This is explained admirably in the first serious book I ever read on the topic, by Professor Glynn Davies. Professor Davies very literally wrote the book on the history of money. It’s called “A History of Money” (University of Wales Press) and a signed copy has pride of place on one of my money bookshelves.
As both Glynn and David point out, the store of value predates the means of exchange by several thousand years. There were banks, and banking, long before there were market exchanges of a circulating medium of exchange (“cash”, for short). By coincidence, while I was enjoying David’s book, two newspaper stories popped up to illustrate some key points about the functions of money. The first concerns fish, the second antiques.
There’s been a mackerel economy in federal prisons since about 2004, former inmates and some prison consultants say. That’s when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard.[From Mackerel Economics in Prison Leads to Appreciation for Oily Fillets – WSJ.com]
Anything can be the medium of exchange, as long is it fulfils certain basic requirements (easy to assay, hard to forge, etc). What I didn’t pick up on, until @heathervescent explained it to me today, is that the mackerel are actually desired by certain groups of prisoners because they are high protein and the prisoners who are working out and body building underwrite, in essence, the value. Thus the technology of vacuum-packing has made a store of value into a medium of exchange.
The second story originates in Merrie England, and concerns the use of very expensive antiques as a long-term store of value and mechanism for deferred payment by persons operating in the less-regulated parts of the economy.
In fact, recent trends indicate that these types of high-value items are actually being used by organised crime groups as currency or collateral in relation to serious criminality, often involving drugs.’[From Antiques haul worth £5m from England’s stately homes after gangs’ garages are raided | Mail Online]
The story of the drug dealers exchanging claims on antiques was wonderful, and it reminded me of the story of the stone money of the island of Yap as so nicely explained in the “This American Life” podcast about money.
Ira and Planet Money producer Jacob Goldstein discuss a pre-industrial society on the island of Yap that used giant stones as currency.[From The Invention of Money | This American Life]
The islanders used huge stones (that came from a special quarry on another island) to serve as a store of value. When a stone was transferred from one person to another, it didn’t actually go anywhere, but the community noted that change of ownership (this is, as I’ve mentioned before, a bit like Bitcoin!).
Every time we do a transaction, we tell (essentially) everybody else that the bits now belong to you. The closest analogy to this is the stone currency of the island of Yap, in the South Pacific[From What should the “mainstream” think about Bitcoin?]
Everyone was happy. So long as the claim was understood by the community, there was no problem. This extended to the very bottom of the Pacific Ocean, since the rafts transporting the stones from the quarry to Yap would occasionally sink, sending the stone to Davy Jones locker. But that didn’t matter, so long as the community agreed who the stone belonged to. The fact that you couldn’t touch or even see the stone didn’t matter. Same for the Ming vases, Chesterfield furniture and mint-condition Matchbox cars (or whatever). Technology can step in to make the claims unforgeable and instantly transferrable at low cost, but that doesn’t change any of the essentials.
There is one clear implication of this, though. Once the technology means that the store of value can be used as a means of exchange with minimum overhead and maximum convenience, and once that technology is available to everyone, then who knows which currencies will find favour with consumers, businesses and governments?
Ultimately, Google will need to have its own virtual currency that can compete with nation-state currencies. If Google can provide such an offering, precisely at the time when nation-state currencies are in trouble, the firm’s share price may explode — and a new monetary world order may be upon us.[From After Wallet, Google’s Only Missing Piece Is The Virtual Currency – Seeking Alpha]
But what would Google’s currency be based on? Their stock? Nothing? My thinking is that it might be energy. I understand that Google have investments in renewable energy and everyone needs energy. So imagine a Google currency that is denominated in kilowatt hours. If you have a google dollar, you can take it to Google at any time and have it redeemed for a kilowatt hour of electricity from a renewable source that they have invested in. It kind of makes sense, as we’ve discussed before.
The argument goes like this: if you save fiat currency for your old age, you don’t know what it will be worth, whereas if you save energy, health care and food for your old age you know exactly what you will get and therefore can plan more effectively. In other words, why save dollars to buy an uncertain amount of heating when you can save kilowatt hours instead and know exactly what you will get? There is a logic to this: there’s no reason why your pension company couldn’t deal with a portfolio of alternative and complementary currencies just as it deals with a portfolio of shares.[From Digital Money: Medical matters]
Of course, they might also store e-mackerel and digital claims on antiques as well. The point is that once the exchange is automated, we should let the market develop not only the payment mechanisms but the currency itself.
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