Unlike barter of physical goods, “money” is a social contract that always involves third parties.
I recently discovered that there are at least some people who give cryptocurrency more respect than is due to it, thanks to their mistaken belief that “more privacy” is always a good thing, and that we should extend privacy into the realm of financial transactions.
The problem with this view is that it completely misunderstands what money is.
At its core, money is an IOU. When I give you “money” for a good, I’m transferring to you a favor that was previously owed to me. When you then proceed to give that money to a third party, in exchange for a further “purchase”, you are just passing the favor along.
Money is “pay it forward” made rigorous.
Money is an abstraction over more specific IOUs. If I do something in exchange for an IOU, I am trusting that you and I have a similar idea about what kind of favors I might be able to call in with that IOU, because we both know the history of that specific IOU. But some favors are bigger and others are smaller. The two of us might pick a standard “size” for our IOUs, and we decide how much a favor is worth in terms of those standard-size IOUs. That’s kind of how “money” works.
But me and you figuring out a private system for IOUs is not very useful, because any IOUs you give to me can only represent favors that you personally can do for me, and any IOUs I give to you can only represent favors that I personally can do for you. Society is much bigger than just the two of us, after all.
What if we want to standardize the IOUs across all of society? What would the effects be?
Well, if I owe you a favor, it’s because you did something to benefit me. More generally, you did something that benefited society, and the IOU I gave to you was the reward. Society is just the people within it, nothing more and nothing less, and you have benefitted someone within it.
If Alice does a favor for Bob, and receives an IOU in exchange, it would be great if Alice could then trade that IOU to Charlie in exchange for Charlie doing a favor for her. Why is it great? Because it means that Alice is no longer dependent on Bob personally to fulfill the favor; she can find anyone who is willing and capable. And that means that Alice is more willing to help Bob in exchange for Bob’s IOU in the first place, which means that Bob has an easier time finding someone, anyone, who is willing to provide him with the help he needs. And Charlie knows that the IOU he receives from Alice will be useful to him in the future. Alice, Bob, and Charlie are all better off in the world where IOUs are standardized.
What if the “favor” that Alice did for Bob was to steal from Dave?
If Charlie knows that Alice’s IOU came from hurting someone, then Charlie should not accept it. Charlie should expect that, if Alice was willing to steal from Dave on Bob’s behalf, then Alice would be willing to steal from Charlie himself, on behalf of Bob or anyone else! If Charlie accepts an IOU from Alice, knowing that Alice received that IOU by stealing, then Charlie is making things worse for everyone in society who is not Alice, including himself!
This goes beyond stealing. Any IOU coming out of a transaction where Alice did a favor for Bob by hurting Dave in any way, or hurting any person in any way, should not be honored. It’s in Charlie’s best interests — in all of our best interests — to make sure that IOUs that come from doing harm are not honored.
If Charlie is going to accept money from Alice, Charlie needs to know that the actions Alice took to get that money, and the actions taken by the person who gave Alice the money, and so on — all the way back to the person who first issued the IOU — have been ethical, i.e. that none of the transactions in the chain involved harming someone who wasn’t a party to the transaction.
One way to solve this would be for Charlie to inspect the history of Alice’s IOU before taking it: he needs to see Alice’s books to determine that Alice got the money from Bob, then he needs to see Bob’s books to see where Bob got the money from, and so on.
That’s a lot of work. It also requires that everyone be completely open about their finances to strangers.
Instead, we have developed a system in which a trusted third party — a “government”, if you will — verifies that each transaction in the chain has met a minimum ethical standard, i.e. that it “obeys laws”, and therefore that Charlie is justified in believing that the IOU represents a legitimate store of value. You can argue all day long about how well the government does this job, and which laws the government should have but doesn’t and which laws the government does have but shouldn’t. But the alternative to “government” is not “privacy”; the alternative to “government” is “everyone is in everyone else’s business at all times”. Privacy is a service that the government provides.
This is what it means to create a currency. You are setting a standard that decides which IOUs will be honored and which IOUs will not be honored, and the rationally correct behavior of someone thinking about using your system is to demand that you forbid transactions harmful to them, by insisting that you have some credible way of declaring that the IOUs resulting from such a transaction will not be honored by anyone else who uses the currency, even by people who support the harmful action.
If you want privacy, use barter.