What Is Money? (Yes, We're Talking About Bitcoin)

Authored by Charles Hugh Smith via OfTwoMinds blog,

Good ideas don't require force. That describes the Internet, mobile telephony and cryptocurrencies.

What is money? We all assume we know, because money is a commonplace feature of everyday life. Money is what we earn and exchange for goods and services. Everyone thinks the money they’re familiar with is the only possible system of money—until they run across an entirely different system of money.

Then they realize money is a social construct, a confluence of social consensus and political force-- what we agree to use as money, and what our government mandates we use as money under threat of punishment.

We assume that our monetary system is much like a Law of Nature: since it’s ubiquitous, it must be the only possible system.

But there are no financial Laws of Nature for money. In the past, notched sticks served as money. In other non-Western cultures, giant stone disks (rai, a traditional form of money on the island of Yap) and even salt served as money.

In our experience, 1) money is issued by a government or central bank (i.e. a currency), and each of these currencies is the sole form of legal money (legal tender) in the nation-state that issues the currency; 2) each of these currencies is available in physical coins and paper bills and digitally as entries in bank and credit card accounts; 3) our currency is borrowed into existence by the central bank or by fractional reserve lending in private banks, and 4) this currency meets all of the utility traditionally required of money:

1. It is divisible into smaller units, i.e. a dollar is divided into quarters, dimes, nickels and pennies, or it is a small unit (for example, the Japanese yen, which is roughly equivalent to a U.S. penny).

2. It is secure, i.e. everyone can’t just print or make their own in unlimited quantities.

3. It is fungible, meaning all the units are interchangeable.

4. It is easily transportable.

5. It has a market value that’s easily discoverable, so buyers and sellers can confidently exchange it for goods and services.

But history informs us that money doesn’t have to be issued by governments, nor does it have to be borrowed into existence by banks, nor does every form of money have to satisfy all five requirements; it’s possible to have multiple forms of money which each serve different purposes.

In other words, our system of money is merely one of many possible systems of money. With the advent of digital cryptocurrencies, the range of monetary systems has expanded greatly.

We tend to look at money as value-neutral and apolitical, but as a social construct, it reflects specific social and political values. As I’ve explained in previous posts, our money is created and distributed at the very top of the wealth-power pyramid.

This feature of our money optimizes the accumulation of wealth and power in the top of the pyramid, and thus our social contract of money guarantees the concentration of wealth and thus rising wealth-power inequality.

To understand why, we need to start with money’s three basic functions.

As a general rule, money is:

1. A store of value (i.e. it serves as a reliable repository of wealth);

2. As means of exchange between buyers and sellers;

3. A tool for recording transactions of credit/debt (i.e. it facilitates recording transactions and keeping track of credits, debts, assets and payments).

Modern-day government-issued currencies perform all three roles. The U.S. dollar, for example, acts as a store of purchasing power, a global means of exchange, and as a tool to keep track of transactions, debts and financial assets.

But in other social constructs, different kinds of money perform different functions. The giant stone disks on Yap (rai) are a store of value, and a means of exchange for high-value items.

But the recording of transactions involving the rai is done in an oral-history ledger: the transfer of ownership of a particular rai is recorded in the community memory, and so the heavy 2-meter-high stone doesn’t have to actually move in physical space to transfer ownership. As a result, a stone rai resting at the bottom of the lagoon is a perfectly functional store of value and means of exchange.

The rai are quarried on another island, and not easily counterfeited. They are not necessarily interchangeable; the value of each one is recorded in the oral record. But since a rai isn’t divisible, or easily transportable, another form of money is used for day-to-day transactions.

The point here is there is no intrinsic reason why the three primary functions of money have to be satisfied by one single currency.

Nor is there any intrinsic reason why one form of money has to be equally tradable for all goods and services. In some cultures, certain forms of money hold symbolic value and are used solely for transactions of symbolic import, for example, as a wedding dowry.

We assume money has been stripped clean of symbolic or moral value, that it has no connection to anything but its current market value. Yet once again, there is no intrinsic reason why money must be stripped of symbolic or moral value. That our money has no symbolic or moral value is entirely a result of our specific social construct.

