The lack of money is the root of all evil.

-MARK TWAIN, Mark Twain’s Notebook

I was explaining Bitcoin in an econ class the other day, and that drove home an idea that I’ve been thinking about for a while. That is the value of our money is based on a shared delusion. The delusion that money is intrinsically valuable. I’m defining intrinsic value as a value that an item has inherent in itself. Food, cars, tools are intrinsically valuable. If you own those things you can utilize those things without relying on someone else (theoretically at least). Thus they have an intrinsic value to you. Money does not, at least paper money.

Paper money has no value unless other people value it. If you want a bicycle and have $100 and go to someone and say I’ll give you $100 for that bike. That person in our society will probably be willing to deal with you, because they know the money has value. Say they are crazy (or maybe really sane) and don’t value money. They will not want a piece of paper with Benjamin Franklin printed on it. But that same person may be willing to make a deal if you offer to trade a bottle of wine and a couple of hams.

It is only because our society shares the belief that cash has value; that gives cash value. While we were discussing Bitcoin people were making the point that it wasn’t backed by a government. That begs the question of what value does paper money have, just because it is backed by a government. Government alone does not not give money value. We Americans no longer back our currency by gold or silver. I can’t trade my paper cash for gold at the bank anymore. Of course gold and silver as a currency are somewhat limited, as their intrinsic value is low (like paper money the value comes from people believing it is valuable). The Chumash Indians used to used sea shells as cash. Other cultures have used beads or leather.

Things that modern people think are ludicrous as money, are real to them, because their society shares that belief. It is in fact no more ludicrous that thinking a hundred scraps of paper with green ink can be valuable enough to buy a bicycle.

The class also challenged the validity of Bitcoin as a currency because they did not trust that it could not be easily duplicated or stolen. Of course this same thing exists for paper currency as well. Counterfeiting has existed as long as they has been money. Roman coins were under-weighted thus reducing the supposed intrinsic value of the money. And that was done by the government. Just as modern governments print too much money. We don’t need thieves to counterfeit our cash, when the government is willing to devalue it when it suits them.

As for the idea that hackers can steal your Bitcoins that is true, but robbers or burglars can steal your cash too. The class talked about the Mt.Gox failure. That of course is a trading house that shut down allegedly due to hackers stealing the Bitcoin keys, just like a bank being robbed. The difference is you do not lose money when a bank is robbed, regardless if the robber is a thug or the banks CEO making bad investments and ruining their bank, because the government insures the money put in the bank through FDIC. Before the 1930’s if the bank went bankrupt, was robbed, or otherwise folded with your cash, it was gone. So Bitcoin is no less valuable in that sense, except for not having official government insurance backing it. Of course it could be possible to purchase your own deposit insurance on Bitcoin, just as you can get third party insurance on your valuable paintings or jewelry.

This brings back the central idea that Bitcoin is no more crazy an idea of money than seashells or scraps of paper with George Washington printed on it. What gives it value is the shared societal belief that it is valuable. If a person is willing to trade goods and services for the “money” they do so because they believe that everyone else in society also believes this “money” has value and will act accordingly. Fortunately our shared delusion makes reality. These scraps of paper have value, but as we saw, those who manipulate currency can shatter our illusion and make money worthless. A billion German marks to see a movie for example (1914 $1.00 = 4.2 marks, in 1923 $1.00 = 4.2 trillion marks).

What money really is, is a score system. It shows how much society values your labor or goods. A hamburger flipper is worth the minimum wage of $7.73 an hour, the CEO of the burger place (McDonalds) is worth $9,247 an hour. Money is scoring how much society values you! My water color of whales is worth a few dollars (if that). Robert Wyland’s watercolor of whales sells for $8,200. His time and talent are clearly more valuable than mine (when it comes to painting). That is the secret behind the magic of money. The powers-that-be want you to worry about your money and how secure and valuable it is, rather than worry about how much society values you.