The Story Crypto Tells Itself About The Origin of Money

When cryptocurrency is introduced to someone completely new, it's pretty much inevitable that part of the explanation of what crypto is will include some history of money. If you really want to understand why crypto matters, you need to know what regular money is, and to understand that, you need to go back to its origins.

Almost everyone already knows the story of how people used to barter goods before money was invented. People in early societies would trade two goats for five chickens and so on. It's better than everyone having to raise both goats and chickens, but ultimately it's inefficient. What if you need some chickens, but nobody needs the goats you have to trade?

Fortunately, one day, someone somewhere had the brilliant idea of coming up with intermediary units called a "currency." This magic invention attached a price to everything so that everyone could buy and sell what they need, when they need it, and in amounts that reflect the market value. It's a perfectly logical transition that makes so much sense that it all seems like a natural progression of history. Adam Smith talked about this evolution from barter to currency, and you'll still hear it repeated today by otherwise well educated economists.

The only trouble is that this story is completely untrue. According to anthropologists, there is literally no record in history of any society starting with a barter system and then transitioning to a currency system. The whole concept of currency solving the problems of bartering is a complete myth. It only gets passed around as fact because it seems so intuitively believable. I believed it when I first heard it. But, let this really sink in, it never happened. Or, at least, there is absolutely no evidence it ever happened, and plenty of evidence for other systems of commerce before currency.

What really happened

What's the reality of how people traded before currency? And what actually caused the shift to currency?

There's no one answer to what people did before our modern concept of currency. Some societies put surplus goods in collective storehouses where distribution was handled by trusted members of society. Some societies just immediately shared out everything gained from a hunt or whatever was gathered as a matter of course. Some societies kept records of favors, but not at any fixed rate of exchange. There are probably as many approaches to apportioning surplus and facilitating distribution as there were societies doing it.

All pre-currency systems had their pros and cons, and the specifics are probably influenced by the type of society they have. But one thing they mostly seem to have in common is that they rely on having a community. One in which everyone doesn't necessarily know everyone else personally, but they have a shared sense of ethics about how everything works. If everyone agrees that the village priestess speaks to the gods, and so she can mediate between people about what a fair transaction is, then it generally runs smoothly enough for everyone to function and get the goods they need. Almost any system of commerce or politics can work if everyone involved agrees to abide by it.

It's not clear that currency was a universal solution to problems everyone was having when it replaced these systems within communities. But, currency does do a few things quite well, and at least one area where currency was better than these early forms of commerce was in dealing with inter-community transactions.

If one community has all their reciprocal favors noted by transferring ownership of huge stone discs, and another community has the village elders moderate the community storehouse of surplus goods, then it's hard for those two communities to do business together. Currency does have the advantage that it's much less reliant on specific cultural features in order for disparate societies to come to a consensus on the relative value of goods.

Just like how everything spreads

While it would be nice to think that all these various communities across the world came together on the idea of currency because it was more neutral and fair and the best possible system for global commerce, the reality isn't anywhere near as idyllic. Currency as we know it was spread, like so many things, by power and conquest.

Currency is a really good way for authoritarians of all stripes to centralize power by decreeing that taxes must be paid in the coins minted with the dear leader's face on it. Currency was also a tool for colonial powers looking to make native subjects dependent on trade with their occupiers. And during the colonial area there was a lot of assumptions made by occupying Europeans that the cultures they were ruling over needed to be taught the "right" way to do commerce.

Regardless of the motive or the method, making people conform to the currency of a central power makes everyone under its rule become bound to it, integrated with it, and ultimately dependent on it. And if you're a society next door to a big empire and want to sell your wares to that vast market, you'd do well to get on board with their money system. Currency both expands and unifies empires.

That currency was largely spread by imperialism doesn't make it bad, or good. It's just a thing, and those are the conditions under which we got to where we are now. The question to be asked, though, is, does this change anything about how we see crypto if we now understand that the origin story we've been telling ourselves about it is all based on a misconception?

Obviously, on a purely pragmatic, practical level, the technology of crypto doesn't change just because we view it differently. But, technologies are frequently defined by what we assume to be their purpose. It's because of our general consensus that kitchen knives are for cooking that we think it's beneath mention to have a small armory of weapons in your house.

The stories we tell ourselves

We might want to question why it is that we feel the need to go through the history of money in order to explain crypto. Of course, most people trying to explain crypto are simply reaching for an accessible narrative to get across key points, and using history might just be one arbitrarily selected approach.

But that doesn't mean that turning to history is a perfectly sterile form of explanation, equal to any other. It's not like we routinely explain Babbage's Analytical Engines and Ada Lovelace in order to get people to understand computers or the internet. No one has to play Pong before playing a modern video game. You generally select history over other methods when explaining something when you want to provide a context that explains how something is part of a grander path.

One aspect of promoting the barter to fiat to crypto mythology is that it has the side effect of attempting to legitimize crypto as more than some random crazy new thing that someone came up with one day. No, you see, cryptocurrency is part of human progress. It's the latest stage of a divine evolution in which we, as economic animals, are always yearning to arc towards a perfectly efficient system of trade.

From There To Where, Exactly?

Currency is essentially the abstraction of value. It reduces everything to a number on a spreadsheet, which can be good and bad. Good in that it allows us to do commerce across space and time and with more flexibility than any other system we know of so far. But, it can be, and often is, bad in that it can reduce everything to a number if left unchecked. Capitalism often gets the blame for reducing human lives and the environment and culture into commodities to be bought and sold at the expense of whatever other ethical considerations we might have. But it's currency that provides the specific mechanism to enable that reductivism.

The narrative of barter giving rise to currency, and currency giving rise to crypto can be seen as the arc towards a perfect separation of reality and value. In a barter system, two goats for five chickens is the trading of commodities that have immediate, tangible value. You can eat them or get eggs or milk or whatever. It's hard to think of anything with more objective value to humans than food to consume in order to stay alive.

Trading a chicken for a little gold can be seen as a step towards trading objective value for something more subjective. Gold does have some tangible utility, but that's not so much why we trade with it. Replace gold with currency, and we've stepped more into trading objective reality for subjective agreement.

We're fully in the space of trading unreality for unreality when we've followed this trajectory to the point where people are trading crypto for crypto, using arbitrage and market fluctuations to obtain more value than when they started, without a single thing of utility being created, stored, or consumed. The crypto market today is largely just a constantly running Ponzino, where a good technology is buried under billions of dollars of absolutely meaningless exchange.

Which is a form of collective insanity, but, it feels legitimate because we tell ourselves the story of going from barter to currency. We're telling ourselves that all this trade does ultimately mean something, because someone, somewhere, sold a goat, and someone, somewhere, eventually buys a chicken. All the derivatives and call options and puts and buy walls and shorting and everything that happened in between was for "efficiency."

However, we never actually started from a goat for chickens, and it's not what we're doing now, either.