The End of Money?
Updated: Jan 29, 2021
We tend to forget that, however crucial to our lives, at the end of the day money is still very much an imaginary construct. In essence, it's a story. We tell each other that a coin, a certain piece of paper, or a digital number has exchangeable value. A mutual agreement based on trust. Yet this past period is unearthing some incredibly weird stuff about cash. So today we're asking one of the coolest questions out there: Does money still work as a story construct?
What is money?
We take the concept of money for granted. We think about having money - and what to do with it - many times a day. But we rarely, if ever, think about the concept itself. And that's actually very strange. Because, what is money really? The answer is both very simple and very complicated: money is a mutual agreement based on trust. It is a deal we have with each other, that states that a currency has a certain value. Without that deal, it would not have any value at all. In that sense, it's a fascinating piece of storytelling. The deal itself is imaginary. But because we all trust that deal, the story becomes a reality.
Yet we are so used to this imaginary construct working in the real world, that we tend to forget it really, truly is just a deal we made with each other based on faith. Still a little on the fence? Just grab your wallet and take out a bill. It doesn't matter what bill, just pick one. What do you see?
The Deal with Money
I'll tell you what I see: a piece of paper with colors, marks, pictures and numbers on it. Without our mutual agreement, none of those things would make any sense. But in our collective imagination, we have made an agreement that a particular set of colors, marks, pictures and numbers has a particular value. So, because of this construct in the mind, we can go to a shop and get something in return. We exchange the paper - that we have agreed upon is worth something - for something else. The same principle applies to coins. Or to digital money exchanges.
Of course, there was a time when physical money was weight against something that was scarce: gold. The value of papers and coins was offset against the amount of gold that was stored in a central bank. Even coins used to be linked to real world scarcity because they were made of actual scarce materials such as copper, gold or silver or nickel. In other words, scarcity drove value naturally. But nowadays we stamp a number on cash, regardless of the original material. The days of cash being linked to scarce materials are long gone.
Today, even the way we create scarcity is an imaginary construct. We deem it illegal if in the real world someone prints their own bills for instance. Because we've agreed that only a central bank is allowed to determine its scarcity. Again, an agreement, a construct in our mutual minds, based on trust. We could just print cash ourselves... but we don't. We are staying true to the original agreement.
So far so good. All these centuries the story has held. But what if we starting to doubt the imaginary construct itself? What happens when we stop trusting the agreement?
The origins of money - the coins we trust
The best anecdote about how we've grown to trust money, is that of Alexander the Great. All its current value is thanks to him, and thanks to art. There is a reason why banks and the art world are always so close; it was art that invented the way we view money today. Alexander had put statues and paintings of his face all around his realm so that people knew what he looked like. With his image well known to the masses, he was the first to introduce a painting of his face on a coin. The verb 'to coin' comes from this practice; we stamp or 'coin' an image on metal. This unified image of Alexander guaranteed trust in a fixed value, stabilizing the economy. Today still, we use images of trusted leaders on coins or bills. In essence, they lent out their trustworthiness. (More on the mind blowing value of art in this blog here).
The origins of money - the banks we trust
In later centuries, Jewish banks transformed how we view the value of money. They were named after literal 'banks' - long tables with money material weighing instruments - that were presents on markets in Venice and other parts of Italy. Being a banker thus became a new job or trade. And when Europe started to shed some of the influence of the Catholic Church, these banks were free to introduce the idea of interest, which became the base of power of such families like Di Medici, famously chronicled by Machiavelli. One could borrow an amount of cash from the bank, make more money with that investment than you had borrowed, and then pay back the amount at a certain interest rate in regular installments. Et voilà, loans were born.
