Money is not metal. It is trust inscribed.

A succinct explanation of money.  From The Ascent of Money by Niall Ferguson.  He ultimately builds to the central point which is too often overlooked - money is a mark of trust and in the complex modern economy the arch of trust is what upholds the entire structure.  Lose trust and you lose everything.  

The Yellow Vests in France, the truckers in Canada, the protesters in Italy, the parents of school children in America, holders of assets in America - there is a lot of trust being lost by governing authorities at the moment.  

What the Spaniards had failed to understand is that the value of precious metal is not absolute. Money is worth only what someone else is willing to give you for it. An increase in its supply will not make a society richer, though it may enrich the government that monopolizes the production of money. Other things being equal, monetary expansion will merely make prices higher.

There was in fact no reason other than historical happenstance that money was for so long equated in the Western mind with metal. In ancient Mesopotamia, beginning around five thousand years ago, people used clay tokens to record transactions involving agricultural produce like barley or wool, or metals such as silver. Rings, blocks or sheets made of silver certainly served as ready money (as did grain), but the clay tablets were just as important, and probably more so. A great many have survived, reminders that when human beings first began to produce written records of their activities they did so not to write history, poetry or philosophy, but to do business.  It is impossible to pick up such ancient financial instruments without a feeling of awe. Though made of base earth, they have endured much longer than the silver dollars in the Potosí mint. One especially well-preserved token, from the town of Sippar (modern-day Tell Abu Habbah in Iraq), dates from the reign of King Ammi-ditana (1683-1647 BC) and states that its bearer should receive a specific amount of barley at harvest time. Another token, inscribed during the reign of his successor, King Ammi-saduqa, orders that the bearer should be given a quantity of silver at the end of a journey.

If the basic concept seems familiar to us, it is partly because a modern banknote does similar things. Just take a look at the magic words on any Bank of England note: ‘I promise to pay the bearer on demand the sum of . . .’. Banknotes (which originated in seventh-century China) are pieces of paper which have next to no intrinsic worth. They are simply promises to pay (hence their original Western designation as ‘promissory notes’), just like the clay tablets of ancient Babylon four millennia ago. ‘In God We Trust’ it says on the back of the ten-dollar bill, but the person you are really trusting when you accept one of these in payment is the successor to the man on the front (Alexander Hamilton, the first Secretary of the US Treasury), who at the time of writing happens to be Lloyd Blankfein’s predecessor as chief executive of Goldman Sachs, Henry M. Paulson, Jr. When an American exchanges his goods or his labour for a fistful of dollars, he is essentially trusting ‘Hank’ Paulson (and by implication the Chairman of the Federal Reserve System, Ben Bernanke) not to repeat Spain’s error and manufacture so many of these things that they end up being worth no more than the paper they are printed on.

Today, despite the fact that the purchasing power of the dollar has declined appreciably over the past fifty years, we remain more or less content with paper money - not to mention coins that are literally made from junk. Stores of value these are not. Even more amazingly, we are happy with money we cannot even see. Today’s electronic money can be moved from our employer, to our bank account, to our favourite retail outlets without ever physically materializing. It is this ‘virtual’ money that now dominates what economists call the money supply. Cash in the hands of ordinary Americans accounts for just 11 per cent of the monetary measure known as M2. The intangible character of most money today is perhaps the best evidence of its true nature. What the conquistadors failed to understand is that money is a matter of belief, even faith: belief in the person paying us; belief in the person issuing the money he uses or the institution that honours his cheques or transfers. Money is not metal. It is trust inscribed. And it does not seem to matter much where it is inscribed: on silver, on clay, on paper, on a liquid crystal display. Anything can serve as money, from the cowrie shells of the Maldives to the huge stone discs used on the Pacific islands of Yap. And now, it seems, in this electronic age nothing can serve as money too.  

The central relationship that money crystallizes is between lender and borrower. Look again at those Mesopotamian clay tablets. In each case, the transactions recorded on them were repayments of commodities that had been loaned; the tablets were evidently drawn up and retained by the lender (often in a sealed clay container) to record the amount due and the date of repayment. The lending system of ancient Babylon was evidently quite sophisticated. Debts were transferable, hence ‘pay the bearer’ rather than a named creditor. Clay receipts or drafts were issued to those who deposited grain or other commodities at royal palaces or temples. Borrowers were expected to pay interest (a concept which was probably derived from the natural increase of a herd of livestock), at rates that were often as high as 20 per cent. Mathematical exercises from the reign of Hammurabi (1792-1750 BC) suggest that something like compound interest could be charged on long-term loans. But the foundation on which all of this rested was the underlying credibility of a borrower’s promise to repay. (It is no coincidence that in English the root of ‘credit’ is credo, the Latin for ‘I believe’.) Debtors might periodically be relieved - indeed the Laws of Hammurabi prescribed debt forgiveness every three years - but this does not appear to have deterred private as well as public lenders from doing business in the reasonable expectation of getting their money back. On the contrary, the long-term trend in ancient Mesopotamia was for private finance to expand. By the sixth century BC, families like the Babylonian Egibi had emerged as powerful landowners and lenders, with commercial interests as far afield as Uruk over a hundred miles to the south and Persia to the east. The thousands of clay tablets that survive from that period testify to the number of people who at one time or another were in debt to the Egibi. The fact that the family thrived for five generations suggests that they generally collected their debts.

It would not be quite correct to say that credit was invented in ancient Mesopotamia. Most Babylonian loans were simple advances from royal or religious storehouses. Credit was not being created in the modern sense discussed later in this chapter. Nevertheless, this was an important beginning. Without the foundation of borrowing and lending, the economic history of our world would scarcely have got off the ground. And without the ever-growing network of relationships between creditors and debtors, today’s global economy would grind to a halt. Contrary to the famous song in the musical Cabaret, money does not literally make the world go round. But it does make staggering quantities of people, goods and services go around the world.

The remarkable thing is how belatedly and hesitantly the idea of credit took root in the very part of the world where it has flourished most spectacularly.