Worldbuilding 101: Currency
Hello all and everyone! Your favourite alien Limax, Vivian, is back once again with money or currencies! We are going Scrooge McDuck this time around! In this post I will use them interchangeably and give you insights into how they work across the known galaxy! AND BEYOND!
What makes a currency
What in Divinum’s name is money and currency even to begin with? For that, we need to go back to the original purpose of it, and what its purpose remains.
Purpose
The purpose of a currency is fundamentally to “facilitate trade of goods and services” which might seem mundane, and that is because it really is. It has no other job than that, and that is it. It is not to store value, be value, or the likes. Currencies have no value in and of themselves but are a means to trade things we truly value. Currency can thus also be used to gauge the value of an object in a manner that everyone can understand. After all, if I say my car is worth 50 thousand 1 kg watermelons, you will look at me like I grew a second head because it is entirely meaningless to you, and to you, watermelons can be worth way less than they are to me.
But why is this needed? As I said, the value of objects can be very different between us. What I think is equal to a watermelon and what you think is equal to it may differ. This is also why I might buy something for 10 bucks but you think, nah, no more than 7! The fact that we chose to buy and not buy things using our currencies is a way that we choose the value on it and helps adjust the market. Most importantly though for a currency is the issue of coincidence of wants.
What is the coincidence of wants? You need a pair of shoes, but all you produce is fish because you’re a fisher. I make shoes, so you need to come to me. No problem, you can trade your fish for shoes! Except I hate fish, so you’re out of luck. Maybe you can find someone else to trade with to get something I do want, or maybe in two steps? ...yeah, as the steps grow, it gets very cumbersome and a giant pain in the tail! This is the coincidence of wants. It is much easier if you can sell all your fish for a third good that we both are willing to trade with each other with. This third unit of goods is our currency!
Properties
For a thing to be used as a currency, it has to have several properties. I have already gone through why it becomes a necessity, but what then becomes a currency? Well, a whole lot can be a currency that has nothing to do with metals! I’ll go through more later; for now, I will tell you the properties currency must have.
Fungible
Fungible means one unit of what you have is no different from another, so if I come up to you and hand you one unit of the agreed upon currency, then you are willing to give me the unit you have, and neither of us see it as a loss or gain. If you start to consider the same unit of the thing as having different values, it is definitionally not fungible.
Durable
If it breaks too easily, it is close to useless as I might break it if I go to the market, and all value is lost. That is indeed sad if it happens. It doesn’t need to have infinite durability! It just needs to survive long enough and endure enough rough housing that I am not afraid, as a consumer, that it will lose its value while I go to the market.
Divisibility
I give you a gold bar for your cabbages, and you will look at me like I am insane. Why am I paying so much? It is extremely overkill in charging but, if that is literally the only unit I can use, then it will be bad because things will be overpaid. This is why there must be smaller units and larger units. This is divisibility.
Portable
This one has historically a contrary example, but I will explain it later. In general, if you cannot take it to the market, no one is going to be able to accept your payment for my world famous shoes. How can I accept the currency if you can’t give it to me!? I can’t! So it has to be able to move easily.
Acceptable
This one is obvious (My editor was being mean here about a certain trivial word choice!). If I don’t agree with you on what is currency, no trade happens. So the currency has to be accepted by people for any reason for it to work. This one, despite how obvious it is, has played a major factor in the evolution of money and currencies.
Scarce
Last, but not least. It must be scarce, aka rare. It doesn’t need to be entirely exotic or the like, but it needs to be scarce enough that not everyone can flood the market with it. If I can within 10 minutes find more of the currency to pay you… what value does the currency really have? Scarcity is a contributing factor to the value of an object, and if everyone has millions of the currency, the currency means little to nothing to all the people. This is why fairly exotic or rare things have historically been used to make currency. It makes it hard to overflow the market, and thus the currency can retain value.
Types of currency
Money is money! No it isn’t. There have been many kinds of currencies throughout the history of you humans, but they all share one universal thing in common. Trus. Each and every one that uses it trusts it will be accepted. Here I will go through several and give examples.
