3 ms·

The Hierarchy of Money

172 points by gwgundersen 6d ago

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hypfer 6d ago
I feel like this is either AI-generated or severely lacks context. There might be a point in there, but it might also just be paragraphs of text with little structure joined together. What's the narrative? What does this want to tell me? And why? Something like an opening header block with 2-5 sentences would go a long way.
- RivieraKid 6d ago
  I just copy-paste the text and ask AI to summarize for 90% of articles I see on HN. One of the most time-saving uses of AI.
  - hypfer 6d ago
    That answers the what, but not the why. The why however I'd argue is a lot more interesting. Also, you can often derive the what if you know the why and just follow the thread and map it out.
  - pasquinelli 6d ago
    doesn't that mean you spend time reading the summary of articles you wouldn't have read on your own, and thus it wastes time?
- jubilanti 6d ago
  It is also totally wrong. I got to the third block and quit, as this is just an LLM bullshit version of the 18th century bullshit fantasy of the origin of money (see David Graeber's Debt). You can't describe how various forms of monetary value work in the modern monetary system as if it were a rural village with physical items, because it is fundamentally different.
  - hyperhello 6d ago
    It introduced vocabulary well enough though? I get that the specifics were all apocryphal.
- gwgundersen 6d ago
  I’m happy to hear criticism and to learn from that, but I wrote this myself. Took quite a while. Re: why, I don’t think most people understand the very basics of the global economy in mechanical terms, and this was my attempt to explain those mechanics. I wanted the various pieces of the system to be motivated by understandable problems, hence the fable-like story. I now see some folks were triggered by this stylized approach. Which is a pity. I think the simple setup is worth the payoff. My explanation of money creation, for example, matches the Bank of England’s whitepaper, and I am especially pleased with how the idea of a reserve currency both develops naturally and rhymes with earlier ideas lower in the hierarchy.
  - rdsubhas 6d ago
    Your article was well worth the read. Thank you for that. It's merely a HN trend where lazy people who can't read an article bad-mouth it as AI. You'll find the lazy AI comment in every article's top first or second comment now. Don't bother justifying yourself, keep it up and keep writing.
  - jasonwatkinspdx 6d ago
    I'd suggest reading about David Graeber and the myth of bartering.
    - throwaway_7274 6d ago
      I'm sure Graeber is right about the ahistoricity of the orthodox just-so story of money, but I've always wondered if perhaps he misread the kind of claim that story is actually making. What if economists don't really intend to make a factual historical claim? What if it's more like the principle of virtual work, if you take the analogy? What if it's saying, look, here are two possible configurations of the world: one with barter and one with monetary exchange. One of these configurations is "more stable" than the other. That's a reasonable explanation for "why" we use money, if you read "why" in a non-causal way. Or maybe economists are straightforwardly careless historians. I don't know!
  - aorloff 6d ago
    Try reading Debt : the first 5000 years Money is about trust, not about the problems of bartering
- Aramgutang 6d ago
  Your attitude is why even short videos shared on social media today begin with a few seconds showing the "payoff" of the video. The risk of having your time wasted is an inherent part of consuming creative works; it makes things more enjoyable when the gamble pays off (dopamine is triggered via reward prediction error). A life where you only consume media with accurately predicted positive utility would be devoid of joy. So I'd say if you want to know the narrative, what it wants to tell you, and why, simply read it. Take the gamble that it may suck, you'll enjoy it more if it doesn't. But also, to avoid being a jerk: it's a piece that attempts to explain the modern global economic system (and the implications of USD being the global reserve currency specifically) from first principles using simple prose, where each "chapter" introduces a new layer of complexity.
  - hypfer 6d ago
    > Your attitude is why even short videos shared on social media today begin with a few seconds showing the "payoff" of the video. Nah, you've missed my point and replaced it with some other gripe you have with the current world. These attention deficit previews are something else entirely from what I said. OP wrote an article that jumps in with a list, but it should've jumped in with "In the following paragraphs, I will explain this for that reason, because I think that XYZ". (Edit: Which, the LLM just reminded me, is simply an abstract) It simply lacks an opener. (And in addition, it lacks flow between these individual sections, but that could be okay if the opener handles that problem)
- rdsubhas 6d ago
  Here we go again. Commenter doesn't read an article because it doesn't fit their style. Immediately bad-mouths it as AI. Edit: typo
- wpm 5d ago
  I felt that it was neither AI-generated or lacked context.
stymaar 6d ago
> The villagers are tired of bartering Come on… It's been known for more than a century that bartering has never been the default mean of exchange among humans, can we kill this myth eventually?!
- compiler-guy 6d ago
  This is obviously not an attempt at anything remotely resembling documentary history. It’s more of a just so story explaining what problem each step solved. Unless of course one thinks that smooth gray stones from a riverbed two miles away reflects some historically significant point in money’s evolution.
  - jubilanti 6d ago
    I'm not going to explain David Graeber's Debt to you, but yes, this exact 18th century fantasy of the emergence of money in caveman times contains the same kind of misunderstandings that also leads to most people having an incredibly misguided view of how the contemporary global financial system operates.
    - compiler-guy 6d ago
      I certainly don't think anything like this actually happened. And the linked article doesn't really do so either. I do think it can be a useful illustration of what problem each technology solves. In another thread you talk about how the internet really is a series of tubes. We all know that "tubes" can be a useful analogy for understanding certain things about circuits and things built upon them. But we also don't think that tubes are more than a very basic analogy. Tubes don't really do packet switching.
      - __MatrixMan__ 6d ago
        By leading with the improvement-order-barter story, the article announces a bias that borders on propaganda. It's maybe worth objecting to even if the goal isn't to be historically accurate. The problem that was actually being solved when money was invented was how to get recently conquered villagers to support the soldiers that recently conquered them. (Demand taxes in the coinage that you pay your solders with, then they can live off the local economy and you don't have to feed them directly, which might be hard if they're very far away--tax collectors can take years to show up, but the demand for the new currency is instant, so your soldiers get fed right away). The system of interpersonal debt that predated money likely outperformed money in a variety of ways from the perspective of the users. It was only for the conquerors that the invention of money solved any problem at all. It's hard to keep reading the article when it starts with the story that is used to distract from this.
markvdb 6d ago
The part where the bat wielding despot required payment using the money of his issue was left out.
- N_Lens 6d ago
  Well we wouldn’t want people to lose trust in the black money, right?
Wilsoniumite 6d ago
As someone who works at a financial institution, this is a really refreshing and concise breakdown of money and monetary systems. I think the most important thing that people should realise from reading this is that none of the things we have in our monetary systems were dreamed up for no reason, each solves a clear problem, and often was found by multiple independent groups of people at different times. I absolutely love the fact that it's essentially just layers of trust, analogous to a certificate authority or a domain name system. And, of course, that the top level of trust is a bit arbitrary, and that "black money", of course the US Dollar, isn't worth more than trust in the US government.
- rcarr 6d ago
  An alternative to the current top level: https://en.wikipedia.org/wiki/Bancor https://en.wikipedia.org/wiki/Bancor
  - mitxela 6d ago
    There is no single current top level. There are multiple disparate levels that have no level above them - the Federal Reserve is one, and Bitcoin is another.
- ozgrakkurt 6d ago
  > I think the most important thing that people should realise from reading this is that none of the things we have in our monetary systems were dreamed up for no reason To be fair, cannibals don’t eat people for no reason either.
Kuyawa 6d ago
The only problem of money is inflation. The ability of one single entity to print money at will, stealing from everybody else without them noticing is one of the greatest con jobs in the history of mankind (and we all know who has the master printer in the world) Money is a beautiful instrument for trading and free markets, the only way for two entities to peacefully exchange goods. Inflate that money supply and you are silently stealing from the pockets of those who trust that instrument
- deleted 6d ago
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- smitty1e 6d ago
  > The only problem of money is inflation. Counterfeiting enters the chat.
  - conorcleary 6d ago
    and, already well established is share rehypothication.
- mattclarkdotnet 6d ago
  Inflation was a problem long before fiat money. It affected the Roman Empire whenever large amounts of gold were added to the money supply through conquests - in fact they understood this at some level because they usually kept it in the temple of Zeus, but in economic downturns they would raid this piggybank. Another historical example is hyperinflation in Spain caused by the huge influx of silver from their central and South American conquests.
- vinyl7 6d ago
  As much as I hate inflation...there is more to it than just printing money. Because money slowely loses value over time, it incentives investment over hoarding. Bitcoin is a perfect example if this because there is a fixed number of bitcoins. People invest and hold onto bitcoin itself rather than spending it, causing the "value" of a bitcoin to increase. It makes for a poor currency because everyone who bought a pizza for several bitcoins a few years ago is now kicking themselves because they essentially paid tens of thousands of dollars for a pizza...so who would want to spend their bitcoins on something today when it could be worth twice as much in a few months?
elonfboy 6d ago
The crypto bros are gonna have an aneurysm reading this
charcircuit 6d ago
How do you describe money without explaining taxes? There is no money without taxation happening.
- mitxela 6d ago
  True, everyone knows nobody would use bitcoin if there wasn't a transaction fee
  - charcircuit 5d ago
    Transaction fees are not taxes.
skybrian 6d ago
The villager parable is too egalitarian. That's not really how it worked. For most of history, peasants were sustenance farmers, meaning they grew their own food and if the harvest was bad, they could starve. For them, there was no such thing as insurance and they really needed ways to reduce risk. For example, they'd feast their neighbors so that when times were hard, the neighbors would hopefully help them out in turn. Investing in close-knit relationships isn't like barter - it's more like informal credit. Kinship networks still work something like this today. And this meant they didn't really need money. Social obligations were everything. But how do people who aren't peasants themselves get food? By extracting rents and taxes, in return for protection and certain services, perhaps plowing fields. Local "big men" might take payment in kind, but for a more organized government, they'd collect taxes using money, which gave the peasants incentives to grow and sell food for money. So villages would monetize or demonetize depending on the state of nearby governments. A monetized society allows people who aren't farmers to buy food. It allows cities to exist. Therefore, civilization was built on military force, taxes, and rent extracted from peasants, who were the basis of a mostly agricultural economy. Be glad our civilization isn't built on sustenance farming anymore.
