Sapiens: A Brief History of Humankind

In fact, even today coins and banknotes are a rare form of money. In 2006, the sum total of money in the world is about $60 trillion, yet the sum total of coins and banknotes was less than $6 trillion.⁷ More than 90 per cent of all money – more than $50 trillion appearing in our accounts – exists only on computer servers. Accordingly, most business transactions are executed by moving electronic data from one computer file to another, without any exchange of physical cash. Only a criminal buys a house, for example, by handing over a suitcase full of banknotes. As long as people are willing to trade goods and services in exchange for electronic data, it’s even better than shiny coins and crisp banknotes – lighter, less bulky, and easier to keep track of.

For complex commercial systems to function, some kind of money is indispensable. A shoemaker in a money economy needs to know only the prices charged for various kinds of shoes – there is no need to memorise the exchange rates between shoes and apples or goats. Money also frees apple experts from the need to search out apple-craving shoemakers, because everyone always wants money. This is perhaps its most basic quality. Everyone always wants money because everyone else also always wants money, which means you can exchange money for whatever you want or need. The shoemaker will always be happy to take your money, because no matter what he really wants – apples, goats or a divorce – he can get it in exchange for money.

Money is thus a universal medium of exchange that enables people to convert almost everything into almost anything else. Brawn gets converted to brain when a discharged soldier finances his college tuition with his military benefits. Land gets converted into loyalty when a baron sells property to support his retainers. Health is converted to justice when a physician uses her fees to hire a lawyer – or bribe a judge. It is even possible to convert sex into salvation, as fifteenth-century prostitutes did when they slept with men for money, which they in turn used to buy indulgences from the Catholic Church.

Ideal types of money enable people not merely to turn one thing into another, but to store wealth as well. Many valuables cannot be stored – such as time or beauty. Some things can be stored only for a short time, such as strawberries. Other things are more durable, but take up a lot of space and require expensive facilities and care. Grain, for example, can be stored for years, but to do so you need to build huge storehouses and guard against rats, mould, water, fire and thieves. Money, whether paper, computer bits or cowry shells, solves these problems. Cowry shells don’t rot, are unpalatable to rats, can survive fires and are compact enough to be locked up in a safe.

In order to use wealth it is not enough just to store it. It often needs to be transported from place to place. Some forms of wealth, such as real estate, cannot be transported at all. Commodities such as wheat and rice can be transported only with difficulty. Imagine a wealthy farmer living in a moneyless land who emigrates to a distant province. His wealth consists mainly of his house and rice paddies. The farmer cannot take with him the house or the paddies. He might exchange them for tons of rice, but it would be very burdensome and expensive to transport all that rice. Money solves these problems. The farmer can sell his property in exchange for a sack of cowry shells, which he can easily carry wherever he goes.

Because money can convert, store and transport wealth easily and cheaply, it made a vital contribution to the appearance of complex commercial networks and dynamic markets. Without money, commercial networks and markets would have been doomed to remain very limited in their size, complexity and dynamism.

How Does Money Work?

Cowry shells and dollars have value only in our common imagination. Their worth is not inherent in the chemical structure of the shells and paper, or their colour, or their shape. In other words, money isn’t a material reality – it is a psychological construct. It works by converting matter into mind. But why does it succeed? Why should anyone be willing to exchange a fertile rice paddy for a handful of useless cowry shells? Why are you willing to flip hamburgers, sell health insurance or babysit three obnoxious brats when all you get for your exertions is a few pieces of coloured paper?