In cultures with forms of money that aren’t issued by a government, social consensus defines what serves as money and what functions it fulfills.

Which Brings us to Bitcoin

Bitcoin's limitations are well-known: the blockchain/mining consumes vast quantities of electricity, and bitcoin can't be scaled to replace all the credit card transactions in the world. But as noted above, every type of money does not need to perform all the functions of money.

Thus some commentators anticipate bitcoin being used for large, infrequent transfers rather than the purchase of consumer goods and services. Other cryptocurrencies may arise to fill that role.

I recently paid translators in South America with bitcoin. The transaction fee was about $4.50. Clearly, bitcoin functions as a means of exchange.

I made a few dollars of profit using bitcoin for transactions like this last year and I paid income taxes on those modest gains. Clearly, bitcoin is a legal financial instrument that the federal government accepts as the source of taxable capital gains.

For those who don't know the situation in Venezuela, its government has destroyed the value of the nation's currency, the bolivar, which traded at roughly 10 to 1 US dollar as recently as late 2012, when bitcoin was roughly $10.

The black market exchange is now over 98,000 bolivars to the US dollar, and one bitcoin is now worth over 1 billion bolivars. Clearly, bitcoin has acted as a store of value. The resident of Venezuela who traded 100 bolivars for $10 and traded the $10 for one bitcoin how has 1 billion bolivars or $13,000 US dollars.

Clearly, bitcoin is a means of exchange, a legal form of capital that accrues taxable capital gains and it's a store of value. So by the conventional definition of money, bitcoin is money. It's our right to think it a nonsensical form of money, just as it's our right to mock the stone rai, and deride the packages of ramen noodles that serve as money in prisons. But our mockery doesn't change the functionality of these forms of money.

No doubt the conventional wisdom in Venezuela dismissed the functionality of bitcoin in late 2012, just as the conventional wisdom continues to dismiss bitcoin's functionality as money. So who was right, and who was wrong? The believer in the status quo who held onto his 100 bolivars as a means of exchange and store of value , or the independent who traded bolivars for bitcoin?

Good ideas don't require force. That describes the Internet, mobile telephony and cryptocurrencies.

Bad ideas require force: that describes the Venezuelan government's management of its currency, and the central bank/central state form of money that dominates the global economy.

*  *  *

This essay was drawn from my new book, Money and Work Unchained, which I'm offering to my readers at a 25% discount ($7.45 for the Kindle ebook and $15 for the print edition) through Saturday, December 9, after which the price goes up to retail ($9.95 and $20).

Read the first section for free in PDF format.

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.


Killtruck BaBaBouy Thu, 12/07/2017 - 13:20 Permalink

BTC is global, just like gold. Both are global good ideas, and the people of the world trapped in their fiat shit paper games are all looking for a way out. Some say that gold isn't controlled. It's been at $1275 for six fucking years, with nary a blip. Yet I can't change the inputs on my spreadsheet fast enough to keep up with BTC. So you tell me. 

In reply to by BaBaBouy

MonetaryApostate Killtruck Thu, 12/07/2017 - 13:44 Permalink

BitCoin is a digital monetary destroying blackbhole, plain & simple, & anyone who thinks trading fake fiat cash for fake fiat digital nothing really does not understand digital means loss of freedom, control, & anonymous transactions.Digital Totalitarianism is what Cryptos Represent, hence the legers & volatility, just imagine 200 banks with 500 employees buying, selling, & trading in Cryptos, & then maybe you'll suddenly get it.Everything will change once everyone realizes they have been printing & loaning hundreds of quadrillions to steal everything...Fake money, fake debt, fake value, fake news, fake investments, fake markets, fake history, fake everything!  https://plus.google.com/collection/QorNbB

