Let’s talk about Money

If religion is a belief system then money has to top the list of ardent followers who are constantly optimizing and maneuvering for the next windfall. However, not many understand that the printed pieces of paper or more precisely the 1s and 0s stored on a hard disk somewhere are of little inherent value. Money is essentially an IOU, a believer putting blind faith in the edict below:

“I am putting my faith in the system that if I receive this piece of paper marked 100 from you today, I can exchange it in the near future for something else that will be of similar value to me and the people around me”

As you see in the statement above there’s a lot left for interpretation. If you study the history, you will find that human civilization is built upon cooperation and trade. Money or anything of mutual value was the grease that helped move the wheels of trade. Money often took the form of spices, sea shells or a precious metal like gold. This was true until the advent of paper money in the 7th century by the Tang dynasty. This was the first example of what we call a “Fiat Currency” Money that has backing of a perceived higher power; a Dynasty or A Central Bank in modern times.

Then there was breakthrough, during the 15th century. The Medici family in Italy with noble intentions of working around usury laws of the church inadvertently invented the first modern banking system. Concepts like Double-entry book keeping, Letters of credit and Holding companies came into existence. Philip Goodchild in his book “Theology of Money” argues that, money is essentially credit, a belief system, in which we participate in practice so long as we treat money as valuable. This means that money is also debt. Every time we handle money, we handle someone else’s debt or obligation.” Money now became debt.

The year was [Year]. The mood in [Location Name] was optimistic. People were flush with cash and had few places to put it. The environment was ripe for a mania.

The statement above is not about current times. It is from the year 1688 England in the context of joint stocks for The East India Company. Debt and the financial instruments created by Medici set the stage for the first market bubble. The cycles of market boom and bust, from Tulipmania to the Dot Com Bubble are as much a study of human psychology as they are a study in history. Humans repeat themselves.

We have also been consistently creating money out of thin air, we went from making an entry in a ledger, to printing pieces of paper to entering a number on a keyboard. “Poof” it’s there to rescue us from whatever crises we find ourselves in, wars, famines, pandemics or just collective plain stupidity, a recurring theme in human history. Many are outraged by this act of money creation and think it is unsustainable long term. Few realize this is not the first and will not be the last time we have to resort to it. There is however a counter argument out there, proponents of Modern Monetary Theory essentially argue that printing money is not necessarily bad if left in good hands that is. There is a delicate balance here between the common folks placing trust in the system and the one’s in authority not going too crazy with their powers of money creation. Anyone remember 10 Trillion Zimbabwe dollars that were worth 40 US cents?  

Remember how Medicis changed everything? On January the 3rd 2009, an anonymous person typed in a few characters on his keyboard that kick started the next big revolution in money. I will attempt in my next post to decipher “cryptocurrency” It is a topic that I find fascinating as it includes Math, Cryptography, Economics and lots of code.

So, stay tuned.. I will leave you with a tune this time around.

The dollar's up, down, you'd better buy the pound

The claim is on you

The sights are on me

So what do you do

That's guaranteed..

Come on, come on, listen to the moneytalk

-      Johnson, Young and Young

P.S. If the topic interests you, I would recommend a book I read a few years back. It’s called , Naked Money: A Revealing Look at Our Financial System -Charles Wheelan