Thinking About Money, Part II: The Many Uses of Money

One reason there have been so many monies in the past is because money has several functions. Amongst others, money is used as a store of value, to facilitate trade and to provide a common measure of value. When we think of money as being backed by the value of gold or silver, we are conflating one possible use of money with money in general. The range of uses makes money both confusing to understand and powerful in operation.

The silver or gold content of ancient coins did serve as a store of value. The silver or gold would hold value even if the issuing authority no longer existed. Indeed, coins circulated many centuries after they had been minted or whose origins were unknown. Merchants would by preference hold high value coins. The problem was determining relative value. The silver or gold content was highly variable and assaying was expensive and time consuming. Further, the value of silver and gold was unstable over time and varied from place to place. For instance, silver imports from the discovery of the new world destabilized the value of silver throughout Europe and caused a significant inflationary wave. Further, most trade was still barter so it was not clear that silver or gold would be useful in all circumstances. So rather than gold and silver, land was often seen as a better store of value. Even today, gold is seen as a hedge against inflation — a good store of value — despite a fair degree of price volatility. Indeed, one of the arguments for Bitcoin is that it represents a better store of value than gold. In sum, gold and silver served as imperfect and limited stores of value throughout much of the ancient and medieval world.

The second function of money is to facilitate trade. Money provides a common means of exchange for people who do not share goods that they can barter. In any minimally developed economy, specialization makes this necessary, as it is impossible to link a complex web of intermediaries and specialists in a system of barter. This seems obvious and simple but notice in this use that storing value is not a significant concern. Any coin both parties are willing to accept is good enough regardless of the long term value of that coin. Often, medieval cities would radically debase small coins when economic and population growth caused a shortage of silver for minting new coins to keep the economy functioning (fiduciary money). As long as all parties agreed to the value of the coins for trading purposes, the loss of silver content did not really matter. Today, stablecoins are meant to serve a similar function. According to Coinbase on October 26th, Bitcoin had a 24-hour trade volume of $34.9 Billion and an average hold time of 84 days. USDT, on the other hand, had a 24-hour volume of $77 Billion and an average hold time of 1 day. While one could obviously hold USDT as a store of value while using Bitcoin for day-to-day trading, it is clear they are generally being used in quite different ways because they are, in fact, quite different kinds of money.

A third function of money is to provide a measure for comparing value. Trying to price thousands of commodities in terms of each other is impractical without the aid of computer systems. Money facilitates trade because it acts as a shared value. The US Dollar is the most obvious money in this instance with nearly 90% of international trade priced in dollars. Indeed, almost all cryptocurrencies are denominated in dollar values and the vast majority of stablecoins are tied to the US Dollar (hence, they are stable against the dollar, but not stable in stored value as that will vary with the dollar). This is why the Ethereum Network gas fees, while paid in Ether, are quoted in US Dollars. The gas fee changes, and the value of Ether changes, thus it is more convenient and transparent to have an agreed upon unit of comparative value. Our poor medieval merchant suffered most from a lack of a widely accepted measure of comparative value. There were so many special taxes, sumptuary laws, exclusions and restrictions combined with numerous coins that it was much more an art than a science to make successful trades. Gold was generally useless for comparative value because it was so rare most people never saw gold coins and had no sense of its value. A significant part of the US Dollar’s power derives from this amazingly useful quality — a universally accepted unit of comparative value. Like Latin, a language that continued to be used for communication amongst elites for 1,000 years after the fall of the Western Roman empire, it is quite possible the US Dollar could be used as a measure of comparative value even if the US were eclipsed as the world’s largest economy.

With different uses of money, why should there not be multiple kinds? With so many new jurisdictions capable of issuing coins, why should we not expect a vast array of coins?