The Making of Money

Money, it is said, makes the world go round. Its influence over the daily life of the modern capitalist subject is immense and totalizing. While far from a recent development, many of our ancestors hardly interacted with the monetary economy at all. For a modern subject, the largely moneyless lives of subsistence farming peasant only a few hundred years ago seems as distant and alien as a Martian colony in a work of science fiction. Yet, even when removed from the recognizable physical representations of money, the concept of what something is “worth” persists. Twenty yards of linen is equal to one coat, one coat is equal to so many sacks of potatoes, and so on. From this, the value of a commodity can be broken down further into two component parts: its use-value and its exchange-value. A coat is valuable because it keeps us warm, this is its use. That same coat also has an abstracted value relative to what it can be exchanged for, based on the labor time and materials invested in the production of the coat. We know that the coat is valuable because it required so many feet of linen and so much labor time to create. This coat can then be exchanged on the market, according to political economist Karl Marx, because it and all other commodities are related to abstracted human labor, the equivalent form of commodities. 

Where does money enter into the equation of exchange? Money is, also according to Marx, the commodity chosen as the universal equivalent of exchange. It “transubstantiates”, as he often puts it, the use-value of a good into its exchange-value. It takes the place of human labor as the abstract understanding of what commodities are worth. The specific form that money takes is an accident of historical development. In the societies of the old world, for example, gold and silver developed as the acceptable representation of Money. From Ireland to China, a merchant could be sure that a pound of gold would be, literally, worth it’s weight in gold. However, as Milton Friedman’s paper “The Island of Stone Money” demonstrates, who is to say that gold and silver really have value?

For the islanders of Yap, a remote Micronesian society of a few thousand people, Money existed in the form of large, circular disks of limestone. As Friedman admits, he first thought that these people were “silly” and “illogical” for treating giant stones as valuable currency. On further reflection, the example of the Yap islander revealed to him the counterintuitive nature the money-form. The bank vaults of gold and silver that were once the standards of international trade were no more real than these gigantic stones on the side of the road. Both had value because it was something everyone agreed was valuable. Diverging from Friedman’s observations to make my own, we can see the islanders use the stones in exactly the same way gold and silver was used. Need to make a dowry? Simply mark off that ownership of one of your giant rocks has been transferred to the other family. So long as everyone agrees that this is the universal commodity for exchange, it can fulfill its purpose even if it seems to be silly to us at first. For one of these islanders, our paper currency would have elicited similar responses to Friedman’s initial thoughts. Money is a social invention that can only stand in for abstract labor as long as people believe that it is worth what we say it is. Otherwise, it will lead to a legitimacy crisis for money, where its perceived, and therefore real value constantly fluctuates.

Episode 423 of the radio program “This American Life”, “The Invention of Money”, offers a look into what happens when money loses its value. The second section of the program details the inflation crisis in Brazil during the 20th century which saw decades of crippling price rises, and how a team of economist devised a plan which fixed it in an unprecedented way. As the program details, the Brazilian government, to finance its building of a new capital for the country, printed large amounts of money to fund the project. While every central bank can increase the money supply, it carries risks when done too quickly. As Chana Joffe-Walt explains in the program, “If there’s say, a hundred dollars in the economy, you create a hundred more, now every dollar is worth half as much. That’s inflation.” This process of inflation is exactly what the president had started when building this new capital in the 1950s. From there, the Brazilian government continued to print money to finance itself, which in turn depreciated the value of its currency even more. As described in the program, the inflation rate reached levels as high as 80% a month.

To solve this crisis, the government eventually enlisted the help of four Brazilian economists. Their plan was almost unbelievable: they proposed the creation of a new currency, the URV. The URV, unlike a normal currency, would not be printed. It would exist only as a legal fiction. However, it was a necessary tool to convince a population that their money had value, even when all of their experience in the previous 4 decades told them otherwise. The trick was to get people to think in terms of URVs rather than in the local currency. Payroll, taxes, and prices were all listed in URV, with the central bank publishing an official conversion rate every day. Despite the URV literally not physically existing anywhere, this scheme worked. After the population became used to the URV, the final part of the plan was implemented. Overnight, a new currency was shipped out to banks all across the county. It was worth one URV and one US dollar. The old currency had been supplanted in the minds of the population by the URV, so when the time came to replace the real day-to-day currency, it was a natural transition since it was pegged to the trust URV. Which, I cannot stress enough, did not physically exist anywhere!

The case of the Brazilian inflation miracle ties back to the theories of what money actually is: a delicate feat of societal engineering that serves as a universal equivalent for the exchange of commodities. It is the mystifying abstraction of human labor that facilities the trade of goods and services. I can sell my hat for 30 dollars and use that money to purchase food without the need for someone to want to trade food for my hat. Money, when understood as a technologic instrument, become comprehensible. It is not magic, but a tool which develops accidentally in history to facilitate exchange. However, with substantial effort and clever policy, it can be invented deliberately, so long as everyone believes in it. In this way, money is a secular religion; separate from the use-value of commodities. It derives its value as a commodity from belief rather than any unabstracted utility. A coin has no significant use if it cannot be exchanged; a coat can keep us warm even if we cannot trade it.

References

Friedman, Milton. “The Island of Stone Money”. Stanford, 1991.

Glass, Ira. “Episode 423: The Invention of Money. This American Life. Chicago, 2011.

Marx, Karl. Capital: A Critique of Political Economy. Vol. 1. Trans. Ben Fowkes. New York: Penguin, 1990