- renehsz 6d ago
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- thisrod 6d ago
  Yes. This could be subtitled, "A rational financial system design process: how and why to fake it."
- altmanaltman 6d ago
  This is a pretty simplistic take as well. Like you end it with saying be glad our civilization isn't built on sustenance farming but in the previous line you say it was built on force, taxes and rent extraxted? Here's a simple counter factual: how do people who are peasants get anything other than food in your model? If they sell the food to get money, your civilization is already not built on sustenance farming and has a working currency. If they don't have money, they will barter which doesn't seem to exist in your model. Also yes, kinship is basically informal insurance where a community collectively takes care of each other. Its not what barter is.
svobodamartin 6d ago
What article is missing is the (hierarchy of) permission. Who can create money, who can access it, who can change the rules, who can freeze or censor transactions or even weaponize whole financial system? What I dislike about fiat is that inflation is treated as a (wanted) feature while it is a cost paid by plebs via Cantillon effect. All Govs keep rolling debt burden being paid with more debt. Paper backed by paper and/or trust into goverments only. History and significant part of the world shows that this trust is being failed too often. How sustainable current system is?
jongjong 6d ago
When I started to understand how money works, it started to feel like everything I've been raised to believe was a lie down to the foundational principles. Even Hanlon's Razor "Never attribute to malice that which is adequately explained by stupidity" also fell apart when I came across Grey's Law "Sufficiently advanced incompetence is indistinguishable from malice." The complexity is extreme and more intricate than any person could have designed. Clearly, it evolved over long periods of time to get to this point. It's worse than a "conspiracy" because a conspiracy requires collaborative intent and a shared understanding. With this system, participants have convergent intent but very little to no shared understanding (as essentially none is required). In terms of outcomes, the system functions in much the same way as a conspiracy, but without any of the self-restraint mechanisms which might otherwise limit the group's actions (as would come naturally if each member had full awareness of what the group was doing)... Which in this case, disturbingly, spans the entire planet and all human affairs. The first step to solving a problem is understanding that the problem exists. This makes this problem particularly difficult to solve because it has power over the collective human minds which created and uphold it. It can replace any dissident with a compatible 'attention head' within its neural net.
- hax0ron3 6d ago
  What things that you thought were true did you discover were lies?
cs702 6d ago
Wow, what a fantastic blog post! While there are some necessary simplifications, I couldn't find a single mistake on a first pass. Anyone who wants to understand current monetary systems should read it. Substituting "stones" for gold is a brilliant stroke of the pen. It will surely be helpful to any readers who are hung up on gold. Thank you for writing this and sharing it on HN.
jrmg 6d ago
For a (I am sure seriously simplified) history of money, I really enjoyed Jacob Goldstein’s “Money: The True Story of a Made Up Thing.”
renehsz 6d ago
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tug2024 6d ago
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gweinberg 6d ago
There may be some value in this, but it is fundamentally wrong from first to last. First: There never was a great age of barter, you needed to have money before you had a lot of specialization. The idea that you could have brewers trying to pay for everything in beer doesn't resemble anything that did or could have happened. Last: Fiat money wasn't something people voluntarily accepted, it's something governments forced on people. Governments required people to pay taxes in fiat money, governments required people to accept fiat money as payments for debts, governments forced people to "sell" their gold.
- kasey_junk 6d ago
  Your presentation about fiat money is more biased than anything presented in the article. Take the UK. They only left the gold standard due to ww1. But they broadly stopped accepting anything but governmental currency in the 1400s for tax payment. It turns out money is more useful than commodities even when it’s a 1:1 relationship and even with that 1:1 relationship governments want their currency to have official legitimacy.
- cs702 6d ago
  The OP never claimed that this is history. The purpose of the story is to explain how things work. Please don't attack a strawman.
- mitxela 6d ago
  You aren't banned from trading in gold coins.
- modo_mario 6d ago
  >The idea that you could have brewers trying to pay for everything in beer doesn't resemble anything that did or could have happened. Why not? Tho i suggest only within small communities which made up a larger share of human life at some point and trade beyond them over larger distances would more often be facilitated by certain nonperishable and not too bulky comodities. We have plenty of evidence for such bartering trade even when currency was already more common. (salt for pelts, etc)
simpaticoder 6d ago
Wonderful. I'd be curious to read a spinoff Just-So story about how "ledgers" and "double-entry accounting" came to be. Similarly about stocks and bonds, derivatives and hedge funds.
evrydayhustling 6d ago
This is a really useful taxonomy and illustrative stories... But these stories imply an ordering which is neither essential nor factual in most cases! Check out Graber's "Debt: The first 5000 Years" for some really interesting analysis, including how debt almost always preceded hard currency in early societies. https://en.wikipedia.org/wiki/Debt:_The_First_5,000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5,000_Years
- gwgundersen 6d ago
