Money: The World’s Biggest Dream

Do you know what this is?

Euro 500 note

It’s a photo of a Euro banknote. Those pieces of paper derive their value from the European Central Bank’s reputation. They’re really worthless if not for the institution’s prudence and strength of the Eurozone economy. Not everyone trusts this institution — even the United Kingdom did not want to use the Euro as legal tender when it was part of the European Union.

Shortly you will be shown an insight about something that is near and dear to our daily lives – something that makes the world go round: money.

How it all started

In the beginning of time, there was darkness. Then Zeus Almighty said, “Let there be the barter system and let man exchange goods for services or other goods or services.”


There has never been a “barter system in human society”. There was no marketplace in which complete strangers meet each other and say, “Yes, I’ll exchange your cow for my handful of magic beans.”

Never happened. The co-incidence of someone wanting magic beans, having a cow to barter it with, and find just the right counter-party with magic beans and wanting a cow for those is just too, well, coincidental. A market couldn’t really form with this kind of barter system.

What really happened was ceremonial gift-exchanges between community leaders. The other common cases were gift-giving between close acquaintances. This is according to Marcel Mauss in The Gift: The Form and Reason for Exchange in Archaic Societies, confirmed and validated by the good editors of Wikipedia.

Barter System, Marcel Mauss

Societies in the past used “commodity money” — things that are used for exchange but also has “intrinsic value”. Meaning that the currency can be utilized as raw materials as well as for exchange.

In 3000 BC, the Mesopotamians used barley as currency. The Wild West used beaver pelts as the standard currency for trading with native Americans. Gold and silver coins were popular currency in medieval europe and to some extent still in use today.

The money we use now is called “fiat money”. The word “fiat” means “let it be done”. Fiat money derives its value from a mere promise — literally — and of course, who made that promise (that is, which country’s government).

The first known successful use of fiat money was in 13th century China by the great Kublai Khan, founder of the Yuan dynasty. Marco Polo wrote about it and he was amazed on how these pieces of paper are traded “as if they were coins of pure gold”.

Commodity Money & Fiat Money throughout history

Was it society that gave rise to money, or whether it was the other way around? Whether you like it or not, money enable strangers to cooperate. The human psyche is often based on “quid pro quo” — “this for that”.

Nothing but Public Opinion

Realize that “money” derives its value from “just” public opinion. A product of society’s imagination, it’s not as “real” as the air you breathe.

Just about anything can become money — as long as it is “in a limited supply” and there’s some kind of agreement within the community for a price system to occur. Some PoW camps in WW II used cigarette sticks to trade suplus supplies between prisoners. Inmates in some US prisons today uses canned fish as a medium of exchange for services between themselves.

Some societies invent their own money without the need of central governance. If you’ve heard of “bitcoin” — that’s an example of a class of money called “cryptographic currency”. These currencies derives their “limited supply” from mathematical properties. It’s a movement to have the benefits of a modern currency without relying on any government — that are inherently fallible.

By now hopefully you realize that money is just an illusion. It is perhaps the world’s greatest fantasy such that it became real.

Just Like Fashion

Any wealth measured by dollars and cents are as brittle as the currency itself. Hence perhaps its wise to not just focus on accumulating a single type of wealth.

Fiat money has almost always loses its value over time — that was true since its invention. This is called “inflation” and it happens whenever there’s more money than goods or services.

Inflation rate at 10% per year

The Venezuelan financial crisis started in 2012 and still going on to this day. Their goverment’s revenues were decreasing because of declining oil prices. However it had ambitious social programs that were to be funded by oil sales.  Instead of reducing spending, they printed more money to pay for those programs. Hyper inflation follows and in 2016 prices went up over 400%.

However even stable and prudent governments maintain a degree of moderate inflation. This is to ensure people will spend their money and continue working to have money to spend. It also provides a false sense of growth to the working class — since salary raises are typically pegged to inflation rates.

The US Great Depression of 1930s was largely caused by deflation — the inverse of inflation.  There were more goods than money, hence prices dropped.  In turn people began to hold money instead of spending it. Eventually, decreased consumption (and hence sales) caused factories to close or reduce their workers, hence causing massive unemployment. Tragically this crisis was solved by World War II where the US government needed to buy goods from its people for use in the war and in turn those purchases were funded by debt.

Not only fiat currency – even bitcoin had lost its value a few times in its short history. Public opinion tend to get easily swayed by news and “alternative realities”. Likewise the value of bitcoin — which is also derived from public opinion. In September 2017, there were rumors of the Chinese government going to ban crypto-currency. As a result, Bitcoin fell by about 37% – or lost about $30 billion of its total value. Crashes like these had happened at least five times in bitcoin’s short history of about eight years.

So yes, money is just an illusion. An illusion that pretty much everybody believes in.


To recap, you’ve just been reminded of what money really is:

  • First, money goes hand in hand with society – there was never a barter system in wide use.
  • Second, money derives its value from public opinion – whether it’s backed by governments or otherwise.
  • Third, currencies are as fragile as fashion trends.

Remember these when planning your retirement. Plan for the day when you become old, stupid, and can barely take care of yourself. Make sure that you are not betting your selinity on the wrong team.

Thank you.


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