Money is a Social Construct
It's initially a hard concept to grasp, but money is a social construct. You know the whole story about how people used to barter and then they created currency because it wasn't exact enough? Yeah, it's not true. That never happened. Repeat after me: there is no evidence a barter-based economy was ever a thing.
I'm going to badly summarize an extremely eloquent and mind-blowing chapter, The Myth of Barter, of David Graeber's book Debt: The First 5,000 Years (read this book, everyone). The story of barter many of us read in our economics textbook is based on Adam Smith's writings about barter, which describe a far away fantasyland - of which no evidence exists. Aristotle also speculated about barter motivating the creation of money in 330 B.C., through a thought process that seems logical. As an economics student, I certainly felt the barter story made more sense than the whole "perfectly rational" man thing.
In Adam Smith's original writings, he describes a situation in which labor becomes increasingly specialized (division of labor) and workers accrue stockpiles of their products. They run into situations if both parties don't have something they other wants (in order to barter), "so everyone will inevitably start stockpiling something they figure that everyone else is likely to want. This has a paradoxical effect, because at a certain point, rather than making that commodity less valuable (everyone already has some) it becomes more valuable (because it becomes, effectively, currency)" (Graber p. 26). This seriously blew my mind, because it spells out so clearly the way in which anything could be money. Think about it - if everyone had some of a certain item, it could easily be currency in the way dollars are.
Anthropologists have found no evidence of barter-based economies as an origin of currency. "Instead, these societies came up with elaborate codes of behavior for sorting out their various debts and obligations. Debt, in other words, came first." (The Age of Cryptocurrency, p. 28). This is what a ton of Graeber's book focuses on - and he's an anthropologist. There are many fascinating examples of how communities kept track of debts, but the point remains that humans were and remain capable of keeping track of exchanges within their communities. Long-distance trade wasn't common in the time before currencies existed, and records found from over 4,000 years ago in Kanesh indicate that past societies kept complex financial records, debts, and even financial instruments.
Metallism vs. Chartalism
There is nothing about the sheet of paper in your pocket that has intrinsic value. People who are metallists (no, not metal fans, its a money thing) believe that money's value derives from the value of the commodity it is based upon. This could be gold, silver, etc. To just quote the Wikipedia because the idea is too dumb for me to entertain,
"Metallism is the economic principle that money derives its value from the purchasing power of the commodity upon which it is based. The currency in a metallist monetary system may be made from the commodity itself (commodity money) or use tokens such as national banknotes redeemable in that commodity. The term was coined by Georg Friedrich Knapp to describe monetary systems using coin minted in silver, gold or other metals.
In metallist economic theory, the value of the currency derives from the market value of the commodity upon which it is based independent of its monetary role. Carl Menger theorized money came about when buyers and sellers in a market agreed on a common commodity as a medium of exchange in order to reduce the costs of barter. "
Ok, except for one problem. Gold doesn't have intrinsic value. It's nice for jewelry, but that's not intrinsic value - it's another social construct, similar to diamonds for non-industrial purposes. Something being pretty doesn't mean it has value. Gold isn't very conductive, and is too weak to make effective tools with. I'm focusing on gold here because silver hasn't been a standard behind currency in a while, but the same applies. There are other, much more plentiful & useful metals we could use if utility was the goal. So, yeah, metallism is on the logic level of defunding Planned Parenthood, denying climate change, and opposing gay marriage (although thankfully, a much less dangerous view point than any of those).
Chartalism, on the other hand, holds that the value of currency comes from it being representative of a network of social trust.
"Chartalism is the theory that money originated with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt, and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue." (Wikipedia)
The term was also coined by Knapp. Smart guy.
Chartalists look "past the thing of currency and [focus] instead on the credit and trust relationships between the individual and society at large that currency embodies. This view... recognizes the presence of an implicit, societywide agreement that allows monetary exchange to perpetuate and debt and credit to be issued and cleared. This negotiated solution, a project that is inherently political, is money. It's not the currency. The currency is merely the token or symbol around which this complex system is arranged." (The Age of Cryptocurrency, p. 26)
Implications of the Social Agreement on Inequality
If we are to think of money like being the key to a society-wide agreement, we can understand why wealthy voices are more valued. The way we have established our social agreement allows for people to accumulate a great deal of money. And, because we have decided a unit of money represents a portion of inclusion within the system, when a person accumulates a great deal of money, they also have a greater degree of inclusion or representation.
This is a core fact of the role of money as a token of social trust. If we are using money to symbolize social trust, that's an inherent worshiping of money. We are equating positive, near-holy values values - trust, social relationships, friendships, camraderie - with money. Therefore, people with a lot of money also get these good values associated with them, as a whole. We view the accumulation of wealth as the accumulation of good values and respect and hard work and trust. There are exceptions of course, but generally wealthy people get more respect than not rich people. As long as money is to symbolize trust and portions of influence, wealthy and successful voices are artificially considered most relevant and correct than poor ones. (And they're louder!)