  I've read "Debt" and responded more fully here [1]. But I'm curious: given your reading of "Debt", what ordering would you change in my post besides the myth of barter? My sense is that people are reacting to the first couple sentences and missing the entire rest of the post. I don't really see how Graeber is related to the Fed funds rate or currency pegs, e.g. Of course money is political, and I could have framed everything in terms of state violence and control, but that's essentially a different blog post. I don't think that adds a lot of clarity for what mechanically happens at Jackson Hole. Happy to hear how I'm wrong. [1] https://news.ycombinator.com/item?id=49785213 https://news.ycombinator.com/item?id=49785213
  - evrydayhustling 5d ago
    100%, that's why I led with the post being useful as-is -- you don't have to shift your view to Graeber's because we can always link to it as a supplement :). IMO part of why myth-of-barter has persisted is because it has worked for helping folks understand our modern finance system (among other reasons, b/c many folks building that system grew up on it as well). So it makes sense to use in an explainer. With that said, it doesn't feel to me like it detracts from anything to start with obligation before currency. Markers of past favors seems like as easy a place to start as trading stones.
lolakutty 6d ago
> The two parties just record the details of the trade on a piece of paper and settle up later.... I think this "paper" would precede the use of stones. When the villagers are tired of bartering, they are not going to magically settle on the use of these stones as value. Because even before that, when the "dairy farmer wants to buy corn, even when he does not have milk to trade" the corn farmer is going to give corn in exchange of a declaration (IOU) from dairy farmer that anyone who is in possession of that IOU is entitled to 5 liters of milk (or what ever the corn was worth to the dairy farmer at that point) from him. New money has entered the system at that point. Because now the corn farmer can use that IOU to barter stuff, either giving corn (produced by himself) or by giving this IOU from dairy farmer (if the other person is interested in accepting milk) I think this would be a much natural evolution of things... And then they would face the problem of counterfiet IOUs, and if they had crypto and signing, they would have used signed IoUs. But then they would need a way to reconcile with the fact that the death or incapacitation of the IoU writers. For example, the IOU written by the dairy farmer becomes worthless if the dairy farmer dies. Then some central body (aka) would enter the picture, as an entity that will never die or disappear, and is the only entity allowed to write IoUs. Solving both the above problems in one fell swoop, by requiring taxes to be paid in its IoUs.
DanielVZ 6d ago
The order of how money emerges is wrong and thus the premise that each step moves the trust higher in hierarchy is wrong. It didn’t necessarily come from banter (see rai stones from yap island). Debt didn’t always come from currency (See Inca system of Reciprocity and Redistribution where there was no currency). Private Banks don’t always precede Central Banks (see Sumerian Temples). I do agree with the argument that money is backed by trust. But I don’t think it’s inherently hierarchical. I think if anything, money and its diverse manifestations in currency are a complex graph where of course there are regions that exhibit hierarchical behavior (eg. Chilean bank backed by Chilean Central Bank that issues bonds and buys or sells US dollars). But for example I believe Crypto/Cigarrets in Prison/Silver/Gold/etc aren’t part of that hierarchical region.
- TacticalCoder 6d ago
  > But for example I believe Crypto/Cigarrets in Prison/Silver/Gold/etc aren’t part of that hierarchical region. Many early chinese kingdoms had coins as money and they were based on the rarity of the metal. And they began turning to shit when they started creating coins out of thin air, with hardly any rare metal in them: some kingdoms literally lost it all once they began hyper-inflating their currency by creating way too many coins (and at times there were so many worthless coins they couldn't even store them anymore). I think coins made of metal are definitely part of the hierarchy of money. And arguably Nixon "temporarily" ending the dollar's convertibility to gold in the early 1970s is an experiment for which we'll soon see the eventual result: https://www.usdebtclock.org/ https://www.usdebtclock.org/
dwd 6d ago
I would recommend reading Steve Keen's 'Roving Cavaliers of Credit' (2009) for how the monetary system works. https://www.researchgate.net/publication/242706930_The_Roving_Cavaliers_of_Credit https://www.researchgate.net/publication/242706930_The_Rovin...
chuliomartinez 6d ago
The fable of barter… if you feel there is something too cartoonish about the idea, you are not wrong, read some Graeber (debt) if you want to understand how it really worked
rad-b 6d ago
I’m sorry to see so many comments bad mouthing the article when it seems like they didn’t read it. I thoroughly enjoyed it. The fable is convincing and lays down the hierarchical trust pretty clearly. It could benefit more from the political part of economy development, but even just as is, it’s a great primer on some of the more important concepts in modern banking.
csomar 6d ago
I thought this would be about the non-fungibility of money and was greatly disappointed. Some (many? most?) people are not aware that a dollar here is not equal to a dollar there and this got way worse in the last few years. It has become exceedingly difficult to move value around even in the same country (despite the hundredth fintech starting up to solve this problem and move money between friends)
- mitxela 6d ago
  The situation with dollars reminds me of the situation of bitcoin on MtGox just before it collapsed. The bitcoin price on MtGox diverged from the price on other exchanges. To a casual user it looked like you were getting a good deal by buying it on MtGox but that's because the last people out wouldn't be able to actually withdraw it, because the promise of a bitcoin from an exchange is not the same thing as an actual bitcoin.
pards 6d ago
> longer than it takes the dairy farmer to gather fresh eggs Nit: Cows don't lay eggs
neilwilson 6d ago
Everything is and always has been “here’s a pig owe me one”. Humans trade by promises. And there is little hierarchy required if a bunch of people are tasked with stripping you of your assets and your liberty unless a specific type of token is delivered at a particular time.