Barter
Okay, this is technically before currencies are used. You trade goods for goods and have the issue before. But the funny thing here is, the issue of “coincidence of wants” can be avoided and was in some ancient civilizations for a while. How, do you ask? Debt! You keep track of who owes who what and how much. This is thought to be one of the reasons, if not the reason, why early writing gets started. Writing starts out as a mechanism to keep track of debts because there is no other way for a larger group of people to know who owes what, how much and to whom. For small groups, this can be done in the head. There are no real examples as we do this to this day for smaller things.
Commodity
Commodity currencies are very fascinating. What does commodity here mean? In terms of money it means that the money IS the valuable third goods that we trade with. The third goods have value in themselves. Some of you might think
But Vivian you brainicled limax, all money has value in itself!
Flattery will get you nowhere! But does it? Grab some coins you have, or a bill. Melt the coins down (don’t do it as it is illegal in some places), and look at the metal you have: is that metal worth anywhere near the printed amount that it had on it before? Unless it is the US penny, the answer is “no”, the metal in of itself is close to worthless. And the bills? They are just paper with ink on it! Remove the ink, and it is a piece of paper that is close to worthless. Modern currencies do not have value in themselves. I will get to why they have value anyway, but this illustrates the difference.
If I give you a gold coin that has a stamped $1000 on it (Why do you put the dollar sign first? You don’t say “dollar one thousand”, weirdos!) and a thousand dollars worth of gold in it, you will value it as that and always trust it because you believe the gold has that value and always will! Which is a faulty belief because value is again assigned by us, and it can be removed in an instance. This is why trust is universal for all currencies, even here!
Examples include:
Metals - Gold and silver have been historically popular, copper too. Electrum, silver and gold alloy was also quite popular!
Cigarettes - Quite common in prisons, and the value comes from… Well, you smoke them and trash your health, but that is the least of your problems in prison.
Shells - Shells can be viewed as having different values individually, but as per unit of mass, they can be agreed to have the same value. And let’s face it, they are very pretty!
Cacao beans - In old mesoamerica, cacao beans were actually used as a form of currency. They were highly sought after, hard to make properly, and came only so often and entered and left the economy at about the same rate.
Giant stone wheels - Also known as Rai Stones. They were used on the island of Yap in Micronesia. These were enormous–2 metres in diameter and even more! But not all of them were this enormous; some were way smaller but still annoying to move. They were cut and transported, then remained in place. How do you exchange these? Mentally! The people had like mental ledgers on who owned which ones and used them for currency. This worked because their population was very small, so any liars would be found out quickly.
Mono
Now when I say mono here, I mean there is only ONE metal (or thing) used. The state says it is all silver, they only deal in silver, nothing else. They might show leeway and trade gold for the silver at its current market value or below for the risk they are taking, but everything by the government is measured in silver. Or whatever metal or currency you use. It is simple, it is easy, and if many states agree to use the same commodity, it makes trading between nations very easy! This is why you humans had the gold standard for almost 100 years. Issues can arise, however, if different areas use different metals or commodities. But that is for another time.
For this section and the next one, it is important to understand that when I talk about mono or poly, I am talking about state/government sanctioned currencies. Currencies can exist that are outside what the government says is the de jure currency to use. But here and next section it all assumes it is big enough that a state is involved in it and likely dictates and makes coins. This is important in history because if you have a body you trust telling you it is something, you place more value in it. It often uses metals at this stage because it is easily minted and such, so we will assume that. Let me give an example. You have two buyers that want your cabbages which cost 1 silver coin of 80% purity, and you got the buyers giving you different coins. Buyer A holds an unfamiliar coin with a stamping on it that you do not recognise, but it says on it that it has 80% worth of silver in it. The other coin from buyer B has a stamping you recognise. It is from the king, emperor, queen, whatever, official minter! It says however that it has only 75% silver in it. You can either trust this unknown coin to be honest, but you have no reason to trust it–it might only be 50%! Or you go for the slightly less silver containing coin that you trust and feel you know has almost enough silver in it. Which do you pick? Most will go for buyer B’s 75% silver coin: a bird in the hand is worth two in the bush after all.
