Pigs as a retainer. Why trust is more expensive than gold?

Pigs as a retainer. Why trust is more expensive than gold?

How the people had learned to trust each other and had started from an exchange of coconuts and gold to an exchange of promises.

A hundred and fifty years ago, the French opera singer Mademoiselle Zeli had a world tour and fate carried her to the island of Tahiti. According to the terms of the tour she had a third of the winnings of the tickets sold and it was obtained so that in the Polynesian islands this profit was expressed in 3 pigs, 23 turkeys, 44 hens, 5000 coconuts and countless lemons, oranges and bananas. Not knowing how to use them was forced to feed the pigs to them, because they failed to find a way to bring them to France.

In its basic concept, money extends not only to culture, but also to human feelings. They are the most heartless thing, and if a problem can be solved with money means that it has no relation to a human. Of course, it is a delusion and money pervade the whole human culture. On top of that they are an important part of human relations and embody the most human thing on earth – trust. In this article, I will tell you how people have learned to trust each other and have moved from an exchange of wheat to an exchange of promises.

Why do we need money?

Especially to avoid being in the situation of the Mademoiselle Zeli. This is an example, how begins the book of William Jevens “The money and the exchange mechanism”, ahead of all textbooks in economics. He shows what barter is – the situation where turkeys are exchanged with hens and lemons with bananas. It turns out that the majority of people are not very satisfied with the outcome of this exchange.

At first glance, the function of money is completely obvious. First, they are an exchange agent that allows us not to sell our labor for coconuts. Second, they are a means to report value and this is easy to understand if we remember that pounds, pound or shekel – words that are now used to denote currency – historically meant a simple unit of measurement. In summary, money is a means of accumulating wealth and not only in this sense, but also as a working six months, and on the seventh to go on holiday.

Functions of  the money

To perform such functions, the money must possess physical properties: easy to divide, be convenient for transportation and durable. Each of these properties is important enough and we know what happens when we do not have small money (coins). At the end of XVIII and the beginning of the XIX century in England, there were only large coins-gold and a little silver, but no copper coins, and therefore the workers received a small coin after several months of work. As a result, private money appeared: Manufacturers of buttons print small honey coins, with which workers receive wages and pay in stores.

But the most important property of money is in this all to recognize them as a means of payment. You should be able to go to the store and the seller for some reason will exchange your money for sausage. And the salesman himself has to be sure that if you then go to the movies, then there that money will exchange for the ticket. And all of them-treasurer, salesperson and you yourself need to be confident that after a year this money, which you have now received will cost something, and it is desirable to cost no less than today.

And so we agreed first that the money should be comfortable to use no and second to be reliable. And if the first problem is easy to solve, then the second one is much more complicated.

If we wanted to invent money that would definitely not be impaired, we would probably start using something useful like money: coconuts like polineziicite or barley like the ancient sumometers or cigarettes as the Germans did after war. What makes these funds good? The fact that even if everyone refuses to accept them as a means of payment, you can use them for their intended purpose: eat coconut, make beer (in the Sumerians there was beer) or smoke a cigarette-or find a smoker and exchange the cigarette for something. The problem of such commodity money is that it is first stored poorly and easily spoiled, second take up a lot of space, and thirdly if you get a good harvest of coconuts, then all your coconuts will depreciter.

Money on Yap Island

There is a very good, widely known and beloved of economists example-the so-called money on the island of Jaap. The island of Jaap is a volcanic island in Micronesia, which is located 500 km from the nearest neighboring island. Many centuries ago the inhabitants of Jaap learned to sail with their small canoes to the neighboring islands located at 500 km and found limestone there. At that time, when European anthropologists reached Jaap, the locals had already sailed for hundreds of years at 500 km, carrying limestone from there and made money.

These money was called “Rai” and looked unusual and strange. They were large, taller than man, limestone wheels with a hole in the middle, and the only way to move was to put a stick in the hole and be worn by several people. In fact they were not moved: a man just wore them in his home and put them in the garden, and if the bought house and had to pay, he just told the seller – “Now this part of my bike, from my money, belongs to you.” And so they kept living, knowing that part of that wheel was yours and the other part mine.

More than a hundred years ago, the inhabitants of the island told a German anthropologist who described this fantastic system that there was a very wealthy family on the island whose riches lie on the seabed: when they returned from the sailing, their “Rai” had to be thrown out of the ship so that they would not sink. But the island’s population confirmed that this money existed, and that this family could afford a lot of things.

When the German administration of the island tried to get the local population to build roads, they sabotaged this process and then the German administrator marked with black crosses the most valuable “Rai” on the island and threatened that they would take them. Then the local population built the necessary roads.