172 points by gwgundersen 6d ago

deleted 6d ago

[deleted]

I feel like this is either AI-generated or severely lacks context. There might be a point in there, but it might also just be paragraphs of text with little structure joined together. What's the narrative? What does this want to tell me? And why? Something like an opening header block with 2-5 sentences would go a long way.

RivieraKid 6d ago
I just copy-paste the text and ask AI to summarize for 90% of articles I see on HN. One of the most time-saving uses of AI.
- hypfer 6d ago
  That answers the what, but not the why. The why however I'd argue is a lot more interesting. Also, you can often derive the what if you know the why and just follow the thread and map it out.
- pasquinelli 6d ago
  doesn't that mean you spend time reading the summary of articles you wouldn't have read on your own, and thus it wastes time?
jubilanti 6d ago
It is also totally wrong. I got to the third block and quit, as this is just an LLM bullshit version of the 18th century bullshit fantasy of the origin of money (see David Graeber's Debt). You can't describe how various forms of monetary value work in the modern monetary system as if it were a rural village with physical items, because it is fundamentally different.
- hyperhello 6d ago
  It introduced vocabulary well enough though? I get that the specifics were all apocryphal.
gwgundersen 6d ago
I’m happy to hear criticism and to learn from that, but I wrote this myself. Took quite a while. Re: why, I don’t think most people understand the very basics of the global economy in mechanical terms, and this was my attempt to explain those mechanics. I wanted the various pieces of the system to be motivated by understandable problems, hence the fable-like story. I now see some folks were triggered by this stylized approach. Which is a pity. I think the simple setup is worth the payoff. My explanation of money creation, for example, matches the Bank of England’s whitepaper, and I am especially pleased with how the idea of a reserve currency both develops naturally and rhymes with earlier ideas lower in the hierarchy.
- rdsubhas 6d ago
  Your article was well worth the read. Thank you for that. It's merely a HN trend where lazy people who can't read an article bad-mouth it as AI. You'll find the lazy AI comment in every article's top first or second comment now. Don't bother justifying yourself, keep it up and keep writing.
- jasonwatkinspdx 6d ago
  I'd suggest reading about David Graeber and the myth of bartering.
  - throwaway_7274 6d ago
    I'm sure Graeber is right about the ahistoricity of the orthodox just-so story of money, but I've always wondered if perhaps he misread the kind of claim that story is actually making. What if economists don't really intend to make a factual historical claim? What if it's more like the principle of virtual work, if you take the analogy? What if it's saying, look, here are two possible configurations of the world: one with barter and one with monetary exchange. One of these configurations is "more stable" than the other. That's a reasonable explanation for "why" we use money, if you read "why" in a non-causal way. Or maybe economists are straightforwardly careless historians. I don't know!
- aorloff 6d ago
  Try reading Debt : the first 5000 years Money is about trust, not about the problems of bartering
Aramgutang 6d ago
Your attitude is why even short videos shared on social media today begin with a few seconds showing the "payoff" of the video. The risk of having your time wasted is an inherent part of consuming creative works; it makes things more enjoyable when the gamble pays off (dopamine is triggered via reward prediction error). A life where you only consume media with accurately predicted positive utility would be devoid of joy. So I'd say if you want to know the narrative, what it wants to tell you, and why, simply read it. Take the gamble that it may suck, you'll enjoy it more if it doesn't. But also, to avoid being a jerk: it's a piece that attempts to explain the modern global economic system (and the implications of USD being the global reserve currency specifically) from first principles using simple prose, where each "chapter" introduces a new layer of complexity.
- hypfer 6d ago
  > Your attitude is why even short videos shared on social media today begin with a few seconds showing the "payoff" of the video. Nah, you've missed my point and replaced it with some other gripe you have with the current world. These attention deficit previews are something else entirely from what I said. OP wrote an article that jumps in with a list, but it should've jumped in with "In the following paragraphs, I will explain this for that reason, because I think that XYZ". (Edit: Which, the LLM just reminded me, is simply an abstract) It simply lacks an opener. (And in addition, it lacks flow between these individual sections, but that could be okay if the opener handles that problem)
rdsubhas 6d ago
Here we go again. Commenter doesn't read an article because it doesn't fit their style. Immediately bad-mouths it as AI. Edit: typo
wpm 5d ago
I felt that it was neither AI-generated or lacked context.

stymaar 6d ago

> The villagers are tired of bartering Come on… It's been known for more than a century that bartering has never been the default mean of exchange among humans, can we kill this myth eventually?!