Poly
Poly here means two or more metals are used. The cliché trite one that I will murder anyone over for using is… Dungeons & Dragons. Copper, Silver, Gold. If you do this, I will hunt you down and make you regret it! Now, with murder out of the way, has this been done? Well, three haven’t, but two have frequently. Bimetallism was common with silver and gold before the gold standard, and the US even resisted the gold standard in favour of bimetallism until they too changed to the gold standard. Polymetallism has some benefits, but a whole lot of issues.
The benefit is that you have two metals to use as a supply. If you can only use gold or silver, for example, once you’re out of gold to stamp into coins, tough nuggie! No more money to make or use unless you debase it, as in reduce the gold content. I won’t go into what that will cause now but will in later blog posts.
The main drawback is market forces. As a state, they have to set a ratio that they will accept taxes at. For the sake of argument here, let us assume 1 gold = 20 silver. This is all fine and dandy as long as the value ratio that the public perceives between the metals is 1:20. What happens if it starts shifting in the public market? What if it goes to 1:21? Keep in mind that the market is under no obligation to keep the ratio set by the state, so the market can operate at the true value.
We can make laws demanding it!
Yes you can, but in the back alleys and when guards ain’t looking, there is nothing that makes it work, and laws cannot circumvent market forces. Anyway, for the government, the thing that will happen is that people start paying all taxes and likes with silver instead, because it is valued less than the gold. At the same time, the state or anyone that will or must obey the dictated ratio will want gold as payment. Once on the street, the gold can be used to get more silver to pay the state and others later. The opposite happens if the ratio goes to 1:19 or the likes. The only way to maintain this is by investing a lot of time, energy and money into maintaining the ratio on the market, and that is generally a futile attempt. This is why polymetallic systems are very unstable.
Fun fact: the Guinea coin was originally worth 1 pound, or 20 shillings in the UK. But because of these forces and that the Guinea was in gold, it came to be valued at 21 shilling before the ratios were frozen by going over to monometallic systems.
With a bimetallic system having these issues alone, imagine how it is with a trimetallic system like Dungeons & Dragons, or more? It is going to be quite annoying and more complicated to maintain!
Representative
Time marches on, and trade is booming! But all these coins and pieces of metal everywhere! If we only could keep the precious commodities safe and not have them risked travelling with people. Cheap metals we do not care about; paper, who cares if it is destroyed as long as the value is in the system, right? But alas, we have only the commodity money… or do we?
This is the benefit of representative money. You have half fake, half “real”. You generally have a central bank or institution (at the end at least, it rarely starts like this, but that is for another time) that promises along the lines of “Any bill given to us printed will be redeemed for the commodity”. There is usually a fixed ratio like 1 gram of gold = 12 dollars, so bring in 12 dollars and you get 1 gram of gold! When you tie your system to gold, as it was done in Europe, and all currency and money is relative to it, it is known as the gold standard. This often coincides with fractional reserves, meaning that they might only have enough commodity for about 10% (or whatever fraction they promise) of the money in circulation. Unless something major happens, most people feel no inclination to redeem this so it works… until something happens, of course!
Which is a common theme in most economic things: it works until it doesn’t! The benefits here are numerous. You can expand the money supply, and if money disappears, you can easily make new ones without getting more of the commodity. You can also expand the money supply, or you can suspend (temporarily) the convertibility to the commodity in times of war to increase spending. The main drawback is that you rely a lot more on the trust of people not going berserk when things go south of the southpole. Which can be a tall order.
Fiat
The word fiat comes from latin meaning “Let it be done”, “Let it be so”. It is called that because the state essentially goes “Let it be so” as it dictates now that the money has value, and people have to accept it. Which is only partially the story. The way to fiat currency or money is a long and complicated one, like the way to representative, that I won’t get into here. But does it have value because the government dictates it? Yes and no.
Fiat money has no value on its own. It is paper, worthless metals or, in modern times, digital 0s and 1s with nothing backing them up. There is however one thing that backs them up. Taxes. Taxes? Why do they matter for the value of money and currency? I can hear you ask these questions. The government says it will only accept these printed pieces of paper and worthless coins for taxes. They do not care what you use, but every transaction will be taxed, every job done will be taxed, all will be taxed, and you either pay it with their currency or face repercussions.
