Money as Protocol
It has been argued that money is speech. Leaving aside legal definitions of speech, money certainly exhibits characteristics of language. While spoken or written language is a system for transmitting information, money is a language for transmitting value. Language has a “network effect”; the more people that use the same language, the more useful (and therefore valuable) that language is. This increase in value is true not just in aggregate, but also per user.
Nations and peoples have their own languages. However, the most successful people learn not only their native language, but also that of the global hegemon at the time. Whether Latin, Spanish, French, or English, there has for large portions of history been a common language used across nations. Partly this is a result of imposition by the dominant military and cultural power of the age. But aside from the threat of violence, a key driver of common language usage is the huge economic efficiencies realized by sharing a language. Notwithstanding the rise and fall of various superpowers over centuries, national languages have also succeeded within their borders due to the efficiency benefits of coordination. Any emperor could tell you that governing lands populated by people who do not speak the same language is difficult, and this fact has been known at least since the Biblical story of the Tower of Babel.
As with governing or coordinating people who speak disparate languages, conducting commerce is inefficient if you are saddled with many different currencies. Paying the butcher with a different currency than you pay the baker is cumbersome. Taken to an extreme, we can imagine a world in which each person has her own personal currency. In exchange for a copy of my book, I demand Andybucks, and in order to buy goods at Target I have to swap my Andybucks for Targetbucks. Then Target trades away its Targetbucks to pay its employees each in their own personal currencies. This world looks similar to the Tower of Babel story, in which everyone speaks a different language and therefore cannot communicate with each other.
As we observe many of the same “network effects” arising from using the same money as from using the same language, what becomes evident is that both money and language are characterized by networks. But both money and language are also protocols. Merriam-Webster’s online dictionary includes several definitions of a protocol. Generally, a protocol is a set of procedures or rules for acting. In the context of participants in a network, that means a set of procedures or rules for network participants interacting with each other. Thinking about money as a type of protocol for interacting within a network is useful because it highlights the issue of network effects and other characteristics that we will explore later.
Today the U.S. dollar is a protocol on which numerous higher-level systems are built. These higher-level structures include the payments system; the banking system, which in turn includes the subsystems of mortgage lending, consumer lending (through credit cards and other instruments), and a portion of the market for corporate lending; the petrodollar system, whereby most oil contracts are priced in dollars; the world’s largest corporate bond market; and the world’s largest government bond market. All of these systems are denominated in dollars and depend on the dollar as a base protocol.
For something to become used widely as a monetary protocol, a social consensus must first develop among its users. Such a social consensus does not arrive out of thin air. It arises from the set of fundamental characteristics identified earlier as the 14 Characteristics of Good Money.