Money is a tool. A lot of people don’t think of it that way, but it is. At its most basic, a tool is a means to an end. If someone needs to lift a heavy object, a lever is the perfect tool. A bucket effectively holds liquid. A saw cuts. Trains transport people and things. I could go on, but there is no need. All these things are tools, and money is no different.
If you think it’s obvious that money is a tool, hang in there a little bit. I want to belabor this point since it is vital to my endgame. There are many different kinds of tools. There are physical tools, hammers and nails, and abstract tools, the FOIL method and ratios. Some tools are unitaskers, like screwdrivers, while others are multitaskers, like computers. Many tools can be used for things not intended by their designers. I mentioned screwdrivers being unitaskers a moment ago. That means that they were designed to tighten and loosen screws and that’s it. A screwdriver could be used as a weapon, though. Likewise, a knife can be used as a screwdriver. There’s usually a drop off in efficacy when a tool is forced into service as a different kind of tool.
How do we use money?
Money is a bit unusual as it is partly physical, little pieces of paper and metal, but it is also partly abstract, lines of computer code or IOUs. Otherwise, money is a pulley or an algorithm only designed for different jobs. Alfred Milnes said, “Money is a matter of functions four – a medium, a measure, a standard, a store.” That’s a catchy way to remember it. All it is really saying is that money is a tool with four main functions. Money is a medium of exchange, a measure of value, a standard of deferred payments, and a store of value. It can be used for other things, like conferring status, but the four main functions are why we use this particular tool.
Throughout history, society has been drastically altered by changes in the tools we use. An obvious example is going from a spade to a plow to a tractor. The amount of food produced by one farmer is exponentially larger than it used to be. Whether this is progress or not is a matter of opinion, but change, growth, and expansion have been driven by innovating our tools. One tool that has been resistant to change, however, is money.
There have been plenty of financial and economic innovations over the years. Interest, credit, securities, bonds, and taxes are some of the more famous. Money itself has been remarkably consistent. If we could pluck someone from thousands of years in the past, that person would have a great deal of trouble understanding REITs and Exchange-Traded Funds, but they would have no trouble with money. The person may need some time to learn the denominations and may think it looks funny. What it is and how it works, though, would be no problem at all.
The question we should be asking ourselves is, should we be satisfied continuing to use a tool that has seen very few changes over thousands of years? A lot of people will instantly answer yes. It just shows what a brilliant invention money was. We still use levers. Don’t mess with the classics. This is being too hasty, though. It’s true that we still use levers, but we don’t use them for everything we used to use them for. In many cases, they have been replaced with wheels and engines and winches and magnets. To know if we should be satisfied with money, we need to take a closer look at the things we use it for and ask whether there are other ways to accomplish those tasks.
How useful is money?
We’ll take Milne’s rhyme backwards and start with money as a store of value. The concept here is simple. Money allows us to keep something of value for later use. Money is an effective tool for this purpose, but it is far from the only one. Anything that is durable and people attach value to will work. Houses, stamps, art, and books are just a few examples of things we use to store value. We don’t usually use foodstuffs since they are not durable, they rot. Portability is nice to have. It would be unwieldy to try to use houses for most transactions. Even with those restrictions, the possibilities for stores of value are almost endless. We use money mainly because we are used to it. It’s comfortable. However, money isn’t always effective. Hyperinflation is the most common way for it to fail to store value. Political instability is another. In times of crisis, people often turn to things with more tangible value, things that have been crafted or are inherently useful. That at least suggests we may be able to do better.
Next, we use money as a standard of deferred payments. It is hard to separate money from its use in this case. In a barter system, the standard of payment is whatever the seller wants or needs at that moment. There were no deferred payments, at least in a market setting. Friends and family might have deferred payments (you use my hoe now and give me a bushel of wheat at harvest), but most economic activity couldn’t be done that way. When tools like credit were created, money was baked in. That doesn’t necessarily mean that there is no other way to do it, but a new tool might feel like starting from scratch. Although, the fact that we can convert one currency into another may show us a path forward.
Money as a measure of value almost splits the difference between the prior two functions. On one hand, we use all kinds of things to measure value: age, usefulness, and beauty being three. On the other, money standardizes the measurements. Standardized measurements are useful for a lot of things, like accounting. At the same time, we resist placing a monetary value on lots of things, especially things we care about. Many are appalled when they find that insurance companies compute a “human life value” (it’s a combination of age, gender, occupation, salary, dependents and things like that. Yes, according to insurance companies and governments, Elon Musk is more valuable than your mom.). Aside from money as a measure making people uncomfortable, it isn’t objective. A meter is a meter, always, no matter what a person is measuring. Money changes value over time and space. Anyone who remembers the cost of a gallon of milk when they were kids knows that. Clearly, there is room for improvement when measuring value.
Finally, we come to money as a medium of exchange. This is the most classic use of money. We all know the story of the inefficiencies of barter. One person makes shoes. Her neighbor raises dairy cows. She wants milk every day, but her neighbor doesn’t need shoes that often. The shoemaker can either trade her shoes for things the farmer needs, or the two could invent money and make their trades with that. In a sense, money helps solve problems of scarcity and distribution. Money is much more efficient than bartering, but the problems of scarcity and distribution have change dramatically in the last 200 years. People can now produce virtually unlimited supplies of necessities and get them all over the globe. For many people, money has become the barrier to getting them what they need. If the tool no longer works, it raises the question why we are still using it.
What is truly valuable?
So, it all comes down to the fact that in economics and finance, we are all using abacuses and slide-rulers, and no one is even trying to invent a graphing calculator. There have been innovations, cryptocurrency is the big one now, but they are changes in style, not substance. An electric screwdriver is still a screwdriver. I’m not saying we should abolish money. Levers still have many uses. I’m saying we should no longer be satisfied with money as the primary economic tool.
I do see a way forward, though. People have spent decades talking about the inherent worth and dignity of all human beings. That’s just a step away from making the self the primary store of value. When it comes to measuring value and means of exchange, things will become a lot clearer when we make a hard distinction between needs and wants. Perhaps food, shelter, water, and the like could be directly distributed while money is still used for leisure. The hardest is the standard of deferred payments. As mentioned, everything we’ve built assumes money. Imagine if that were the case with technology and levers. Would we reject the lightbulb because it doesn’t use a lever? We need to be open to all possibilities to get meaningful change.