Although I have a degree in economics, money, in the technical sense, had always baffled me - until I started to think about money as promises (just like it says on the banknotes). This metaphor - or reality - has made the whole subject, from the simplicity of notes & coins to the complexities of derivatives & other instruments, seem much more comprehensible
Consider a simple barter between two neighbours with gardens: I'll swap you some of my potatoes for some of your sprouts. Deal done. Consider a slightly more complicated deal: I'll give you some of my potatoes now if you'll give me some of your strawberries next summer. Deal done, but what if the summer is exceptionally wet & you don't have any strawberries to give me? If we can agree an alternative way of rewarding me for my gift of potatoes there is no problem; if we can't agree we may need recourse to a good legal system with judges who can rule on how to share out the risk of such a deal, according to rules which have developed in our society over time. Perhaps the risk was all mine because I should have realised that my neighbour was at the whim of the elements & there could not be a 100% guarantee that I would get strawberries when I gave him the potatoes
Such bartering, while good for community relations, is of course a very inefficient way to run an economy & does not give room for much growth & development. The amount of time needed to search out people who have things that I want & who also want the goods or services which I have to offer cannot also be spent producing those goods & services. The setting up of chains of barter may not be possible with perishable goods such as vegetables - there is only a short time in which I can swap my neighbours sprouts for another neighbours carrots while they are still fresh. Alternative ways, used in some of the schemes for local 'currencies' which were popular a few years ago, need complex systems to record the interlocking swaps of potatoes for baby sitting for fixing my leaky taps. How much better to have a simple system of tokens which are recognised everywhere to account for all these interlocking promises or services rendered without the need for such complicated recording or for direct face to face negotiation, limited as that is by the need for proximity in time & space. Thus we have money in the form of cash
But the very anonymity of cash, its bulk, the need for a secure place in which to store it & the need to check & count it at every stage mean that there are real advantages in other ways of recording all these interlocking promises & obligations (again without having to record the details of each promise or undertaking) such as marks on paper or electronic symbols on computer chips, & then to bundling & unbundling groups of promises of various kinds into tradeable instruments such as derivatives
All these tokens, marks & recordings remain however recordings of promises - of my entitlement to some of your strawberries next summer - & so they can, distressingly easily, just evaporate; they have not gone anywhere, nobody has stolen or appropriated them; we just had a wet summer & a whole complex web of interlocking promises collapsed for want of a pound of strawberries
This leads me on to the point about connections, & to a partial explanation of why, or how, some people are able to accumulate more money than others. The more connections I have, the more people in the neighbourhood I know, the more I can organise swaps of potatoes for other useful goods & services, the more we can divide our labour, the more opportunities I will hear about. The more connections I have or can make to people who are themselves well connected, the more opportunities I in turn shall have. And so - it is after all a simple point - wealth & status depend upon my ability to make connections. But how do I do this, & how or why are some people so much better at it than others?
The story of human progress - history - is the story of the development of more & more means of communicating - connecting - at a distance, a distance through both space & time. With speech as the sole means of communication we have to be within hearing distance & my words instantly float away on the air. With writing I can send letters over long distances & they may survive to be read by others far into the future. And so it goes on until we reach the age of the internet
But communication at a distance means communicating with people I do not know, have not been able to learn whether to judge or trust. And so we need to develop parallel systems of establishing trust. Those token coins, identified by the head of the king, himself very well-connected, eventually allow me to swap my potatoes for cinnamon bark from Ceylon, albeit with maybe a complicated chaining method along the way - exchange rates. To begin with, for extra reassurance, the tokens are made of something which human psychology seems to invest with intrinsic value, something which glisters like gold; the idea of real value must be illusory, for gold provides neither shelter or nourishment; only the promise of further exchange has worth
Currency is not enough however, I need other guaranteed standards, of weight or measure or of quality. Even the straightness of cucumbers. If I go to the local street market it is easy to judge whether the cucumbers look like a good buy, but what if I am the Tesco cucumber buyer, making a deal for 1m cucumbers from Spain, sight unseen?