Paper or gold

In the XXI century it is difficult to imagine that bullion gold or a huge slice of limestone are good money. But for the locals for centuries it was like this. And what rule this money real and real means of preserving value. The fact that there is a limited amount: it is impossible to quickly print, impossible to collapse their value, which is why local residents trusted them.

Of course, people always suspected that getting paid with gold was not always convenient. If you want to buy a matchbox, you can’t make such a small gold coin, and if you want to buy Alaska, there’s no way you can carry that much gold with you. Long ago people realized that instead of giving a man a bag of barley or a piece of gold, you could give him a promise that you would betray him. It was this moment when the modern money appeared, referring to the following words: money means trust. Money is as good as a good word to the person who gives you.

If you imagine that money is simply a mutual obligation due to certain circumstances, then you may realize that the physical bearer, the physical coins are not so necessary. Because if I owe you something nonexistent, say 15 magic crystals, and you give me 17 magic crystals, it just means you owe me two crystals. If everything is exchanged only in crystal receipts, and the crystals themselves are not needed, then we can forget them, and the economy can exist without them for a long time. A very important part in the history of money – this is a debt reporting system: Sumerian clinique tables, new-found certificates from the bark of wood, Excel tables, modern banking programs.

Five hundred years ago, along with centuries of settlements and receipts, there was a lot of physical gold and silver, but over time they became less and less. When Wellington moved to Portugal to conquer the Pyrenees from Napoleon, the local suppliers did not accept the receipts he had given to the English bankers and therefore had to carry with him a sufficient amount of precious metals.

Over time, it turned out that to carry papers around the world is easier than gold and silver. This is how the paper money appeared – and at the first stage they were attached to precious metal, so you can exchange your banknote for a certain amount of gold or silver. The gold standard existed long enough, and after the Great Depression of 1929 they began to give up on it – first Britain and its colonies, and then the United States. This caused panic in France, which feared it would not be able to exchange its dollars back into gold, insisted that the US government, through the US reserve fund, exchange the French dollars in gold and store them in a separate box.

The Gold Standard

Later, in 1944, future “winners” of World War II, who already knew victory was close, gathered in the state of New Hampshire at a place called Bretton-Woods to discuss what the financial system would look like after the war. They agreed that the US dollar would be “attached” to gold, and all other currencies would be fixed against the dollar. For example, if there is a franc or a stamp in you can exchange them for dollars – guaranteed exchange at a fixed rate, then dollars exchange in gold.

This system existed until the early 1970s, when President Richard Nixon finally renounced the gold standard. Then gold is simply sold on the market – like lemons or plain other commodity. And modern currencies, the dollar, the euro or the yen are not secured by anything: there is no chain action, as a result of which you can understand that you will be guaranteed to receive at least something useful in exchange for your banknotes. Everything available in modern money – it is their reputation, the confidence in that shops, crates, movie theaters will accept them as a payment, and that with them you can pay chewing taxes. As a result, this means that the money is worth as much as the reputation of the country that printed them.

Money from the air

In the modern economy of Russia and the US, 90% of the money, in addition to not being secured, exists simply as a physical reality. For a printed ruble, a noisy piece of paper that can be touched or spent on something, you have 9 rubles or, respectively, 9 dollars, which physically simply do not exist, which are records in databases.

In the modern economy of Russia and the US, 90% of the money, in addition to not being secured, exists simply as a physical reality. For a printed ruble, a noisy piece of paper that can be touched or spent on something, you have 9 rubles or, respectively, 9 dollars, which physically simply do not exist, which are records in databases.

“A person who has decided to take out a mortgage in a bank is actually making new money out of fresh air. Because he says, “Give me credit please,” and in this situation the bank is not obliged to place on the market, seek deposits and only after receiving deposits from the population give a new loan to their new client.”

In that case, what provides value of this money?

Of course, this credit money is backed up with some assets. If we think, for example, of a mortgage, then they are directly supported by real estate that is bought for these credit funds. If we think about a car loan and this loan is used to buy a car, and if a person needs to repay that loan, then they will be obliged to sell their car to pay off their loan.”

It turns out that modern money is really taken literally from the air: at this moment, when you walk into the bank and take out a mortgage, you create several million rubles. But how can we trust the money derived from the air? Who guarantees us that tomorrow they will not become the same air they were in two days ago. Oleg Blehov’s answer is astonishing and obvious: they are secured by your home, because the mortgage is given to you not just like that. Because you want to use your home and you don’t want it taken, you’ll return that money – and thus they will never disappear. If you take a car loan, then your money is secured by your car. If you take a simple consumer credit to buy a washing machine or phone, then your credit is secured by your future work.”

Credit obligations can have value and be valued at all, which is why debtors repay their debts. If all of a sudden they give up and declare a deflategate, saying “I don’t know you,” then the chain will devalue everything. Therefore, if we benefit from some currency, we implicitly agree and ultimately believe that debtors will repay their debts, and if they give up, then the creditors somehow receive these debts: they can go to court and take a bet – and in a convenient way will return what belongs to them by law.