compiler-guy 6d ago
This is obviously not an attempt at anything remotely resembling documentary history. It’s more of a just so story explaining what problem each step solved. Unless of course one thinks that smooth gray stones from a riverbed two miles away reflects some historically significant point in money’s evolution.
- jubilanti 6d ago
  I'm not going to explain David Graeber's Debt to you, but yes, this exact 18th century fantasy of the emergence of money in caveman times contains the same kind of misunderstandings that also leads to most people having an incredibly misguided view of how the contemporary global financial system operates.
  - compiler-guy 6d ago
    I certainly don't think anything like this actually happened. And the linked article doesn't really do so either. I do think it can be a useful illustration of what problem each technology solves. In another thread you talk about how the internet really is a series of tubes. We all know that "tubes" can be a useful analogy for understanding certain things about circuits and things built upon them. But we also don't think that tubes are more than a very basic analogy. Tubes don't really do packet switching.
    - __MatrixMan__ 6d ago
      By leading with the improvement-order-barter story, the article announces a bias that borders on propaganda. It's maybe worth objecting to even if the goal isn't to be historically accurate. The problem that was actually being solved when money was invented was how to get recently conquered villagers to support the soldiers that recently conquered them. (Demand taxes in the coinage that you pay your solders with, then they can live off the local economy and you don't have to feed them directly, which might be hard if they're very far away--tax collectors can take years to show up, but the demand for the new currency is instant, so your soldiers get fed right away). The system of interpersonal debt that predated money likely outperformed money in a variety of ways from the perspective of the users. It was only for the conquerors that the invention of money solved any problem at all. It's hard to keep reading the article when it starts with the story that is used to distract from this.

markvdb 6d ago

The part where the bat wielding despot required payment using the money of his issue was left out.

N_Lens 6d ago
Well we wouldn’t want people to lose trust in the black money, right?

Wilsoniumite 6d ago

As someone who works at a financial institution, this is a really refreshing and concise breakdown of money and monetary systems. I think the most important thing that people should realise from reading this is that none of the things we have in our monetary systems were dreamed up for no reason, each solves a clear problem, and often was found by multiple independent groups of people at different times. I absolutely love the fact that it's essentially just layers of trust, analogous to a certificate authority or a domain name system. And, of course, that the top level of trust is a bit arbitrary, and that "black money", of course the US Dollar, isn't worth more than trust in the US government.

rcarr 6d ago
An alternative to the current top level: https://en.wikipedia.org/wiki/Bancor https://en.wikipedia.org/wiki/Bancor
- mitxela 6d ago
  There is no single current top level. There are multiple disparate levels that have no level above them - the Federal Reserve is one, and Bitcoin is another.
ozgrakkurt 6d ago
> I think the most important thing that people should realise from reading this is that none of the things we have in our monetary systems were dreamed up for no reason To be fair, cannibals don’t eat people for no reason either.

Kuyawa 6d ago

The only problem of money is inflation. The ability of one single entity to print money at will, stealing from everybody else without them noticing is one of the greatest con jobs in the history of mankind (and we all know who has the master printer in the world) Money is a beautiful instrument for trading and free markets, the only way for two entities to peacefully exchange goods. Inflate that money supply and you are silently stealing from the pockets of those who trust that instrument

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smitty1e 6d ago
> The only problem of money is inflation. Counterfeiting enters the chat.
- conorcleary 6d ago
  and, already well established is share rehypothication.
mattclarkdotnet 6d ago
Inflation was a problem long before fiat money. It affected the Roman Empire whenever large amounts of gold were added to the money supply through conquests - in fact they understood this at some level because they usually kept it in the temple of Zeus, but in economic downturns they would raid this piggybank. Another historical example is hyperinflation in Spain caused by the huge influx of silver from their central and South American conquests.
vinyl7 6d ago
As much as I hate inflation...there is more to it than just printing money. Because money slowely loses value over time, it incentives investment over hoarding. Bitcoin is a perfect example if this because there is a fixed number of bitcoins. People invest and hold onto bitcoin itself rather than spending it, causing the "value" of a bitcoin to increase. It makes for a poor currency because everyone who bought a pizza for several bitcoins a few years ago is now kicking themselves because they essentially paid tens of thousands of dollars for a pizza...so who would want to spend their bitcoins on something today when it could be worth twice as much in a few months?

elonfboy 6d ago

The crypto bros are gonna have an aneurysm reading this

charcircuit 6d ago

How do you describe money without explaining taxes? There is no money without taxation happening.

mitxela 6d ago
True, everyone knows nobody would use bitcoin if there wasn't a transaction fee
- charcircuit 5d ago
  Transaction fees are not taxes.

skybrian 6d ago

The villager parable is too egalitarian. That's not really how it worked. For most of history, peasants were sustenance farmers, meaning they grew their own food and if the harvest was bad, they could starve. For them, there was no such thing as insurance and they really needed ways to reduce risk. For example, they'd feast their neighbors so that when times were hard, the neighbors would hopefully help them out in turn. Investing in close-knit relationships isn't like barter - it's more like informal credit. Kinship networks still work something like this today. And this meant they didn't really need money. Social obligations were everything. But how do people who aren't peasants themselves get food? By extracting rents and taxes, in return for protection and certain services, perhaps plowing fields. Local "big men" might take payment in kind, but for a more organized government, they'd collect taxes using money, which gave the peasants incentives to grow and sell food for money. So villages would monetize or demonetize depending on the state of nearby governments. A monetized society allows people who aren't farmers to buy food. It allows cities to exist. Therefore, civilization was built on military force, taxes, and rent extracted from peasants, who were the basis of a mostly agricultural economy. Be glad our civilization isn't built on sustenance farming anymore.

