letters, and you?)

  12. Blockchain tech actually is WORSE for illegal activities, since records are always kept of EVERY transaction.
    Plus, no govt money ever stopped "illegal" activities with their stamped pumped up money.

    Shame on you, IOTBS…
    (Yes, faulty video overall, you can check my order comment for other problems)

  13. It's not completely made up. Money is a representation of some of our needs and wants, and what we're willing to do to get those satisfied. Messing with the system like if it were made up gets you to a situation like in Argentina or Zimbabwe.

  14. and the super rich have money but keep gold why because if anything happens like a EMP form the sun or nukes they and only them stay rich nice hay kind of funny how everything always works out for them but not you and me .

  15. Money is a business innovation, not a technological. And the (anarchical/conspiracy style) title is fit for the "it’s ok to be dumb" channel

  16. Saying that cryptocurrencies are for crackpots and junkies is amusing, but perpetuating a frustratingly ignorant stereotype.

  17. Joe: How money do you have?
    Me: uhh 69 cents, Ah you know what that means, I don’t have enough money for chicken nuggets :(((

  18. The association of cryptocurrency and its usage for purchasing illegal goods on the black market traces back to the infamous Silk Road. The story of the Silk Road has been reported on so frequently it's easy to see why the association became so crystallized in the public mind. However, if one looks at the history of confirmed Bitcoin transactions per day, they would note an, almost, imperceptible drop in the number of transactions after the Silk Road was shutdown. In fact, only a few months after the Silk Road was shut down, the number of confirmed transactions per day hit a new all time high and has, on average, continued to increase up until the present day.

  19. You shared a really important inaccuracy relating the formation of money to barter. This is actually inaccurate and has been discredited by the field of economic anthropology for about 100 years. Barter is a by-product of the abrupt collapse of a monetary system but has basically nothing to do with long-standing ancient or prehistoric economies. (See the book “Debt” by David Graeber)

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