FINCHELON: #01 - Exploring The Origin And Essence Of 'Money'

Money is an elusive concept. We tend to believe that we understand the overall concept of money. But do we? as touched upon by Mr. Yuval Noah Harari in his book 'Sapiens', money is a 'trust based system'. More that being a technical evolution, it was a mental revolution. It is probably a mental model that helps enable various transactions between people in their immediate environment as well as across the world.

At FINCHELON , we are trying to make the system of money more comprehensible to people and help them understand how it works and how they can interact with the system of money to create life for themselves where they are able to get access to resources to live and succeed in life.

FIRST-PRINCIPLE VIEW OF MONEY

Let's look at things as a very fundamental level. All the animals on the planet require access to the basic elements in one form or the other to survive. At very basic level we require food, water, and air for our survival. Since the begining of time, we have been dependent on these mediums to gain access to the elements that support life.

Different species have evolved over time to go beyond passive consumption to intentionally gathering the elements in certain form. When evolved species such as Homo Sapiens started to look across time, they saw the need of making efforts to have access to these elements and store them in the native form or convert them to a form that sustains itself as time passes and hopefully stays available as need arises.

A simple example is food. When we were hunter gatherers, we probably did not see the need of storing food in various forms. As the population increased and our minds evolved, we saw this need and started to intentionally growing various crops and storing them in storable formats.

There came the need of having tools that could help with better cultivation. We started to dig EARTH to get access to various metallic forms that could help us with cultivation and even building tools for evolving needs.

As we evolved further, it started to become difficult to have access to everything we needed or wanted. This gave rise to the concept of EXCHANGE OF THINGS and thus the BARTER SYSTEM evolved. This also gave rise to the concept of TRADE where one entity having access to some resource in abundance was ready to let go of some amount of it in exchange for another resource.

Eventually, we realized the need of a common medium of exchange that could be easy to carry, easy to store, easy to trust, and has a high shelf life. This is the revolution that has taken place over time and has evolved from METALLIC COINS, to PAPER BASED MONEY to DIGITAL MONEY.

Again referring to the book 'SAPIENS', money is a TRUST BASED SYSTEM and MONEY CAN CONVERT ANYTHING TO ALMOST ANYTHING. Thus it becomes important to understand the money and leverage it to navigate a life where we have access to resources when we most need them.

'TIME' & 'INTEREST' - THE INSEPERABLE BROTHERS - PREVIEW

The financial system under which all the activities take place in today's world is driven by the concept of INTEREST RATES. The fundamental question is, why do we even need interest rates?

Our monetary systems have evolved in a way that aims to keep the FLOW OF MONEY ongoing. It is very critical to understand that the economy is driven by the FLOW of money rather than the quantity of money itself. Because it is a trust based system, the trust starts to wither as time passes by and/or the flow of money does not occur as at the expected point in time.

When banks lend money to individuals and corporations, there is always an uncertainty involved about recovery of that money and this uncertainty is a function of time. As time passess, our ability or inability to efficiently create economic/commecrial activity becomes apparent and thus leads to the fact that the flow of money will increase or decrease over a period of time.

Thus, anyone who lends money to anyone else, expects to get higher amount back over a period of time because there will always be some entities that will delay the return of money or even default. Thus, when a bank gives a loan to 100 people, the interest rates incorporate for those probabilty of delays and defaults over time. These interest rates also cover their overall cost of operations in terms of infrastructure, salaries etc.

The central banks charge interests rates when they lend money to other banks.

The central bank also pays interest rates to banks when its borrows money from these banks.

The banks charge interest rate from individuals and corporations when they lend money to these entities.

The banks also pay an interest rates when they take deposits from these individuals and corporations.

Thus, ideally as the more time passes, the uncertaintly involved with the money increases that gives rise to interest rates that help cover for these uncertainties.

THE BOTTOM LINE

Money as a concept should be learnt and understood in terms of its FLOW rather than an entitiy in itself. The parameters that affect this FLOW are the intentions, actions, and inactions (we'll talk about it more) of human beings.

In the upcoming articles we will touch upon the concepts of inflation, how central banking system works, how various financial instruments are structured, and how we can understand anything in finance from basics. Stay tuned.

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