Furthermore, we need to make sure that the state does not turn out to be a bad debtor. It is not obliged to place its dwelling at stake. Very often in history, money was depreciated precisely for this reason – because the government was a bad debtor: it accumulated debts, and then either devalued its currency in order to pay back its debt more easily (because with cheap rubles, debts are returned more easily than expensive ones), or declared a deflator and generally renounced all its obligations. The last time this happened in Russia, in August 1998, the value of the ruble to the dollar fell 3 times more and a long economic crisis occurred in Russia.

Cut paper

There are also more frightening cases when the value of money falls not two or three times, but even hundreds and millions of times, as happened in Germany after The First World War and very recently in Venezuela and Zimbabwe. Sometimes this happens because of external upheaval, and sometimes just because of very bad government. But usually, this leads to an absolute devaluation of money, they cease to make any sense and literally turn into sliced paper. In such cases, people usually use money substitutes. Foreign currency is used. For example, in Russia in the 1990s everywhere used dollar, and even prices in stores were often in dollars. Not because by law it could have been paid with dollars, but because it was more secure and with it it was possible to measure the value.

Thank God, we should not make an exchange with the help of a barter and replace milk for cigarettes. We use a variety of money – most often national, but not always. We even know that different currencies are trusted differently. The Swiss franc is much more relied on than the Zimbabwean dollar. Why? Because we trust the Swiss government more, we believe that it will not declare a deflation, will not give up its debts, will not print 100 times more money than what it has, that there will be no mad upheaval or catastrophe.

In Russia, for example, the use of the ruble would be most reasonable, because it is the official means of payment and all shops are obliged to accept it. However, it is known that Russian citizens trust the dollar a little more than the ruble. Here is an amazing example: every time there is a search of a FSB general or a colonel from the Ministry of Interior, billions are confiscated in a different currency and it turns out that most of this money is in dollars or euros.

“Dirty” money

Honest people also try not to keep all their money in rubles, so they usually buy dollars with some of them. People do not like to take a mortgage in dollars very much: this would be profitable, but if the value of the ruble falls and the dollar rises, it will be difficult to repay such a mortgage. And this is proof that even Russian citizens trust the US Reserve and the US Federal Reserve more than the Russian Central Bank. Oleg Shibanov says:

“After all, the Federal Reserve and the US Federal Reserve were established in 1913, more than a century ago. And now we are gradually beginning to understand what bankers are doing, what they are going to do, and we trust those who do not throw an extra hundred trillion dollars into this system, because at present the total money supply in the world economy is about that. You more or less understand that inflation in dollars has been stable for many years and you see that since 1947 it has fluctuated around 2-3% per year, no more, and you know that in all probability this situation will not change and in the future, therefore, you are unlikely to see a significant depreciation of currencies. ‘

At the end, it’s really amazing, but the same dollar can evoke a different level of confidence. Sociologist Vivian Zelitzer, in his book on the sociology of money, describes the story of a member of a Philadelphia street gang, Marty, in the 1950s. Social workers once asked him why the small nickel coins given by his mother were sacrificed at church, and the hundreds of dollars he earned by stealing or robbing were not sacrificed. He replied, “Of course. I can’t give dirty money to God!

Economists know that dirty money is not liked not only by God but also by the authorities – and therefore it costs less. According to Oleg Shibanov, during the money laundering they lose 10% of their face value. This means that 100,000 drug barons cost, for example, as much as 90,000 honest bakers.

So it turns out that if we look at all the money we talked about today, it has a striking common feature: the more ephemeral and meaningless the money that people use, the better the society in which they live. A bag of barley, a bucket of butter or five coconuts are much less ephemeral things than gold, and can be eaten, and are therefore useful. But in the normal development of the economy no one uses them. Gold is a less ephemeral thing than paper money, but finding someone to pay with it is quite complicated. And the most ephemeral money, which we can’t even pay for in a Russian store, inspires the most confidence in us. This money of countries with developed institutions, a functioning court, a responsible government and a central bank, these countries in which we would like to live.

This is basically the main thing we need to know about money: it is a unit of trust. The less acquaintances each of us can trust, the better the money he uses.

 

References:

Vymatnina Yu. Money, or Golden Antelope. SPb., 2016.

Ferguson NM Rise of money. M., 2010.

Friedman M. Money Mischief. Episodes in Monetary History. San Diego; New York; London, 1994.

Selgin G. Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage. University of Michigan Press, 2008.

Zelizer V. The Social Meaning of Money: Pin Money, Paychecks, Poor Relief, and Other Currencies. Princeton, 1995.

 

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