Oh wow! That can turn bad… maybe I can use other currencies and still pay it? Well, you can, but that gets tricky. You still need to ACQUIRE the currency the government decides, and if you use other ones, they can slap on various taxes, fees and more that you still gotta pay in their chosen currency despite you using others. It gets needlessly complicated, especially if the government says “I take 10% if you use our own currency”, and it sounds way easier to start accepting that currency, others start using it for the same reason, and it spreads and gains all the value it needs to be a currency.
This is of course a simplified explanation, as this does not happen out of nowhere. It is meant to illustrate the reasoning of where fiat money gains its value. It is the government that gives it value by accepting it for taxes, which makes it so they can use it for government spendings.
Pegging a currency
In a fiat system, currencies generally float relative to each other. A Swedish crown is judged in international value based on many factors, so is an American dollar. These changes depend on many factors, even if domestically, they do not change much in value. It is internationally they do in relative terms.
Pegging a currency means that you, the state, define your currency’s value in terms of another currency internationally. Yuan is a famous example that pegs its value to the dollar. This has many benefits internationally, and in trade, the big issue is that it can also cause lots of trouble. How is it beneficial? Simple. By keeping the Yuan below many other currencies' values, exports become cheaper, and thus other nations will choose to buy from China over other exporting countries. China does a lot of work in buying and selling their own currency to the market every day to maintain the pegged value. Market forces will demand changes, and there is no way around it. So to keep it they gotta play the game, and that is a costly affair. China, however, considers this a worthwhile effort to keep their exports competitive.
Technically, one can say all representative currencies are pegged to a commodity, and that is true. This is one of the appeals. All are pegged to the same currency, so exchanges were trivial. If I get 12 dollars for 1 gram of gold and I get 10 pounds for 1 gram of gold, then I get 1.2 dollars for each pound.
Speculative
As you humans enter into new domains, you have gotten more and more weird currencies. What is the next step? Who knows? But keep in mind, currencies only have value if we believe in them and trust them. This is a universal truth for all of them.
The latest in your inventions are cryptocurrencies, which are a fascinating technology. But they have nothing to tie their value down. Fiat has the government. Representatives and Commodities have a commodity to tie it down. But crypto? There is nothing tying it, and that is why it is so incredibly volatile in value. There are new currencies and ideas to explore as a world builder, but keep in mind these things.
A currency needs to be trusted, and as economies grow, regardless of your political ideologies, a currency must be able to be manipulated for a healthy economy. Why? In order to throttle things or speed them up. Economies are inherently volatile, so tools must exist to manipulate the entire economy and people in order to prevent it from going boom, crash, boom, crash, and so on. A more stable economy is better for everyone. Maybe in the future cryptos and purely digital currencies can exist that work with it all, maybe you can imagine it! I have, can you?
Mathematics of currencies
Now, some of you are now getting PTSD flashbacks to Mathnam just hearing this, but hear me out, this can be fun! ...coming from the mathematician Limax.
Scale
A currency must cover a huge swath of range of value to ever be possible. You have the humble commoner that has to cover this week's costs and living expenses. You have the investors who use a lot of their money for businesses. You have the shop owner who also has lots of money, and things go around. You also have the state and nation itself that will be churning out enormous amounts of money to fuel their armies and social programs and everything in between!
Different currencies solve this in different manners. Polymetallic ones can use many levels of different precious metals. Representative currencies can print larger bills, so can fiat ones, of course. This will attract thieves, bandits and more if they are ever moved. It is a very large issue, a very big thing and how it is solved is in many ways quite magical. But alas, I won’t talk about it today.
Denominations
Almost all currencies have subunits. Dollars and Euros have cents, Pounds have pence, and so on. Japan has only Yen, no subunit. Sweden, we have Öre, which we are about done with because fuck them. Roman currencies had dozens of units, and some of them were, to be honest, quite dumb. Some units were only twice the value of the previous one, at which you go…why? Well, I do, but hey, as long as it works, right? Anyway, you can go nuts here depending on your currency. Maybe you can do a three tier system of subunits? Spice things up!
