So I was all set to write on latest and greatest in payments (it’s January, reckoning time, how’s your outstanding balance these days?), but then I got this fantastic email from a reader:
“What is money these days? Isn’t it just electronic blips? It feels like it’s not even real. It feels like an act of collective imagination.”
I gotta say, when you make your living talking about money, you should be able to answer that question, so let’s do that today. Let’s boil a cow down to a bouillon cube (I forget who said that first, but it wasn’t me).
There are three things to know about money: What is it, what it does, how it works. Whether you’re in high finance or just trying to make rent, these three things determine our options on any given day.
1. What is money?
At its core, money is a medium of exchange. Before money, we bartered: my goat’s milk for your bee’s honey. But ruminants and apiaries are cumbersome to carry around. So people started carrying around coins (wood, clay, metal), then later, bills (linen/cotton paper), which are more portable and more durable. Most recently, it’s been electronic blips, but on the same principle – more portable, more durable.
Today’s monetary system is relatively new. Picture this: 1945. Bretton Woods, New Hampshire. Four guys – a Brit, a Frenchman, a Russian, and an American – meet and set up a new monetary system in the hopes of avoiding another colossal currency meltdown that led to the rise of Hitler and – you guessed it – the outbreak of World War II.
Among the many things they decide: that (a) the US dollar would be the currency of international trade (given that Europe and Russia were in smoldering ruins, it seemed like the only viable option), and that (b) One US dollar would be pegged to 1/35 of an ounce of gold.
These last two decisions lead us into the next question, which is:
2. What does money do?
The electronic blips, the swiping, the paying with your app, may not seem real, but try not paying your mortgage and see how unreal they are (as American federal government workers are finding out). Imagination implies something that’s not really there; you’re just pretending. Try that with money, and you get into trouble fast.
Money is less an “an act of collective imagination,” and more an act of faith – fiat. Fiat is more powerful. Fiat you can’t always touch, but nevertheless undergirds your daily survival. That’s why when you or governments lend or borrow, there’s almost always a “full faith and credit” clause – it means that all parties acknowledge the real-life, material, consequences of a promise that happens on paper.
Fiat makes it possible for you, a business, or a sovereign government to borrow, lend, or grant money you do not actually own. It’s why you can get a mortgage or a small business loan, why we were able to rebuild after World War II, and recover from the 2008 meltdown.
3. How does money work?
For all human history, the most important thing about it was how much you had. The more you had, the better. But since 1999 (thank you, WTO) there’s been a second dimension: Speed. Yep, like the (FANTASTIC) movie. How much money you have still matters, but increasingly important is if and how fast you can move it.
Velocity counts: It’s true if you’re trying to feed your family in Manila, hit the strike price before the guy across the street, or finance a factory. On top of how much you got, it now needs to be able to move. The faster, the better.
And that’s why both the fiat and the electronic blips matter: Because today, the only money that matters is money you can move (there are, actually, different kinds of money, like M1 and M4, but that’s for another time). We are laying down rails for the world’s money to move without friction, like a bullet train. The faster you can move your money, the more powerful it is. The inverse is also true: Money that is slow or impossible to move is less valuable.
The velocity of money is the foundation for the modern payments business. Hey, look at that! We wound up talking about payments anyway. Tell us about all the ways you want to move money, and thanks for all your great notes. Keep ‘em coming! Write us at firstname.lastname@example.org.