I've exposed my understanding of money in the previous post. I want to build on top of that now.
If we were to create a society from scratch, and if we can agree that money is a medium of exchange, the next step is to choose what type of money we will adopt.
Let's refer to this type of money as currency, because it enables the flow of capital amid participants in the society.
Many things have been used as currencies in the past, like salt, cattle, even sea shells and metal coins. By 1816, the humanity decided to adopt a type of shiny yellow rock and the gold standard was born.
Gold was the preferrable medium of exchange for over a century. It was considered scarce, no one could produce it out of thin air, and everyone agreed it could it had value. Seemed a pretty good candidate for a currency.
Fast forward to 1930, and the human race decided gold was too unconvenient to be used for everyday's transactions. Naturally, society started to issue deposit certificates, redeemable for gold on demand. Given the convenience of carrying paper rather than bare metal, that was the birth of Paper Money.
At some point in 1944, after the World War II, the western nations decided to adopt the deposit certificate issued by the United States, as at that time it was the most stable economy with the most amount of gold. In the agreement, any nation which held US Dollars could redeem gold. In fact, the agreement was written in the bill itself.
Of course it could not end well. Sovereign nations who held Dollars started to doubt if their currency was actually backed by gold, and many withdraw requests followed. To stop the bleeding, Nixon revoked the grant in 1970, and for that point onwards the US Dollar was not back by anything.
But at this point, it didn't matter anymore.
Currency Is Just An Agreement
We take it for granted. I don't recall when I started to believe that gold or dollars were worth something, it seems it was always true to me. But it is important to keep in mind: the currency has the value the society agrees for it. What type of object we choose, either paper or metal, doesn't matter, as long as we find a story good enough to have everyone believing in.
It needs to be this way because of the nature of Wealth. As a society, we need to have a logical metric to measure how our work is valued among others, but this value makes sense to only humans. Animals couldn't care less about money, although all living things do care about food.
Currency, therefore, is imaginary. The object we use daily is just a way to transfer that imaginary thing to other individuals, preventing double spending. But the currency itself is intangible, exists only in our minds.
This idea blown my mind.