In reply to by Killtruck

Killtruck Killtruck Thu, 12/07/2017 - 13:27 Permalink

Downvote all you want, fuckers. You know it's true. People want a way out, they want a deflationary ANYTHING at this point, to get SOME return on their money. Historically gold would do that, but it's totally controlled (in my opinion, but Steve St. Angelo says it's all just some randomness).BTC has 7 billion opportunites to grow, and governments are too slow and stupid at this point to have much impact on it at all. Even if the TPP blows a wad and buys all of the available BTC's, they could suppress the price temporarily, but people would just buy the dip and push the price higher. At this point, they just have to watch. Because you can't settle this trade with shitty printed imaginary dollars...you need imaginary numbers instead. :)

In reply to by Killtruck

taketheredpill Killtruck Thu, 12/07/2017 - 13:46 Permalink

Except:1. You need a way to get $$ into BTC.  US Gov can shutter any US exchanges.  And so will other (major) countries.  So you will end up trying to get US$ to an exchange run out of a factory in Hungary or god knows where, and the US Govt will be trying to stop you every step of the way.2. US Govt can simmply force ALL US corporations to not transact in BTC.  Likewise other major Governments.3. What about 51%?  Can US government bring it's computing power (and a few corporate voulnteers) to bear, break 51% of total hash rate and walk back (hoover) BTC outstanding.4. US Gov will allow banks to fuck over BTC investors via CME futures.  Banks will be glad to do it since they get access (finally) to trading vol, and they don't necessarily like BTC since future Crypto currency / smart contracts may cut into their lines of business.

In reply to by Killtruck

Killtruck taketheredpill Thu, 12/07/2017 - 14:21 Permalink

 I am more than willing to be corrected on the following, as I am but a poor backwoods country bumkin. 1.) True. I wish them luck. It's not like there aren't plenty of countries lining up to give the USGOV a giant middle finger, especially financially. I can think of one...what's that one...R-something...RubbaLubbaDubDub!...no, that's not it. 2.) How would that be any different than whenever BTC was first starting out, and no major corporations accepted it? It still worked, and it still survived, and it still grew, because some segment of the population still assigned it value.3.) That may technically be possible. But if you're going to do that, you need 51% of the total BTC to become available. The sheer number of HODL'rs and BTC's locked away in cold wallets - especailly given the meteoric rise recently...I can't think that it's likely. Also, you have to consider that cryptos are the hydra - there's over 1000 of them. Shut one down completely, okay. Then LTC starts growing. Or ETH. Or Dogecoin. Or IOTA. You think a 55 year old gov't employee is going to be able to move fast enough to keep up with the kids these days? It would be like trying to play whack-a-mole in hyperspeed. You couldn't kill them fast enough. What are you going to do, shut down the internet? Shut down computers? Disconnect cell towers? Please. 4.) How are these CME contracts being settled, exactly? In BTC? Because unless these banks have a huge tranche of BTC's sitting around, they have to settle in dollars. And I don't know if you've been paying attention lately, but it seems like people are trying to trade their dollars for BTC's. So the only people that would be getting fucked in that scheme are the speculators and funds that want to play around trading dollars v. BTC. You won't find many hardliners making that trade, only the weekend warriors. The hardliners are the true believers, and I doubt they'll give up BTC's for a handful of paper, because the whole reason most of them got into it early was because they saw the scam from the start, and BTC gave them a way to escape it. 

In reply to by taketheredpill

daveO Killtruck Thu, 12/07/2017 - 14:34 Permalink

Unlike stocks and commodities, there is no way of knowing who exactly owns BTC at any given time.
When the first crash occurs, the Main Stream Media will interview a 'man in the street' who will say, "Oh yea, I had a few BTCs, but I couldn't sell fast enough, it was clearly in a bubble" or just "Yea, it was in a bubble".
Meanwhile, the pumpers will continue to come on here and call me and others 'fucking idiots' because the word fuck is the millennials' trigger word. Hence, if I'm a fucking idiot, then they should definitely buy moar! (If you aren't catching flack, you aren't over the target.)
This is how reality is manufactured in a fake economy.

In reply to by Killtruck

lil dirtball daveO Thu, 12/07/2017 - 15:50 Permalink

> ... there is no way of knowing who exactly owns BTC at any given time.

Lol ... for you and the hoi polloi. The NSA knows exactly everything.

There is NO digital privacy. It is ALL hackable, crackable, traceable and collectible. Assume at your own risk.

In reply to by daveO

Dabooda Killtruck Thu, 12/07/2017 - 14:00 Permalink

Even if the TPP blows a wad and buys all of the available BTC's, they could suppress the price temporarily, but people would just buy the dip and push the price higher.  If anybody buys all "available" BTC they will drive the price MUCH higher.  The only way they could depress the price would be to buy up a huge tranche of BTC and then dump it massively, all at once.  Is that a sensible -- or even possible -- strategy?  Without the power to issue naked shorts, which could then be covered with paper currency, what's a workable strategy for pumping & dumping BTC?  I'm not seeing it.

In reply to by Killtruck

Killtruck Dabooda Thu, 12/07/2017 - 14:06 Permalink

Exactly, that's what I'm saying. The ONLY way for them to influence it is to buy up everything available, and then dump it all at once (much like a $4billion notional paper gold dump at 3 AM). But that would be one of the most tremendous backfires in the history of mankind. I almost kind of wish that they would do that, just to see how high it would slingshot the price. 

In reply to by Dabooda

Endgame Napoleon Killtruck Thu, 12/07/2017 - 14:06 Permalink

Like Charles says, there is not just one form of money. Bitcoin and gold are both money, used for different purposes or maybe for some of the same purposes, like hedging against an economic collapse. It seems like Bitcoin would be a good way for pay to be handled. Then it could be converted into cash. Maybe, people would save more. Rather than government per say, I actually think banks might take it over, the too-big-to-fail banks. That might be stupid. I never really thought about the nature of the currency, in of itself, before reading the ZH blog, not much anyway. I just took it for granted that green fiat would rule forever.

In reply to by Killtruck

herkomilchen Killtruck Thu, 12/07/2017 - 14:26 Permalink

Bitcoin is moving how we were all expecting gold to move.  Have to admit, lends credence to the suspicion that something fishy going on in gold markets.  Can't help but wonder if the gold in the London vaults is being re-hypothecated thousands of times over to suppress gold prices.  Wonder if all owners moved to took possession, as Bitcoin owners do, if gold's price would surge too.

In reply to by Killtruck

Raffie BaBaBouy Thu, 12/07/2017 - 14:15 Permalink

Gold for sure. Look at gold/silver getting beat into submission yet again. REAL MONEY getting beat down into REAL VALUE.LONG LIVE THE PUMP-N-DUMP!!!By your views, my fake Bitcoin can buy well over 13oz of GOLD (17000BTC and gold is 1250) which is REAL MONEY....... BWHAHAHAHAHA 5000+ years!!!! Gold going to rest in the 1200 area... ROFL... REAL MONEY... look at it burn...

In reply to by BaBaBouy

The Wizard Captain Chlamydia Thu, 12/07/2017 - 13:50 Permalink

The concept of what is money has been discussed for eons. IMO, the purest form of money is barter. It is where something of substance is being exchanged for something of substance in a transaction between two or more parties. There is no third party entering into the transaction determing value and taking a piece of the transaction for themself.Money is power, and rare are the heads that can withstand the possession of great power. Benjamin Disraeli Here is a good one from attorney Larry Becraft. It will take some time to digest it. I also recommend to dig into Edwin Vieira's book The Pieces of Eight.home.hiwaay.net/~becraft/MONEYbrief.html

In reply to by Captain Chlamydia

The Wizard CrabbyR Thu, 12/07/2017 - 17:36 Permalink

Private property exchanged for private property is not taxable. This is why the government wants all of our assets to be considered "personal" or "real" property. Placing your assets in a ledger on a blockchain is the governments dream. One must learn the law to determine the difference between what is private and what is considered personal/real property. The educational system left us ignorant on those concepts.Have you ever asked yourself if your labor is private property. There are numerous USSC cases claiming it is private. How do you think the government gets you to make it public property?