Highly Composite Numbers
Here comes the numbers! BRACE YOURSELVES!
What is a highly composite number (HCN)? To put it as simply as I can, highly composite numbers are positive integers (1, 2, 3, 4, ...) such that there are more ways to divide them, without remainders, than any previous positive integer. Let me show an example. 1 is boring, so it is excluded on the basis of boringness. Next number is 2. Well, it can be divided into 1 (by dividing by 2) and 2, (by dividing by one), giving us 2 ways to divide it. 3, well you can do the same, 1 and 3 there, so no fun, and it is not more than 2, so it is not a HCN. What about 4? Well, we can divide it by 1, 2 and 4, that is 3 ways! So we have a new HCN because it bested our previous one of 2!
Next is 5 and it is only 2 (check it yourself), what about 6? We can divide it by 1, 2, 3 and 6, that is 4 ones we can divide with! Another one! And so it goes on. The list goes on from there. What is the list?
2, 4, 6, 12, 24, 36, 48, 60, 120, 180, 240, 360, …
Notice something? Several of those numbers are used or have been used historically! 60 minutes per hour, 24 hours per day, 360 degrees… It all comes back to these numbers and their usefulness.
Why are they useful? Well, you didn’t listen clearly! It is because you can divide them up in so many ways! If you have, let's say, a loaf of bread that costs 3 A-coins, but the next coin up, B-coin, is 12 A-coins, that means for 1 B-coin I can get 4 loaves of bread easily! And you can keep dividing it in many other ways to make it coincide in a lot of ways that you humans like. This is why highly composite numbers exist so much in human culture. I will elaborate on this more later in a later post. I strongly recommend using these in currencies, units or in general as they have been beloved for aeons. Why did you go away from them, though? The ten sodding fingers on your hands. That is why. Which is fair in its own right. Some have done 20 (fingers and toes), but be creative! Highly composite numbers are natural to every imaginary civilization, 10 only means something to those with digits matching that number.
Economic roles
In an economy with a currency, everyone plays a role in order to make it function. If all of one part gives up, things go sideways and diagonal.
Consumers
Some might call these the least interesting of all the players in an economy, but deep down, they are the most fundamental. Who are they? They are the everyday person, the commoners, the ones living and working everyday. Raising 90% of all children, they are over 90% of all people. They are, in all fashions, the economy. If you can convince the consumers something in the economy, you have the economy in the palm of your hands!
The consumers are the ones who use the currency everyday, each and every day. It switches hands. It is their bacteria, their fingerprints, their beings imprinted through usage on all of it. They are, deep down, everything. When a shift happens in any economy, any new currency, any new style of currency, these are the people you need to convince. Fail at it, and your will means nothing.
Banks
Banks are huge complicated beasts which I will not go into details about here, but let's imagine in some country not like the savings-poor US but rather like Western Europe where savings actually exist. You have savings in there, but let’s say it is 20 thousand dollaridoos. How much are you going to use it as an average person on a daily basis? Close to never. If, like normal, you get about 2-4 grand in a month, 50-80% disappear to bills, 10% goes to joy, 10% is savings (I am making up numbers so shift as you see fit), so almost nothing of it will move. Money sitting unused is bad for an economy. So let's say you generally hover around 19-21 thousand dollars in your account, and it is slowly going upward in savings. What does this mean?
Well, if I as a bank take 80% of your money, that is 16 thousand dollars of your deposited money, and lend it out, that means someone–the lender–can use it and stimulate the economy. Business can be done, things can be bought. Money can be moving. And with interest, the bank gets the money back and can even EARN money! Huzzah! Wait, what if a lender defaults? Generally, banks are meant to calculate the risk, so over the course of all their loans, the value of defaults is less than the money gained by good loans. Of course, shit does not always go like that, but again, economic crises are for another post.