The origins of money - the stocks we trade
Another key moment was the introduction of the first stock market in the Netherlands. This history is tied to energy, or rather, the abundance of it at the end of the 16th and into the 17th century of the Dutch Golden Age. A mathematician called Simon Stevin had invented a better way in which the wheels of wind and watermills would 'grab' into each other. Instead of using straight grabbers that pushed the wheels into one another, he introduced curved grabbers that grabbed at an angle. This increased the amount of power and energy threefold. Before the Dutch knew it, they had three times as many planks sawed, three times quicker than before. A question emerged: what to do with this abundance of wood?
The decision was made to build more ships, since they were already good at that. Okay cool... but what to do with an abundance of ships then? Now that this famous Dutch fleet was being constructed, a new plan and investment was needed. The founders of the now famous East India Company came up with a luminous idea: what if people could pay now for future value?
Those days, about half of the ships that ventured out into the world, did not return. But the other half came back with valuable, scarce spices and other unknown products. The value of ships that did successfully return home to Amsterdam was so enormous that plenty of people wanted to take the risk of financing them beforehand.
But of course, you didn't want to risk being the one who invested in a ship that got lost... So, the decision was made to throw all the investment money on one big pile. And that everyone who invested would be paid out a percentage from the value of all the returning ships. This negated the risk of investing in a ship that never returned and made sure everyone was on board (pun intended).
Of course, all of this needed to be made official. So, a piece of paper was made to prove you made that investment into the big money pile they had the called East India Company. You now owned a small piece or 'stock' in it. And again, exchangeable value was created on the basis of an imagined construct. In this case future value.
When money crashes
Funny but important add-on to this story: the first stock market crash was also in Amsterdam in 1637, and it's called Tulip Mania. The value of tulips at one point skyrocketed in the midst of the business boom that the East India Company created. So, everybody wanted a piece of the pie and started producing them. The market was flooded with tulips, while the stock price was still sky high... yes, imagined value... and then of course, it all came tumbling down. The first stock market crash.
Stock markets' values are based on what we imagine them to be, not on what they are. Every so often, reality hits the imaginary, and a correction needs to be made. A great example are the tons of weird - and mostly imaginary - mortgage constructs leading up to the Credit Crunch in 2008. They worked because of the agreement between bankers there was enough value in things called collateralized debt obligations, asset backed securities and credit default swaps. Yeah right. So, surprise, surprise, that agreement didn't hold up. The bankers lost trust in the deal. Hence; kaboom.
Just how arbitrary the stock market really is, was also demonstrated recently when a retail investment group on Reddit decided they wanted to troll hedge fund managers who went short on GameStop stock and felt like cashing in. They kept posting on social media how bad the company was doing, in hopes that the stock price hoovering around twenty bucks a share, would fall down to the preferred - and cash-able - level. The Reddit group started pushing people to buy. And before they knew it GameStop stood at almost 500 dollar a share. In no way a representative value of a physical video game retailer in an increasingly digital world. All just a game (pun intended).
Nobody in their right mind can argue that stock markets represent real world value. Forget our little Reddit story: at this time of writing (2021), with a series of existential crises going on but still sky high stock prices on the boards, it's not the money banks, but the food banks that tell us how real world value is truly doing. And their lines have never been longer.
Insurance of value
Another very notable moment in monetary value creation was the start of the 'Widows and Orphans Fund' in Scotland by Webster and Wallace. In essence this was the first modern insurance company in the world. During a war in the 18th century that Scotland was involved in, there were a lot of women and children who lost the male breadwinner of the house. To prevent them landing on the streets in poverty, the fund was founded.
The idea was that if everybody chipped in, and that this new pile of money was invested into safe stock, there would be enough money left over for the unfortunate families. It worked. It turned out that if enough people participate, the money pile will keep growing, while also being able to support those that were unfortunate. The principle still is that simple today: the more people chip in, the healthier the insurance pile of cash will remain.
And after that we used the same principle on houses, jobs, cars, healthcare, retirement... everything can be insured. And everyone could be paid out if enough people chipped in to grow the pot. You wouldn't have guessed it today, but the concept of insurance is a pretty cool paradox: insurance exists because of charity and socialist constructs, while leaning on a capitalistic principle to maintain the pot (provided the markets don't crash too hard of course). It's both socialism and capitalism at the same time. A trust in both that makes it real.
