Money as an abstract concept is not an overly foreign idea to me. Taken out of any societal context, exchanging fairly worthless metals or paper for immediate and real goods and services doesn’t make much sense. However, it’s also quite easy to understand how money works in the present day. Money is the ability to purchase something, a sort of short-form contract where everyone agrees that a unit of currency is worth something, though exactly how much that unit of currency is worth greatly varies. Since everyone follows this model, it’s easy to see how money works, at least on a micro level.
What fascinates me more is how money gained its value in the first place. How does a bartering society, one that exchanged real goods and services, go to exchanging these same goods and services for intrinsically worthless baubles?
My hypothesis is that any currency started out as something only the upper class in society had. For example, with the Yap Islanders, after the fei was discovered or popularized by explorers, it could only be acquired by those with the means to put together and crew ships. The fei also had to be scarce enough that not everyone who wanted the pretty rocks could have them, so it could become a status symbol. This symbol was then given to those that had done them some sort of service, and eventually became recognized as currency in that fashion. It not only represented the upper class in society, but was also a measure of skill and expertise – a bad smith, for example, wouldn’t have as many customers as a good one, and consequently less money. They could then exchange money for what they wanted, and the cycle continued. Eventually this evolved into the complex system a multitude of countries employ today, where the value of money is no longer tied to the upper class giving it meaning, but rather a government. In present society, even if the upper class moved to declare a currency worthless, as long as the government still considered it an official currency, it would remain so. It now functions as a contract, one that cannot be broken without the government setting an appropriate penalty.
The most striking thing about the Yap economy is not that they use massive stone discs are money, but that their ownership system doesn’t have any safeguards. In America, we have banks that secure and track money, government agencies that regulate the banks to make sure everyone is being treated fairly, and public media to spread the word when a bank does something unsavory; in Yap, the only way to identify who possess which stone disc is by shared belief and word of mouth. There are dozens of ways this could be exploited, so I am quite surprised that they’ve somehow kept to this idealistic form of ownership.
On the other hand, it is clear that sometimes the government has no idea how to manage its own money either. This is brilliantly illustrated in Brazil’s economic woes starting in the 1950s, where they printed money without caring to think about how it would affect inflation. To be fair, I also don’t have a secure grasp on how inflation works, but I’m also not employed by the government as an economist. Equally sad is how each new plan of fixing it seemed to make the problem worse. Locking the prices when money was quickly becoming worth less and less had the obvious effect of convincing people to not sell anything, and I’m amazed the idea of confiscating everyone’s money only ended in an impeachment, as opposed to a revolt and subsequent assassination. Even the URV is a a strange idea; it seems to work only because people failed to realize that the cruzeiro itself was still fluctuating.