Money is a fiction.
That doesn't mean that the bills in your wallet or the numbers in your bank account aren't real — it just suggests that the only reason money has value is because we believe it does. At least that's how Jacob Goldstein, host of NPR's Planet Money, explains it in his recently-released book, Money: The True Story of a Made-Up Thing. The book gathers fascinating accounts about money that go as far back as ancient times, all the way to the birth of cryptocurrency and the latest moves by the Fed.
While some finance books may be dense and dry, Goldstein mixes his "true story" of money through insightful, peculiar tales — that are laugh-out-loud funny, too. Money caught up with Goldstein to talk about his new book, the evolution of currency over the centuries, and why we can all have more money.
Some questions and answers have been edited for brevity and clarity.
You present the history of money in a very detailed and even entertaining way. Where did the initial idea for this book come from?
When I got to Planet Money 10 years ago, I started doing historical stories and asking "what is money?" And it's a really interesting question. I was in my mid-30s and I thought of myself as well-informed about the world, but I realized I didn't really know what money was. When I started looking into it, what became clear is that there's this really rich history because money has been reinvented again and again. It became clear that following it over time, telling this series of origin stories of what money is and how people think about it would be a good book.
You write: "The thing that makes money money is trust." Does that mean the only thing that lends money any value is our willingness to believe in it?
I think you're right, yes. And clearly today, when we have money backed by nothing, that's true in a pretty straightforward way. You can't really do anything with a $100 bill that makes it worth $100. It's only the fact that people will give you stuff in exchange for that bill that makes it worth $100. In a subtler way, I think that was true even under the gold standard when $100 got you about five ounces of gold. But the "moneyness" of the gold is the trust. When a thing becomes money, whether it's gold or in other places cattle or cowrie shells, the money part is the trust. It’s the belief that other people will accept the thing as money.
Why do you think people hold such beliefs and trust that money is...money?
That's a fun question. I mean, it's useful for us all to believe in it together. I thought of money in this very cold way because I associate greed and material gain with a very individualistic worldview. But money is a useful thing. It exists only when everybody gets together and agrees to believe in money. To me, that's a fun counterpoint to this kind of individualistic thing; there's a real collective belief that makes it work. And so, I think people believe it because it's useful and they believe it in practical terms because everybody else believes it.
We’ve talked about belief, trust, perception... all these abstract concepts. I think they go hand in hand with the notion that money is essentially a made-up thing. So, are there alternatives to money?
I think yes, depending on the sort of setting. There are and have been very small non-industrial societies, based on a group of people that is small enough that they all know each other. Traditionally, they're largely self-sufficient, so they make or grow most of what they need, and they have strong norms of reciprocity and giving. Those cultures can exist without money, so that's one end of the spectrum.
If you get to a bigger society, I feel like you can get by without money if you have a lot of centralized power. The Incas apparently didn't have money. The Emperor and his people took what was grown or made and gave it to other people as they saw fit. There is the tribute economy, where it's basically the government or the elites in some fashion deciding who gets what. So that's another option for a moneyless society.
Given those two options, I feel like we need money. I don't want to live in a society where somebody else takes everything I make and decides what I get or don't get. In the world I live in, I feel like I need money.
One of the chapters revolves around the idea that everyone can have more money. So, how can I get rich?
I assumed that if somebody is getting richer, then somebody else must be getting poorer. But that's not true. In the long arc of history, many, many people have gotten richer.
One really interesting way of understanding that is this study by an economist named Bill Nordhaus, where he looked at the history of artificial light so he could answer the question: If a typical worker at different points in history spends a day's wages to light up a room with artificial light, how long can the light last? And he found in ancient Babylon, a worker who spent all that they earned in a day to light up a room with sesame oil, it was like 10 minutes of light, and that persisted for a long time.
We had the industrial revolution in 1800 when productivity really took off. And productivity is an essential idea for how we can all have more money. The basic idea of productivity is, if you work for an hour, how much stuff do you make? How valuable is it? And what happens over the last couple hundred years is that with new machines and new technologies, we get better and better at making stuff, so that a worker today produces much more than a worker 100 years ago and can buy much more.
Mario Draghi, the former president of the European Central Bank, uttered the phrase ‘whatever it takes’ during uncertainty in regard to the euro. You wrote: "The mere promise was enough to end a panic." Would you agree that a powerful figure can just make a statement and finances will be affected, for good or ill?
Yes, it's especially true with central banks. It's certainly true with the Federal Reserve in the U.S. It's basically about credibility. Central banks have the power to create money out of thin air by the trillions of dollars, and they are using that power now in the crisis. And if people believe central bankers, then a simple statement from them is very powerful.
We just saw the Fed shift the way it's going to think about inflation in the long run. Jerome Powell said we’re going to leave interest rates lower for longer, we're going to let the economy run hotter, we're going to let unemployment come back down… and people move lots of money around based on what Powell says or what the head of the European Central Bank says because they believe them and because they are powerful. Just the promise to do something is super powerful.
Editor’s note: Mario Draghi accepted a mandate to become prime minister of Italy, and after winning a vote of confidence, he was sworn in on February 13th, 2021.
Have your views on money changed since finishing the book?
One of the big lessons of the book for me is that money has changed again and again. So, we're not done. Money is going to continue to change, and I think it was hard for me to really feel that lesson. I think there's such a strong tendency to innately feel like the way the world works is the default setting. But in fact, there are lots of different ways to do money, have banks or not have banks, and the way we do money will almost certainly continue to change. And I think I am much more aware of that and much more humble about trying to predict what's going to happen, or even what would be good or bad.
Money: The True Story of a Made-Up Thing is out now.