But what if trust starts to erode? Is money still real then?
The concept of virtual money
A prime example of this is the already discussed relationship between the stock market and what economists call the 'real economy' of goods and services. The world is slowly coming to the realization and even the acceptance of a hard fact: stock markets and the real economy have little to do with one another. The stock market is an imaginary construct on top of another imaginary construct.
A new example is virtual money. Bitcoins and other virtual currencies are very popular. And I don't dispute that they are valued concepts for traders. But even with the best of intentions, there is no banker on the planet that could successfully argue the value of virtual currencies is based on real world goods and services. They have no link so far, even less so than the stock market, other than the 'agreement of value' between tech entrepreneurs, traders and banks. Just like the mortgage agreements had that lead to the Credit Crunch...
Yes, you are right my fellow nerd, there is value in the encryption methods in the back end of the tech. That blockchain technology is useful for sure. But now that we know their principles, who needs the currencies themselves? Essentially they work the same as Monopoly money, or in-game currency in video games: within the game they have real value. But the moment they are outside the game, they have no exchange value. And you don't have to take my word for it. The number one magazine for the tech world Wired, who you'd expect to back new tech, are the biggest critic of the Bitcoin because its incredibly damaging practices to the environment.
What does this mean? Well, money is not supposed to stink. That's part of the agreement. Money itself is not good or bad. You can use it for good or bad, sure. But the medium itself has no moral standpoint. We say 'money talks'. But money does not actually scratch its throat before it starts citing moral lessons from Shakespeare.
Yet here it is, virtual money stinks. All these virtual coins don't just look like modern day pyramid schemes, they are also absolutely detrimental to global warming. The sheer amount of raw computing power that is needed to 'mine' them and maintain a virtually constructed 'scarcity' - yes again, an imaginary story of value we tell each other - is so crazy high, that entire server parks need to be created and maintained. And they gobble up energy and produce heat like baby black holes.
Hence, the world environment is literally being crushed to maintain virtual value.
And even if you don't care about that (the world be damned, gimme my Bitcoin!), you just can't argue it creates trust...
The concept of a billion
Speaking of tech entrepreneurs, their value is going through the roof right now! Billionaires are getting richer because of the pandemic. But what is actually the value of a billion? Just think of it like this: with a dollar you buy a snack. Ten dollars buys you a meal. A hundred dollars buys you new clothing. A thousand dollars buys you family insurance. Ten thousand buys you a nice car. A hundred thousand gets you closer to a house. A million buys you a Bugatti Veyron. Ten million one of the world's supermodels. A hundred million buys you a gigantic yacht. And a billion buys you... Yeah. What does a billion buy you anyway?
The answer is cool: a ticket to space. In an ultimate twist of the experience economy, some high profile tech entrepreneurs are building commercial space flight. Apparently, if you have everything, your mind wanders to the stars for value!
Sounds awesome. But even here there's a catch.
The catch of cash
While the rich are getting richer, the poor are getting poorer. In the past century or so, the gap has grown wider. And in recent years we have seen massive debt building in countries all over the world. Where this debt is tied to the real world, we see that only by keeping interest rates at extremely low levels, can we maintain the agreed construct of the economy. This of course only leads to even more lending, more debt, with even lower interest rates.
And to add to all this weirdness, we are now seeing negative interest rates too. To give you an idea of just how weird this is: in some countries, banks will now pay you money if you bring money to them. You gotta admit, that's weird. Thankfully, triggered by the hundreds of millions of people living with debt, the field of psychology has been making massive inroads in understanding what the effect of all of this weirdness truly is.
