While a big portion of our life is governed by money, it's surprising how little we know about how it really works? A huge chunk of our life is spent either trying to earn more of it or spend it in the most virtuous fashion, yet we hardly ever question what money is.

If you have to take away one thing from this note, take away this. Money is not something real, it is what we believe it to be. It is a collective hallucination — a story we tell each other in which we agree  to take something with no inherent physical value and hold it sacred.

The dominant form of money or currency we are familiar with is "fiat money". According to Wikipedia, Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. This form of money has gained popularity with the rise of nation states. Money today is controlled by the governments which rule these nation states.

Indian Rupees is a fiat currency, dollar is a fiat currency. They get value because the govt. of a sovereign state says that they will value the note of paper which we carry in our wallets. So, in a way fiat money gets its value from the armies which protect this nation states.

Though this idea of nation states' govt controlling money is a few centuries old. In fact, the idea of nation states is only ~250 years old. Before nation states, money could be issues by anyone. There were many non-govt forms of money. In USA in 1800s, many individual banks issued their notes. In medieval ages, Medici which was a powerful family in Italy used to issue their own money.

The fundamental dilemma of the current situation is this. The money which you have earned through your hard earned labour, its value is not universal. Since it is controlled by a third-party, their incentives control its value.

Govts or Central banks can easily print more money to finance its deficit - and the value of money you have in your bank loses its value. If you think deeply about it, its bizarre. You have given the right to someone else to control the value of your earnings. Why should you pay the price if the govt. whom you have entrusted with maintaining the supply of money is not prudent? Why should your earning get devalued?

Now, don't get me wrong. There are some functions which a central bank serves like maintaining the liquidity, ensuring there is no bank run, etc. But, giving the control of printing money takes too much away from you - from the fruits it gives.

A funny example of how critical the power of printing and controlling money is the case of Federal reserve system of the USA. If you watch this documentary, and its a great one, you will realise that the money issued in USA is infact not even controlled by the US govt. It is controlled by a cartel of private banks which has instituted this system - Federal Reserve System which controls the flow of dollar in the world.

Now, given how crucial is dollar in the world economy (how dollar became so important is another interesting story for another day) - this is too much power in the hands of a cartel of bank.

The question I have is this: This is 21st century. We have made many advances since the 18th century when the current system of money was born. How can this be made better?

There are things like cryptocurrency which have been tried. But, I don't think we have found an answer yet.

Should it be controlled by govts.? Should it be based on immutable blockchains? Or should we go back to the idea of non-nation state currencies? What should money look like in the 21st century - I think, this is a question which is still unsolved.