This raises interesting questions as to what happens when faith in the wealthy decreases. Corrupt behavior by the people supposed to represent the embodiment of pro-social values erodes the fundamental trust in money, making it a negative rather than positive social agreement. It could be argued that "bad" behavior by the wealthy actually weakens the value of money. Perhaps the absence of the supposedly pro-social values of money in developing countries rife with corruption is responsible for their weak and changing currencies.
Given that money is a symbol of a society-wide agreement, whatever we agree upon can be an effective store of value. Including Bitcoin. I used to be a big fan of Bitcoin, but based on the bureaucracy and fights within the Bitcoin leadership the currency seems to not stand a chance. The potential remains for cryptocurrencies, in my opinion, and all the issues with Bitcoin can be readily addressed. The founder of a company that creates Bitcoin-mining computers and chips, Balaji Srinivasan of 21.co, explains the rebuttals to conventional rejections below.
For example, the unstable price of Bitcoin is due to the lack of a closed loop - a Bitcoin economy. Right now, if you pay Foodler or some retailer in Bitcoin, you get your item and they get their payment. But, that service provider almost certainly cannot pay their suppliers in Bitcoin, and their suppliers can't pay their workers in Bitcoin, and so their workers cannot complete the circle by patronizing services with their Bitcoin wages. At some point in the chain of transactions, the Bitcoin holder will be forced to convert their money to a fiat currency (gov-backed). Therefore we see a downward pressure on the Bitcoin price. It certainly doesn't help that it is illegal in China for banks to deal with Bitcoin, giving Chinese suppliers little reason to change their traditional business methods. Even for American businesses (who have no direct exposure/supply from other countries), employees paid in Bitcoin would have a hard time paying for housing, medical care, and buying stocks with their money. It's notable that Coinshark.io is trying to solve that particular issue, but until a bitcoin-based bank opens no true ability to pay for a mortgage etc. in Bitcoin will exist.
The 21.co mining chips are a really cool idea, because devices could use spare power to mine Bitcoin, which then could be used to make micro payments to content creators, among other things. Imagine - when you visit the New York Times, your phone automatically pays .001 Bitcoin, or whatever, for the article. Having devices exchange compensation that they generate automatically could solve one of the Internet's biggest issues, that is, paying content creators.
Bitcoin the currency aside, blockchain technology has applications in so many areas. My favorite is for public record-keeping. (Also, the guy below is totally right)
Government records currently live on paper. Your social security card, birth certificate, passport, marriage certificate, and more are physical objects, able to be lost, destroyed, or stolen. It makes no sense for our identities to be lose-able.
"The blockchain could be a critical piece of infrastructure for governments to implement what we call "responsive open data". Unlike today's open data, responsive open data responds to the commands of citizens -- when they want it, where they want it.
By putting business licences, property titles or birth certificates on the blockchain, governments will enable citizens to digitally conduct transactions without lawyers, notaries or queuing at government offices. Once on the blockchain, registered ownership of a car, a home or other assets can be transferred from one person to another without the need for a government recorder or other third party, while still being legal and publicly acknowledged." - Wired
The usefulness of blockchain tech in developing countries is even greater. (As, generally, the usefulness of non-government backed currencies is!) Honduras is building a private blockchain that will hold property records to combat fraud/corruption, along with the issue that a majority of homes and properties that have been in the hands of owners for decades lack records. This has resulted in situations where houses or land are taken away from the rightful owners by corrupt politicians or people. It seems pretty obvious that any record requiring the government, hospital, or whatever to be involved should be stored in a blockchain-like format. That way, fraud is virtually impossible and the costly issues of identity theft and lack of access to data (informational asymmetries in healthcare, for example) go away.
Blockchain tech for finance is another huge possibility. Blythe Masters, the infamous creator of credit default swaps, is heading up a company creating blockchain technology for large financial transactions. Syndicated loans, which are often billions of dollars - at the least hundreds of millions - take a very long time to settle on the respective parties balance sheets / account statements. With a blockchain record of these transactions, the costly settlement times can be dramatically reduced.
The uses go on and on. The point of this all is to say, money, financial systems, government records, all of it, is a social construct and an arbitrary and inefficient way of doing things. Even though it seems like Bitcoin the currency will not be viable, this is only due to the human-based challenges the management of the Bitcoin code library / rules ran into. The principles and technology behind Bitcoin and the blockchain represent major improvements in the way we do business, keep records, and much more. There's no need to keep operating in a manner reflective of the pre-digital age, moreover, there is no need for government-backed currencies when technology can replace the role of central trust-provider.
We get interesting questions as to how the nature of our social agreement with money changes when an agreement is no longer needed. As Bitcoin manages the whole "trust" thing using algorithms and a transparent blockchain, money need no longer represent "goodness". This currency represents far more than the change from government-backed currency, it represents a shift away from Protestant and general moral values attached to wealth. No wonder Bitcoin is so threatening to the powers that be - if money no longer implicitly indicates "goodness", the constructs around wealth as an optimal end goal / evidence of worthiness further erode. Additionally, the validity of wealthy voices erodes when the system has room for "bad money" in it. Bitcoin, and crypto-currencies, are a neutral kind of money, and that threatens the whole way we think about wealth (especially in America).