Money exists mostly in our imagination.
Yes, there are these green rectangles of paper with round numbers printed on them and all these documents listing what we owe, own and earn.
These are tangible objects we can feel with our senses and call them real, but money is imaginary and its value completely relative.
Money is Trust, Value is Beliefs.
Only 4% of Money is Cash
With the advent of electronic banking, most of the money does not even exist in an actual physical form. As Ray Dalio explains it very well, only 4% of the money in the US economy is printed cash. 96% is under electronic or paper form.
That is 96% of the money is even more fictive. A global computer crash would completely erase the US economy. (that was part of the plot of the movie Fight Club).
What is real is the Belief we have in these green rectangles of paper and these screen statements. Money exists only because we agree to believe in it.
Money seems natural and real because enough people believe in it.
Almost everyone on the planet agrees that a piece of paper or a chunk of metal with some special mentions on it can be used to exchanged goods and services. It is so ingrained in the culture that we often have to actually unlearn its use and rediscover other forms of exchange, like barter, sharing, pooling.
Paper Money - Literally
Many parallel systems also exist, many apps, websites and video games deal with Units or Credits. The advent of the Bitcoin is another example that money can be created out of nothing but just sheer will and shared belief.
When I was a kid in Italy in the 70s, in the small village where we were living, it was common practice for storekeepers to write down an amount on a scrap of paper and just stamp or sign it when they did not have change to give back.
You could use the piece of paper at any other shop in the village, it was as good as government money.
Money is trust.
For those who remember it, telephone booths and subway turnstiles had their own tokens, which could also sometimes be used as currency. In the past, some businesses accepted postal stamps as mailed payment from people without a checkbook.
Local currencies are not so much of an oddity, Disneyland has the Disney Dollar, Arizona has its own Dollar. Ithaca in New York state has the Hour (as in Hour of Work), like many local communities in the US and abroad.
It all starts with people accepting, agreeing and believing in this new tool for exchange. Local currencies are often mocked as anti-capitalist initiatives from nostalgic liberals but they are just a reduced representation of the real thing.
Ecuador is a nation of 16 million which currency, the Sucre, disintegrated in one week after a troubled history. People stopped believing in their own currency and adopted the US dollar. History is full of such examples, the Papiermark of Germany, the Argentinian Peso, the Zimbabwe Dollar... A currency fails when people no longer believe in it or agree about it. Money is trust.
A paycheck is a promise. By working, you believe the guy who promised to pay you. You both trust the other to deliver.
A check is a promissory note. You put on paper a promise that you will pay this money back to the bank once the bank has given the money to the recipient. You make a promise. Both the bank and the recipient believe you.
When you borrow money from the bank, you sign also a promissory note. You make a promise to pay the money back. A mortgage is a loan backed by a real asset. If you break your promise, you give up the asset.
It is all about promising and trusting (or not trusting) each other.
The lack of trust is immediately apparent.
If a foreigner would offer you a bill in his currency, that piece of paper as no value to you because nobody else around you would give you services or goods in exchange for it. Nobody else would believe in it. It would have no value. It is not even money to you. At best you would see some exotic, decorative value or maybe you would know someone who collects monies from around the world, but that is about it.
Money under the form of currency is a tool to simplify the exchange of goods and services between people.
Two people can exchange goods and services but that has limitations. He mows your lawn, you walk his dog. Because it is more convenient for you to walk the dog than mowing the lawn and the reverse is true for your buddy, all is fair and fine.
But what if your friend had to seek someone else to walk the dog? And the person has no interest in him mowing the lawn? What can he offer? Money is great for that because the same money can be used for many different things with many different people. The dog walker knows he will be able to find someone who also believes in that same money to give him what he desires or needs in exchange for it. And so forth.
Money is also great when there is a difference in value in the exchange. Lawn mowing in less frequent than dog walking, so someone may feel shortchanged. By paying money this problem is dissipated.
You must also understand the difference between Price and Value.
The difference between Price and Value
An exchange occurs when two people
agree on Price
but disagree on Value.
— Bill Williams, Trading Chaos.
That is when you purchase something, getting that something is more important to you than keeping the money.
The seller has zero interest in keeping the something in question but wants your money.
The amount of money (the Price) is the same for both, but the interest for the something (the Value) is totally opposite.
You and the seller agreed on the Price (the amount of money) but had a disagreement on the Value of something (the interest for it).
Value is Belief
Obviously, value is totally subject to change and depends on people's opinions and Beliefs.
Some would pay top money for something others would not even consider possessing.
Here are coming up concepts like priceless, or what money cannot buy or even that everyone has a price.
Value is an opinion, value is Belief.
Many works of fiction depicted money having lost its value because of an apocalypse or some wilderness survival. And everyone has lived a situation when, at least temporarily, money was beside the point.
Because money is trust and borrowing is a promise, the interests paid on a loan are just more of that, a bigger promise. This how more money can be created out of the blue. By promising more of it.
Until we had paper and electronic money, one had to produce actual goods, grow wheat, raise cows or dig gems to honor a payment. The process was slow and had major limitations. Now the network of believers is plain gigantic and the payment can be virtual. This is how we came to functioning with 96% of our money under a fictive form.
There are a few things that emerge from all that:
- The amount of Money available to humankind is infinite because Trust has no physical boundaries.
- The amount of Money available to You is also infinite but you certainly believe otherwise.
- Money issues are directly linked to Trust issues.