So banks not only act as storages of worth to use, they also act to increase the money supply by lending it out so other people can do business. This helps the economy all around. I will go into the nitty gritty details, but not now. I am overdue finishing this! Always imagine that before the transition from primitive bank-like entities to proper banks is finalised (even before laws), banks or bank-like entities will start taking these gambles. Money is to be earned!
Producers & Central Banks
There are two types here: the minter and the central bank. The minter, in commodity money, is generally in charge of making sure that coins and currencies are of the quality that the government and all wants. If you promise 80% silver, gold, whatever, by weight, then by Divinum so it shall be! ...wait, there is a war going on? Maybe we can do 75% then and get more money to fund the war effort! This again will cause issues if it is done indefinitely, but as a temporary thing, most consumers will pay no attention, and a commodity money state can recover afterward. There are many things to do here, all fascinating, and I cannot go into all of them here. Holy moly, how often do I say this here? It is like economies are complicated!
With central banks, we are now generally in the representative money era or beyond. They are serving so many jobs and are a massive undertaking. What jobs, you may ask?
Lender of last resort: banks are failing due to bank runs, so they gotta get cash fast to not go under
Printer of money
Setter of interest rates
Dictator of lending to other banks
MOAR!
The amount of jobs they serve are enormous. But in general, they are different from ordinary banks in that their job is not making money, they don’t even hold private assets or money. Their job is one and only one: to maintain the economy at large and make sure it is healthy. Every power they have, every ability they are granted, is for this single purpose. This is why most nations detach them from politics to make them independent. Keep the economy and currency healthy. No matter who is in charge, the nation's economy and currency must be running! LEEROY!
Naming Currencies
The name of a currency generally has a historical backing. In Sweden, it is called “Kronor” (crowns) because it is related to the royalty and the crown. Thaler, or Taler, a common currency in a lot of Europe for a long time, was named after a town that was famous for making high quality coins (Daler is the Swedish word for it, and we used to call coins “Riksdaler” which would be translated as “Realm Thaler”). The names have meaning and history behind them. Thaler means Valley where the town was, but it lost that meaning. Imagine, where did your version of “thaler” come from? Why did it come to matter? How did it matter? Fun fact, “dollar” comes from Thaler, if a long route.
Currency Design
For those who wish to go the extra mile and design it, even in the abstract, this is for you! When you have coins or bills, what do you even put on them so they are recognisable? Famous people, of course! If you are about as vanilla as one can get. But it is a tried, true and tested strategy. You can spice it up by shifting who you consider important enough to put on there. In Sweden, there used to be kings, but today, there are other people! Most of which I have no clue who they are, but I know on the 20 kr bill, it is Astrid Lindgren!
You can also take abstract symbols for concepts that are culturally important or were culturally important. It can be from their current religion, their historical religion, maybe it was a personal sigil or the likes that someone important did and it became a symbol for the entire nation? History can be woven in, and it can be quite weird. Especially if minters are more private than state owned. Here the minters themselves are the ones to be trusted, so their coins gotta stand out in order to show how trustworthy they are, like the thaler.
Summa Summarum
Oh boy, this is such a huge topic, and I feel so inadequate having only done this. I have so much to say, but here we are. So final words? If you are going to use commodity money, make it interesting, make up metals and things! You can use shells! Alloys! So much more! It is called “salary” because it is related to “salt”, and salt was once precious and hugely important. So getting paid in salt was a huge thing. Can you play with what is used, what the agencies involved are, what the history of the currency is? It all can give so much life to your world and make it feel alive and unique. Keep in mind, while I do give a lot of stupid strategies, as you can see, they are stupid, have been done, and thus, you can do them, too! Just show the issues!
And again, if you use D&D, or the really trite “credit” in scifi, sleep with an eye open… I am coming for you!
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Copyright ©️ 2023 Vivan Sayan. Original ideas such as the purpose and properties of a currency, types of currency, mathematics of currencies, and economic roles belong to the respective authors. Generic concepts are copyrighted under Creative Commons with attribution, and any derivatives must also be Creative Commons. However, specific language or exact phrasing is individually copyrighted by the respective authors. Contact them for information on usage and questions if uncertain what falls under Creative Commons. We’re almost always happy to give permission. Please contact the authors through this website’s contact page.
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