Friday, August 7, 2009

The money agreement

My son asked me to explain money to him. This was in the context of telling him that his US money, which he had earned doing chores, wouldn't work in Australia - that he'd have to change it for Australian money.

The funniest things happen when I try to explain things to my kids.

This is what I came to. Money is not something that has value. It's something that people agree has value.

They say money doesn't grow on trees. It's true, and you wouldn't want to use leaves as currency, because the rate of inflation would probably be insane; there are just too many of them. But paper money is only one solution. In some areas of Africa, cowrie shells have been used as money; in ancient Japan, rice was used as money. Modern video games will sometimes have a form of currency, given an arbitrary name ("snelfus" in my son's favorite PBS Kids game), that players have to "earn" through various activities and then exchange for objects of value inside the game world.

The key is this: if you have something I want, I either have to

a. give you something you want, that you feel has equal value, or
b. give you something that you feel you can give to someone else in return for something of equal value.

In a lot of fantasy scenarios, you'll see bartering systems. In many of these, you'll also see gold, silver and bronze coins. I think gold, silver and bronze coins are pretty close to being "things of equal value," because you could argue that the metal itself has an empirical value independent of what is stamped on it. This certainly seems to be the case with pirate gold, where some coins would get cut in half to make sure all the pirates got equal shares.

With paper money, the agreement is the key. I offer someone $10 and they take it, not because they think the pretty paper I've given them is worth that much, but because they know that everyone else agrees it has that value and are willing to exchange it for goods of that value. The change of European money from francs, drachmas, etc. to Euros was a change in the fundamental underlying agreement.

I haven't given a lot of thought to how one could extrapolate this principle in an unusual way for fantasy or science fictional purposes. However, I think it has potential to be stretched. When I thought about it this way, for example, it suddenly made sense why certain vendors in foreign countries (I think specifically of Mexico) will accept American money. They accept it because they know other people who share their idea of its value, and with whom they can exchange it for things they want.

We're leaving tomorrow morning to return to the US, so look for me to blog again after I get home. I hope you're all having a good weekend.


  1. Nice article, Julie. There was a time when I travelled to India,EU,UK,US in a single trip. It was dealing with four currencies at the same time. With credit card it gets easier as everything that you spend gets converted to US dollars. Nice article...

  2. In my upcoming Star Wars game— set at the dawn of the Old Republic— the standard credit is defined by a basket of very basic goods and services for daily life (inspired by The Economist’s Big Mac Index). What actually goes on in your bank account is that you hold a bunch of various goods and service contracts (“100 hours of master-class work from the Droid Engineers Guild”) whose value in terms of credits fluctuates from minute to minute, but all the prices you care about from day to day (e.g. lunch) stay the same in terms of credits. The smarter the droid intelligence you have for converting the actual things-of-value in your bank account to credits at the time you need credits, the better deal you get, but you need to pay for the time of the droid intelligence...

  3. Interesting model, slothman. I could see that might be challenging for the common non-droid intelligence to grasp. Mind you, a lot of the workings of our money are challenging to grasp, too...

  4. I was looking to create a unit of currency that reflected purchasing-power parity, which is what matters to our everyday handling of cash. A hard currency is vulnerable to fluctuations in the availability of the substance backing it (like silver or gold); a fiat currency is vulnerable to the monetary policy of the government backing it, and the stage I’m setting is one where there is a high degree of distrust so a fiat currency wouldn’t be accepted. So your average person would have holdings of various goods (and be able to promise their own future labor as a tradable contract), which they’d convert to credits for their walking-around money the same way we hit the ATM.

    The ultimate result of all this is that the prices in credits of everyday goods remain uniform across the whole galaxy and over time, barring sudden changes in relative cost of production of an everyday good. (Banks would issue credits on a per-economy basis; you’d buy some when you landed on a planet, cash them in when you boarded a ship for another one. From a gamemaster’s perspective, this is very convenient because you only need to make people worry about getting cash at major scene changes; from inside the game, it would be nice to never be annoyed by seeing prices for all the basics like meals and entertainment spiral up throughout their life.)