What is money?

Key Markets report for Monday, 28 April 2025

​At university, I studied economics. It may not have been a complete waste of time and energy, but at times it definitely felt that way and, as I would find through my professional life, it left me almost completely ill-equipped to deal with everyday realities of financial and commodity markets. That’s in spite of the fact that I made every effort to learn and understand the curriculum and managed to graduate with the Magna Cum Laude distinction, at the top of my class.

Thanks for nothing, Dr. Gucciardo

One of the questions that bothered me was simply, what is money? The curriculum addressed it, of course, but not so much by answering the question, but by listing the functions of money, defining a number of aggregate measures of it (M1, M2, M3…) and providing us with a tall tale about money creation - a tale I couldn’t quite digest.

When my economics professor went through the lecture about money creation, he asked, “is that clear,” and I raised my hand: it wasn’t clear. He then rushed through the exact same explanation that I didn’t understand the first time and again asked if it was clear. It still wasn’t, but I could feel my classmates stares: don’t you dare…! They were eager to get out and I wasn’t going to force them to sit through the third rendering of the non-explanation explanation. Sure, Dr. Gucciardo, I got it now, thank you!

I figured I’d read the chapter on money creation and that should do it; I did and it didn’t. Then I got some other textbooks at the university library but that didn’t help much either and I finally gave up, thinking that the issue is too complicated and beyond my intellectual capacities. It took many years and the invention of the internet and YouTube for me to realize why I couldn’t grasp the problem: all the standard explanations were deliberately formulated to make sure that we don’t get it. The concept of money was meant to remain a mystery and our economics curriculum deliberately omitted key pieces of the puzzle so that we could never see the full picture.

The alchemy of money and banking was meant to remain an impenetrable mystery. in a speech to the Economic Club of New York, Federal Reserve chairman, Alan Greenspan stated that, “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” But thanks to the internet, the mystery is now being demystified. In a recent interview with Robert Breedlove, one of the world’s leading monetary economists, Dr. Richard Werner offered an authoritative and very illuminating exploration of the mystery and exposed the bankers’ alchemy.

Among other things, Werner confirmed what I thought about my economics curriculum on money and said that "nobody knows what money is.” At the same time, it seems that economists in general aren’t too bothered by this: “it's not really that important, let's move on..." Even the central bankers say that they can’t really define what money is. Dr. Werner’s interview is over 2 hours long, but I highly recommend it.

Beyond the bankers’ mystery, money clearly does exist: it is something, so it should be possible for us to explain and define it. If we think of gold and silver pieces as money, the proverbial story about the crafty goldsmith might make sense, but while it can explain how the issue of money can be abused, it doesn’t really explain money itself. I tried to explain it to myself by imagining a transition from a pre-money society to a society with money: how and why such a transition might have taken place.

From nomads to farmers

If we picture a nomadic tribe, and I believe most of us have seen at least one documentary report in our lives, they live without money and the whole group works to secure its own sustenance. At times they have to work hard, but most of the time they seem quite leisurely in doing their chores, but everyone except the babies and the very frailest in the group contribute. In other words, all of the labor is absorbed in securing the group’s sustenance.

But once people discover agriculture, they gradually increase their productivity and begin to generate surplus - more than they need for mere sustenance. Now, not everyone has to work and the group has surplus labor, which they can allocate for purposes other than sustenance. The group would know what their most pressing needs, or desires are: they might like to build roads or bridges, providing them access to further hunting grounds, fertile fields or markets where they could exchange goods with the surrounding tribes.

But the families of workers building the roads and bridges had to eat as well, which meant that they’d have to be given access to a certain quantity of meat, grain, cooking oil, and other goods drawn from the group’s surplus. To ensure that each laborer obtains an agreed upon compensation, either some system of accounting would have to be formulated, or a certain number of vouchers or tokens would have to be issued for them.

Labor, productivity and wealth

Let’s suppose the group comes up with a satisfactory scheme, everyone’s happy and the roads and the bridges get built. We might call these capital investments and they would make the group even more productive, generating more surplus and more wealth. Now they might allocate some of that wealth toward further capital investments, or they might decide to build temples or cathedrals or give stipends to musicians, sculptors or playwrights. At some point, they might even decide to build pyramids or fund space programs.

With time and rising productivity, workforce and wealth, a large civilization could emerge. I believe that this simple thought experiment could go a long way to explain what money is, or at least what it should be:

• Money should be an expression of an economy’s wealth, reflecting the social surplus it generates.

• If we assume that the group uses vouchers or tokens as money, it’s clear that the greater its wealth, the more tokens there should be in circulation. This is where I see limitations to Bitcoin as money.

• If the number of tokens issued is greater than the social surplus, some workers might go hungry. This could cause social turmoil.

• The group could spend some of its own future productivity if it is confident that capital goods they build will increase the community’s wealth by more than what they invest today.

• Once money is consumed, it should disappear: if I exchanged my token for a piece of meat or a measure of grain, and I ate it, the money I spent on that final good should be destroyed regardless of whether my labor resulted in a capital good which remains behind and contributes to my community’s productivity.

• Money creation should be a public, not private function. This implies ultimately, that central banks shouldn’t be independent of the political process in society, but subordinated to it.

• The decisions about what should or shouldn’t be built belong to the group; they should be reached through some form of a democratic process. The members of the group are the only ones who know what their needs and their aspirations are. They might be inclined to build infrastructure, machinery, transport systems, schools, libraries or churches, and spend some of their wealth on arts, sciences, entertainment, sports and leisure activities. They probably would not wish to spend their wealth on technologies to dim the sun, replace red meat with maggots and crickets, or conduct gain of function research to make pathogens more deadly and more infectious. These are the toxic gifts of the private money creation system.

If an effective system of accounting was in place, the group would not have to use money at all. For all of us who have grown up in the current matrix, this could be hard to imagine, but ancient Egypt spawned a civilization with a 3,000-year continuity without using money at all. The same is true of the Incas in South America.

The above is not an explanation of money in any sense. However, it makes better sense to me than anything I studied in my economics courses and textbooks. Since money exists, it should be possible to define it, and as with many other challenges in life, asking the right questions usually brings us closer to correct answers or, at least better understanding.

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Today’s trading signals

With yesterday’s closing prices we have the following changes for the Key Markets portfolio: