This ebook is copyright material and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased or as strictly permitted by applicable copyright law. Any unauthorized distribution or use of this text may be a direct infringement of the author’s and publisher’s rights and those responsible may be liable in law accordingly.

Epub ISBN: 9781473556041

Version 1.0

1 3 5 7 9 10 8 6 4 2

VINTAGE

20 Vauxhall Bridge Road,

London SW1V 2SA

Vintage is part of the Penguin Random House group of companies whose addresses can be found at global.penguinrandomhouse.com.

Extracts from Sapiens copyright © Yuval Noah Harari 2011

Extracts from Homo Deus copyright © Yuval Noah Harari 2015

Yuval Noah Harari has asserted his right to be identified as the author of this Work in accordance with the Copyright, Designs and Patents Act 1988

Sapiens was first published in Great Britain by Harvill Secker in 2014

Homo Deus was first published in Great Britain by Harvill Secker in 2016

This edition published by Vintage in 2018

penguin.co.uk/vintage

A CIP catalogue record for this book is available from the British Library

The Scent of Money

IN 1519 HERNÁN Cortés and his Conquistadors invaded Mexico, hitherto an isolated human world. The Aztecs, as the people who lived there called themselves, quickly noticed that the aliens showed an extraordinary interest in a certain yellow metal. In fact, they never seemed to stop talking about it. The natives were not unfamiliar with gold – it was pretty and easy to work, so they used it to make jewellery and statues, and they occasionally used gold dust as a medium of exchange. But when an Aztec wanted to buy something, he generally paid in cocoa beans or bolts of cloth. The Spanish obsession with gold thus seemed inexplicable. What was so important about a metal that could not be eaten, drunk or woven, and was too soft to use for tools or weapons? When the natives questioned Cortés as to why the Spaniards had such a passion for gold, the conquistador answered, ‘Because I and my companions suffer from a disease of the heart which can be cured only with gold.’

In the Afro-Asian world from which the Spaniards came, the obsession for gold was indeed an epidemic. Even the bitterest of enemies lusted after the same useless yellow metal. Three centuries before the conquest of Mexico, the ancestors of Cortés and his army waged a bloody war of religion against the Muslim kingdoms in Iberia and North Africa. The followers of Christ and the followers of Allah killed each other by the thousands, devastated fields and orchards, and turned prosperous cities into smouldering ruins – all for the greater glory of Christ or Allah.

As the Christians gradually gained the upper hand, they marked their victories not only by destroying mosques and building churches, but also by issuing new gold and silver coins bearing the sign of the cross and thanking God for His help in combating the infidels. Yet alongside the new currency, the victors minted another type of coin, called the millares, which carried a somewhat different message. These square coins made by the Christian conquerors were emblazoned with flowing Arabic script that declared: ‘There is no god except Allah, and Muhammad is Allah’s messenger.’ Even the Catholic bishops of Melgueil and Agde issued these faithful copies of popular Muslim coins, and God-fearing Christians happily used them.

Tolerance flourished on the other side of the hill too. Muslim merchants in North Africa conducted business using Christian coins such as the Florentine florin, the Venetian ducat and the Neapolitan gigliato. Even Muslim rulers who called for jihad against the infidel Christians were glad to receive taxes in coins that invoked Christ and His Virgin Mother.

How Much Is It?

HUNTER-GATHERERS HAD no money. Each band hunted, gathered and manufactured almost everything it required, from meat to medicine, from sandals to sorcery. Different band members may have specialised in different tasks, but they shared their goods and services through an economy of favours and obligations. A piece of meat given for free would carry with it the assumption of reciprocity – say, free medical assistance. The band was economically independent; only a few rare items that could not be found locally – seashells, pigments, obsidian and the like – had to be obtained from strangers. This could usually be done by simple barter: ‘We’ll give you pretty seashells, and you’ll give us high-quality flint.’

Little of this changed with the onset of the Agricultural Revolution. Most people continued to live in small, intimate communities. Much like a hunter-gatherer band, each village was a self-sufficient economic unit, maintained by mutual favours and obligations plus a little barter with outsiders. One villager may have been particularly adept at making shoes, another at dispensing medical care, so villagers knew where to turn when barefoot or sick. But villages were small and their economies limited, so there could be no full-time shoemakers and doctors.

The rise of cities and kingdoms and the improvement in transport infrastructure brought about new opportunities for specialisation. Densely populated cities provided full-time employment not just for professional shoemakers and doctors, but also for carpenters, priests, soldiers and lawyers. Villages that gained a reputation for producing really good wine, olive oil or ceramics discovered that it was worth their while to specialise nearly exclusively in that product and trade it with other settlements for all the other goods they needed. This made a lot of sense. Climates and soils differ, so why drink mediocre wine from your backyard if you can buy a smoother variety from a place whose soil and climate is much better suited to grape vines? If the clay in your backyard makes stronger and prettier pots, then you can make an exchange. Furthermore, full-time specialist vintners and potters, not to mention doctors and lawyers, can hone their expertise to the benefit of all. But specialisation created a problem – how do you manage the exchange of goods between the specialists?

An economy of favours and obligations doesn’t work when large numbers of strangers try to cooperate. It’s one thing to provide free assistance to a sister or a neighbour, a very different thing to take care of foreigners who might never reciprocate the favour. One can fall back on barter. But barter is effective only when exchanging a limited range of products. It cannot form the basis for a complex economy.

In order to understand the limitations of barter, imagine that you own an apple orchard in the hill country that produces the crispest, sweetest apples in the entire province. You work so hard in your orchard that your shoes wear out. So you harness up your donkey cart and head to the market town down by the river. Your neighbour told you that a shoemaker on the south end of the marketplace made him a really sturdy pair of boots that’s lasted him through five seasons. You find the shoemaker’s shop and offer to barter some of your apples in exchange for the shoes you need.

The shoemaker hesitates. How many apples should he ask for in payment? Every day he encounters dozens of customers, a few of whom bring along sacks of apples, while others carry wheat, goats or cloth – all of varying quality. Still others offer their expertise in petitioning the king or curing backaches. The last time the shoemaker exchanged shoes for apples was three months ago, and back then he asked for three sacks of apples. Or was it four? But come to think of it, those apples were sour valley apples, rather than prime hill apples. On the other hand, on that previous occasion, the apples were given in exchange for small women’s shoes. This fellow is asking for man-size boots. Besides, in recent weeks a disease has decimated the flocks around town, and skins are becoming scarce. The tanners are starting to demand twice as many finished shoes in exchange for the same quantity of leather. Shouldn’t that be taken into consideration?

In a barter economy, every day the shoemaker and the apple grower will have to learn anew the relative prices of dozens of commodities. If one hundred different commodities are traded in the market, then buyers and sellers will have to know 4,950 different exchange rates. And if 1,000 different commodities are traded, buyers and sellers must juggle 499,500 different exchange rates! How do you figure it out?

It gets worse. Even if you manage to calculate how many apples equal one pair of shoes, barter is not always possible. After all, a trade requires that each side want what the other has to offer. What happens if the shoemaker doesn’t like apples and if, at the moment in question, what he really wants is a divorce? True, the farmer could look for a lawyer who likes apples and set up a three-way deal. But what if the lawyer is full up on apples but really needs a haircut?

Some societies tried to solve the problem by establishing a central barter system that collected products from specialist growers and manufacturers and distributed them to those who needed them. The largest and most famous such experiment was conducted in the Soviet Union, and it failed miserably. ‘Everyone would work according to their abilities, and receive according to their needs’ turned out in practice into ‘everyone would work as little as they can get away with, and receive as much as they could grab’. More moderate and more successful experiments were made on other occasions, for example in the Inca Empire. Yet most societies found a more easy way to connect large numbers of experts – they developed money.

Shells and Cigarettes

MONEY WAS CREATED many times in many places. Its development required no technological breakthroughs – it was a purely mental revolution. It involved the creation of a new inter-subjective reality that exists solely in people’s shared imagination.

Money is not coins and banknotes. Money is anything that people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services. Money enables people to compare quickly and easily the value of different commodities (such as apples, shoes and divorces), to easily exchange one thing for another, and to store wealth conveniently. There have been many types of money. The most familiar is the coin, which is a standardised piece of imprinted metal. Yet money existed long before the invention of coinage, and cultures have prospered using other things as currency, such as shells, cattle, skins, salt, grain, beads, cloth and promissory notes. Cowry shells were used as money for about 4,000 years all over Africa, South Asia, East Asia and Oceania. Taxes could still be paid in cowry shells in British Uganda in the early twentieth century.

In modern prisons and POW camps, cigarettes have often served as money. Even non-smoking prisoners have been willing to accept cigarettes in payment, and to calculate the value of all other goods and services in cigarettes. One Auschwitz survivor described the cigarette currency used in the camp: ‘We had our own currency, whose value no one questioned: the cigarette. The price of every article was stated in cigarettes … In “normal” times, that is, when the candidates to the gas chambers were coming in at a regular pace, a loaf of bread cost twelve cigarettes; a 300-gram package of margarine, thirty; a watch, eighty to 200; a litre of alcohol, 400 cigarettes!’

In fact, even today coins and banknotes are a rare form of money. The sum total of money in the world is about $60 trillion, yet the sum total of coins and banknotes is less than $6 trillion. More than 90 per cent of all money – more than $50 trillion appearing in our accounts – exists only on computer servers. Accordingly, most business transactions are executed by moving electronic data from one computer file to another, without any exchange of physical cash. Only a criminal buys a house, for example, by handing over a suitcase full of banknotes. As long as people are willing to trade goods and services in exchange for electronic data, it’s even better than shiny coins and crisp banknotes – lighter, less bulky, and easier to keep track of.

For complex commercial systems to function, some kind of money is indispensable. A shoemaker in a money economy needs to know only the prices charged for various kinds of shoes – there is no need to memorise the exchange rates between shoes and apples or goats. Money also frees apple experts from the need to search out apple-craving shoemakers, because everyone always wants money. This is perhaps its most basic quality. Everyone always wants money because everyone else also always wants money, which means you can exchange money for whatever you want or need. The shoemaker will always be happy to take your money, because no matter what he really wants – apples, goats or a divorce – he can get it in exchange for money.

Money is thus a universal medium of exchange that enables people to convert almost everything into almost anything else. Brawn gets converted to brain when a discharged soldier finances his college tuition with his military benefits. Land gets converted into loyalty when a baron sells property to support his retainers. Health is converted to justice when a physician uses her fees to hire a lawyer – or bribe a judge. It is even possible to convert sex into salvation, as fifteenth-century prostitutes did when they slept with men for money, which they in turn used to buy indulgences from the Catholic Church.

Ideal types of money enable people not merely to turn one thing into another, but to store wealth as well. Many valuables cannot be stored – such as time or beauty. Some things can be stored only for a short time, such as strawberries. Other things are more durable, but take up a lot of space and require expensive facilities and care. Grain, for example, can be stored for years, but to do so you need to build huge storehouses and guard against rats, mould, water, fire and thieves. Money, whether paper, computer bits or cowry shells, solves these problems. Cowry shells don’t rot, are unpalatable to rats, can survive fires and are compact enough to be locked up in a safe.

In order to use wealth it is not enough just to store it. It often needs to be transported from place to place. Some forms of wealth, such as real estate, cannot be transported at all. Commodities such as wheat and rice can be transported only with difficulty. Imagine a wealthy farmer living in a moneyless land who emigrates to a distant province. His wealth consists mainly of his house and rice paddies. The farmer cannot take with him the house or the paddies. He might exchange them for tons of rice, but it would be very burdensome and expensive to transport all that rice. Money solves these problems. The farmer can sell his property in exchange for a sack of cowry shells, which he can easily carry wherever he goes.

Because money can convert, store and transport wealth easily and cheaply, it made a vital contribution to the appearance of complex commercial networks and dynamic markets. Without money, commercial networks and markets would have been doomed to remain very limited in their size, complexity and dynamism.

How Does Money Work?

COWRY SHELLS AND dollars have value only in our common imagination. Their worth is not inherent in the chemical structure of the shells and paper, or their colour, or their shape. In other words, money isn’t a material reality – it is a psychological construct. It works by converting matter into mind. But why does it succeed? Why should anyone be willing to exchange a fertile rice paddy for a handful of useless cowry shells? Why are you willing to flip hamburgers, sell health insurance or babysit three obnoxious brats when all you get for your exertions is a few pieces of coloured paper?

People are willing to do such things when they trust the figments of their collective imagination. Trust is the raw material from which all types of money are minted. When a wealthy farmer sold his possessions for a sack of cowry shells and travelled with them to another province, he trusted that upon reaching his destination other people would be willing to sell him rice, houses and fields in exchange for the shells. Money is accordingly a system of mutual trust, and not just any system of mutual trust: money is the most universal and most efficient system of mutual trust ever devised.

What created this trust was a very complex and long-term network of political, social and economic relations. Why do I believe in the cowry shell or gold coin or dollar bill? Because my neighbours believe in them. And my neighbours believe in them because I believe in them. And we all believe in them because our king believes in them and demands them in taxes, and because our priest believes in them and demands them in tithes. Take a dollar bill and look at it carefully. You will see that it is simply a colourful piece of paper with the signature of the US secretary of the treasury on one side, and the slogan ‘In God we trust’ on the other. We accept the dollar in payment, because we trust in God and the US secretary of the treasury. The crucial role of trust explains why our financial systems are so tightly bound up with our political, social and ideological systems, why financial crises are often triggered by political developments, and why the stock market can rise or fall depending on the way traders feel on a particular morning.