renehsz 6d ago
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thisrod 6d ago
Yes. This could be subtitled, "A rational financial system design process: how and why to fake it."
altmanaltman 6d ago
This is a pretty simplistic take as well. Like you end it with saying be glad our civilization isn't built on sustenance farming but in the previous line you say it was built on force, taxes and rent extraxted? Here's a simple counter factual: how do people who are peasants get anything other than food in your model? If they sell the food to get money, your civilization is already not built on sustenance farming and has a working currency. If they don't have money, they will barter which doesn't seem to exist in your model. Also yes, kinship is basically informal insurance where a community collectively takes care of each other. Its not what barter is.

svobodamartin 6d ago

What article is missing is the (hierarchy of) permission. Who can create money, who can access it, who can change the rules, who can freeze or censor transactions or even weaponize whole financial system? What I dislike about fiat is that inflation is treated as a (wanted) feature while it is a cost paid by plebs via Cantillon effect. All Govs keep rolling debt burden being paid with more debt. Paper backed by paper and/or trust into goverments only. History and significant part of the world shows that this trust is being failed too often. How sustainable current system is?

jongjong 6d ago

When I started to understand how money works, it started to feel like everything I've been raised to believe was a lie down to the foundational principles. Even Hanlon's Razor "Never attribute to malice that which is adequately explained by stupidity" also fell apart when I came across Grey's Law "Sufficiently advanced incompetence is indistinguishable from malice." The complexity is extreme and more intricate than any person could have designed. Clearly, it evolved over long periods of time to get to this point. It's worse than a "conspiracy" because a conspiracy requires collaborative intent and a shared understanding. With this system, participants have convergent intent but very little to no shared understanding (as essentially none is required). In terms of outcomes, the system functions in much the same way as a conspiracy, but without any of the self-restraint mechanisms which might otherwise limit the group's actions (as would come naturally if each member had full awareness of what the group was doing)... Which in this case, disturbingly, spans the entire planet and all human affairs. The first step to solving a problem is understanding that the problem exists. This makes this problem particularly difficult to solve because it has power over the collective human minds which created and uphold it. It can replace any dissident with a compatible 'attention head' within its neural net.

hax0ron3 6d ago
What things that you thought were true did you discover were lies?

cs702 6d ago

Wow, what a fantastic blog post! While there are some necessary simplifications, I couldn't find a single mistake on a first pass. Anyone who wants to understand current monetary systems should read it. Substituting "stones" for gold is a brilliant stroke of the pen. It will surely be helpful to any readers who are hung up on gold. Thank you for writing this and sharing it on HN.

jrmg 6d ago

For a (I am sure seriously simplified) history of money, I really enjoyed Jacob Goldstein’s “Money: The True Story of a Made Up Thing.”

renehsz 6d ago

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tug2024 6d ago

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gweinberg 6d ago

There may be some value in this, but it is fundamentally wrong from first to last. First: There never was a great age of barter, you needed to have money before you had a lot of specialization. The idea that you could have brewers trying to pay for everything in beer doesn't resemble anything that did or could have happened. Last: Fiat money wasn't something people voluntarily accepted, it's something governments forced on people. Governments required people to pay taxes in fiat money, governments required people to accept fiat money as payments for debts, governments forced people to "sell" their gold.

kasey_junk 6d ago
Your presentation about fiat money is more biased than anything presented in the article. Take the UK. They only left the gold standard due to ww1. But they broadly stopped accepting anything but governmental currency in the 1400s for tax payment. It turns out money is more useful than commodities even when it’s a 1:1 relationship and even with that 1:1 relationship governments want their currency to have official legitimacy.
cs702 6d ago
The OP never claimed that this is history. The purpose of the story is to explain how things work. Please don't attack a strawman.
mitxela 6d ago
You aren't banned from trading in gold coins.
modo_mario 6d ago
>The idea that you could have brewers trying to pay for everything in beer doesn't resemble anything that did or could have happened. Why not? Tho i suggest only within small communities which made up a larger share of human life at some point and trade beyond them over larger distances would more often be facilitated by certain nonperishable and not too bulky comodities. We have plenty of evidence for such bartering trade even when currency was already more common. (salt for pelts, etc)

simpaticoder 6d ago

Wonderful. I'd be curious to read a spinoff Just-So story about how "ledgers" and "double-entry accounting" came to be. Similarly about stocks and bonds, derivatives and hedge funds.

evrydayhustling 6d ago

This is a really useful taxonomy and illustrative stories... But these stories imply an ordering which is neither essential nor factual in most cases! Check out Graber's "Debt: The first 5000 Years" for some really interesting analysis, including how debt almost always preceded hard currency in early societies. https://en.wikipedia.org/wiki/Debt:_The_First_5,000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5,000_Years

gwgundersen 6d ago
I've read "Debt" and responded more fully here [1]. But I'm curious: given your reading of "Debt", what ordering would you change in my post besides the myth of barter? My sense is that people are reacting to the first couple sentences and missing the entire rest of the post. I don't really see how Graeber is related to the Fed funds rate or currency pegs, e.g. Of course money is political, and I could have framed everything in terms of state violence and control, but that's essentially a different blog post. I don't think that adds a lot of clarity for what mechanically happens at Jackson Hole. Happy to hear how I'm wrong. [1] https://news.ycombinator.com/item?id=49785213 https://news.ycombinator.com/item?id=49785213
- evrydayhustling 5d ago
  100%, that's why I led with the post being useful as-is -- you don't have to shift your view to Graeber's because we can always link to it as a supplement :). IMO part of why myth-of-barter has persisted is because it has worked for helping folks understand our modern finance system (among other reasons, b/c many folks building that system grew up on it as well). So it makes sense to use in an explainer. With that said, it doesn't feel to me like it detracts from anything to start with obligation before currency. Markers of past favors seems like as easy a place to start as trading stones.