In reply to by CrabbyR

ConfederateH Captain Chlamydia Thu, 12/07/2017 - 13:21 Permalink

Real money needs to be a stable store of value.  Bitcoin clearly isn't that, it is a wild internet bet.  If BTC were still under $1 few would be even talking about it.  It is not BTC's money properties that are driving the frenzy, it is greed, and even CHS seems to have lost track of that.I also will say that I can go anywhere in Europe, likely SA too, use my Maesto ATM card to draw and pay in cash, and it will not only cost pennies, but the vast majority of vendors would far rather have an instantaneous cash transfer than waiting for some dubious miner to pick up my transaction and put it on the block chain.Most people also miss the anonimity aspect.  Bitcoin is NOT anonymous, it is a PUBLIC ledger.

In reply to by Captain Chlamydia

MuleRider ConfederateH Thu, 12/07/2017 - 13:47 Permalink

Great comments here...let me preface my comments by saying I am as against the Fed-fiat shit-show as anyone here or elsewhere you might find.  That said, let me offer this as to why I think BTC still looks and feels like a frenzied fad.  I've got an old pickup in the driveway that probably wouldn't fetch more than $2,500 according to KBB if I were to sell it.  I get plenty of utility out of it and am somewhat attached to it after having it for so long, but I could turn lose of it if I really needed some extra money.  So if I did go to sell it tomorrow, I wouldn't think twice about turning lose of it if somebody swung by with 25 hundred dollar bills.  I wouldn't be too concerned if the person gave me a $2,500 check if they seemed legit enough...worst case, I go to the bank to verify the funds are available before accepting and making a deal.  I could also see myself accepting 2 1 oz. gold coins, so long as I could verifty their authenticity, and likely the same with a commensurate amount of silver.  But what about if I were to be offered 0.125 BTC for the pickup?  No way in hell I'd do that, or even if I considered it, I'd want to make sure I got those BTC converted into USD as quickly as possible.  I don't think I'm nearly alone in that sentiment among the vast American and global public.  And keep in mind, that's with just trying to unload an old beater pickup.  Are people really, seriously thinking of using BTC regularly with transactions totaling in the 10s or 100s of thousands of dollars?  

In reply to by ConfederateH

ConfederateH MuleRider Thu, 12/07/2017 - 14:30 Permalink

I sold some AG miner shares in Aug and bought a little BTC, because I knew if I didn't and what has happened happened that I would never be able to stop kicking myself.  It has fortunately balanced out my investments, but the recent PM collapse still has me in the red.My guess is that less than 1% of the worlds population understand crypto's at all.  But when they see people making this kind of money on rapid price increases, especially if they are gamblers like the chinese, then they jump on the band wagon.  This just pours gas on the greed fire.  We are dealing with mass psychology and the money changers who have been manipulating it for centuries, not "money".So whether I would sell the old pickup would depend on what other cars I had.  I would probably keep the old one and sell the new one anyway.

In reply to by MuleRider

gn28 Captain Chlamydia Thu, 12/07/2017 - 17:12 Permalink

BTC is currency, gold is the only money on this earth. Money means that something with guaranteed value over time and by no means creatable out of nothing. BTC is just a way to get everyone used to digital currencies and out of cash and physical things. Take your short term gains from BTC, but expect to have nothing left than a digital account when it ends and everyone is mostly forced into a FED-coin where negative rates will just mean you lose a chunk of your digital wallet with no options left. PS: I really like the concept of BTC, but it is software and you can always create more with a code change. WAKE UP !

In reply to by Captain Chlamydia

Number 9 Thu, 12/07/2017 - 13:15 Permalink

trying to trade on gdax.. catching the dips and rips.. damn thing shut off but luckily was in us dollars.. jumping in and out of ltc to btc..doing ok..but think i am just gona let btc ride..

e_goldstein Thu, 12/07/2017 - 13:23 Permalink

I made a few dollars of profit using bitcoin for transactions like this last year and I paid income taxes on those modest gains. Clearly, bitcoin is a legal financial instrument that the federal government accepts as the source of taxable capital gains.Why the fuck would you do that, Charles? Cryptos have been labeled as commodities. If you paid tax on your transaction, you should have only paid capital gains not income.