Note: This was originally published as a response to the Aeon Conversations piece ‘What is Money‘
Money is not a store of value. It is a claim upon value. This might sound like pedantic semantics, but it is crucially important, especially if you’re trying to alter how it works.
Imagine a Coca Cola bottle with Coke in it. That bottle is a store of value. If I open it and drink the Coke, it will kickstart energy processes in my body and help me to carry on surviving. Now imagine a piece of paper next to the bottle that says ‘whoever holds this is entitled to claim this bottle of Coke’. That’s a claim upon value. If a group of people come to believe in the validity of that claim, the note can be passed around as a means to metaphorically ‘transfer’ Coke value, or – more accurately – to transfer access to Coke value. That’s then a form of money.
The fundamental difference between the note and the Coke can be tested by a simple experiment. Burning them. Imagine I drop the Coke into a furnace and it evaporates away. Nobody can ever drink it now, and we have destroyed value. The note is simultaneously rendered meaningless. It’s just a piece of paper saying you can claim a non-existent thing.
Now imagine that instead of incinerating the Coke, I burn the note instead. The Coke remains, and no value is destroyed. All that has happened it that I’ve destroyed my claim to that value.
Let’s scale this vision up now. Imagine a nation of people with energy, intellect and resources to make things. This is real productive capacity, and it a source of real value in the form of real goods and services. Now imagine a piece of paper that says ‘whoever holds this is entitled to claim goods and services from the people of this nation’. That’s a claim upon value. Now imagine that 60 million people believe in that claim. A network like that is so powerful that it’s in nobody’s interest to not believe in the claim.
That’s pretty much like the British Pound, for example.
And if I take my £10 note and burn it, what happens? I’ve destroyed no value. All I’ve done is destroyed some of my personal claim upon the good and services created within the UK.
That’s an act of sacrifice, because the curious thing that occurs as a result of this is that all the remaining claims become worth slightly more. We call that deflation. So, when the Joker in the 2008 Batman film The Dark Knight burns millions of dollar bills, he’s giving up his claim to the underlying value they represent, and transferring it to others.
Of course, it’s a bit more complex than that, because that act of altering the number of claims in the system can induce all manner of economic activity. This is what we sometimes call ‘monetary policy’. Creating new money claims via credit systems is one means of activating and steering real economic activity producing real value.
And the key players in that are not just central banks, but the entire commercial banking sector. Because really, it’s not like most money claims take the form of physical notes any more. Most are data entries, binary code imprints on hard drives of computers within data centres controlled by commercial banks. The act of creating and moving monetary claims around in such a system is the act of editing databases.
And this poses interesting possibilities for designing alternative forms of money. Change the nature of the database, the rules concerning who gets to create claims, and the rules concerning what a valid claim looks like, and you can alter real economic activity in interesting ways.