lolakutty 6d ago

> The two parties just record the details of the trade on a piece of paper and settle up later.... I think this "paper" would precede the use of stones. When the villagers are tired of bartering, they are not going to magically settle on the use of these stones as value. Because even before that, when the "dairy farmer wants to buy corn, even when he does not have milk to trade" the corn farmer is going to give corn in exchange of a declaration (IOU) from dairy farmer that anyone who is in possession of that IOU is entitled to 5 liters of milk (or what ever the corn was worth to the dairy farmer at that point) from him. New money has entered the system at that point. Because now the corn farmer can use that IOU to barter stuff, either giving corn (produced by himself) or by giving this IOU from dairy farmer (if the other person is interested in accepting milk) I think this would be a much natural evolution of things... And then they would face the problem of counterfiet IOUs, and if they had crypto and signing, they would have used signed IoUs. But then they would need a way to reconcile with the fact that the death or incapacitation of the IoU writers. For example, the IOU written by the dairy farmer becomes worthless if the dairy farmer dies. Then some central body (aka) would enter the picture, as an entity that will never die or disappear, and is the only entity allowed to write IoUs. Solving both the above problems in one fell swoop, by requiring taxes to be paid in its IoUs.

DanielVZ 6d ago

The order of how money emerges is wrong and thus the premise that each step moves the trust higher in hierarchy is wrong. It didn’t necessarily come from banter (see rai stones from yap island). Debt didn’t always come from currency (See Inca system of Reciprocity and Redistribution where there was no currency). Private Banks don’t always precede Central Banks (see Sumerian Temples). I do agree with the argument that money is backed by trust. But I don’t think it’s inherently hierarchical. I think if anything, money and its diverse manifestations in currency are a complex graph where of course there are regions that exhibit hierarchical behavior (eg. Chilean bank backed by Chilean Central Bank that issues bonds and buys or sells US dollars). But for example I believe Crypto/Cigarrets in Prison/Silver/Gold/etc aren’t part of that hierarchical region.

TacticalCoder 6d ago
> But for example I believe Crypto/Cigarrets in Prison/Silver/Gold/etc aren’t part of that hierarchical region. Many early chinese kingdoms had coins as money and they were based on the rarity of the metal. And they began turning to shit when they started creating coins out of thin air, with hardly any rare metal in them: some kingdoms literally lost it all once they began hyper-inflating their currency by creating way too many coins (and at times there were so many worthless coins they couldn't even store them anymore). I think coins made of metal are definitely part of the hierarchy of money. And arguably Nixon "temporarily" ending the dollar's convertibility to gold in the early 1970s is an experiment for which we'll soon see the eventual result: https://www.usdebtclock.org/ https://www.usdebtclock.org/

dwd 6d ago

I would recommend reading Steve Keen's 'Roving Cavaliers of Credit' (2009) for how the monetary system works. https://www.researchgate.net/publication/242706930_The_Roving_Cavaliers_of_Credit https://www.researchgate.net/publication/242706930_The_Rovin...

chuliomartinez 6d ago

The fable of barter… if you feel there is something too cartoonish about the idea, you are not wrong, read some Graeber (debt) if you want to understand how it really worked

rad-b 6d ago

I’m sorry to see so many comments bad mouthing the article when it seems like they didn’t read it. I thoroughly enjoyed it. The fable is convincing and lays down the hierarchical trust pretty clearly. It could benefit more from the political part of economy development, but even just as is, it’s a great primer on some of the more important concepts in modern banking.

csomar 6d ago

I thought this would be about the non-fungibility of money and was greatly disappointed. Some (many? most?) people are not aware that a dollar here is not equal to a dollar there and this got way worse in the last few years. It has become exceedingly difficult to move value around even in the same country (despite the hundredth fintech starting up to solve this problem and move money between friends)

mitxela 6d ago
The situation with dollars reminds me of the situation of bitcoin on MtGox just before it collapsed. The bitcoin price on MtGox diverged from the price on other exchanges. To a casual user it looked like you were getting a good deal by buying it on MtGox but that's because the last people out wouldn't be able to actually withdraw it, because the promise of a bitcoin from an exchange is not the same thing as an actual bitcoin.

pards 6d ago

> longer than it takes the dairy farmer to gather fresh eggs Nit: Cows don't lay eggs

neilwilson 6d ago

Everything is and always has been “here’s a pig owe me one”. Humans trade by promises. And there is little hierarchy required if a bunch of people are tasked with stripping you of your assets and your liberty unless a specific type of token is delivered at a particular time.