The mind in debt
Turns out that people who are in debt cannot think much beyond their lizard brain. This means they can only think of survival in the immediate future and can no longer use their own imagination and logical powers to get out of debt. In other words, once you are in debt, your mind changes to short term thinking, and you become its anxious prisoner. And with the massive amounts of debt growing in the world right now, this means fewer people will develop a better future. Simply because they cannot imagine one to start working towards.
Even sadder is the fact that this is most often caused by simple purchases such as a washing machine on loan or similar things. Think about that for a second. This means that the economy based on consumption of goods is undermining its very own purchasers-in-debt to consume more goods. In essence, the consumption based economy is undermining its own consumers. And while we are talking about that type of economy, we have now found out that this too is based on imagination.
The hits just keep on coming.
Did you know for instance that there will be no more fish to fish and eat by the time it is 2045? That is in 24 years from now. Regardless of your emotions about that coming disaster, let's stay focused on the subject of value: that knowledge has done nothing to change the price of fish! The price we pay for deforestation is also nowhere reflected in the price of wood, or meat that is cultivated on deforested areas. And it is already causing the death of about half of all the other species on the planet. A planet that as far as we know, is the only one that has life in the universe.
That's crazy right? It might costs us all human life on Earth, nay, possible all life in the universe, including our entire species... but we don't price it in? By Jove people.
Money gets even weirder
All of this again means that the scarcity principle, the one that the first big economists such as John Adams and later Milton Keynes have argued, is now no longer working in the real world. Maybe at one point it did. But all value has now seemingly become imaginary, even if it means real life will disappear forever from the planet (Google 'runaway greenhouse effect').
All of a sudden that billion for a space flight outta here seems pretty cheap.
Okay, maybe I got a little carried away there for a sec. And maybe we'll be able to stave off a runaway greenhouse effect. But if that's how low the bar is, one can still not argue that this builds trust in the story of monetary value.
From the point of view of the imaginary construct - the agreement that we call money - these are not particularly good signs. And the problems are actually pretty down to Earth. For instance, our concept of value is changing for essential workers, such as delivery people, food distributors, bus drivers or medical personnel. And even in a sports like Formula One - arguably the most capitalist sport on the planet - there will now be a budget cap. The reason? Competition is hampered if the flow of money is free, because it predominantly flows to only a few teams, making for a more boring sport to watch. In this case, capitalism equals boring. Ouch.
On a broader scale the concept of a Universal Base Income has already been rolled out in North Western Europe by some countries, with many more to follow, spurred on by the crises we are facing. For those who missed it, the Universal Base Income is the idea that everybody gets a blank check of a thousand euros every month, until they don't need it anymore. And here again, our old concept of how money works in a capitalist sense is being challenged. We thought this would never work. But it did.
Instead of decreasing initiative, the blank check's results are the opposite: it stimulates initiative to follow your own career and your own path, especially by those who previously did not show initiative. Why? Well, honestly, we're not sure. But we suspect it moves people beyond their lizard brain. It takes away a very strong fear of not being able to provide things needed for survival, such as food and a roof over your head. And that frees up the mind to make money.
We're also seeing different movements come up that only a few years ago would be unthinkable. Entire portfolio's of the biggest investor companies in the world, worth hundreds of billions of dollars, have now moved away from fossil fuels, in many cases even for one hundred percent. Wallstreet broke records investing into green alternative energy and the like in the pandemic year. Or a group called MillionairesforHumanity who are asking governments to tax them more! I don't know about you, but I needed a moment to let that one sink in. People asking for the government to tax them more might be a first in our species history.
Told you shit was weird.
New currency and exchange constructs
Now, I'm not writing this article to argue about The Climate Crisis or over-fishing or deforestation or even my favorite sport, Formula One. No, I'm writing it because of the story implications. All of this and more, is slowly casting doubt about the agreement of value. This was the question we posed at the beginning: does money still work as an story construct?
The answer is that it at the very least, it's under fire. If you like at all the individual cases separately, you might think they are isolated. But once you get that birds eye view, this is the brutal, cold and undeniable reality we are facing: in all of the cases above and more, the actual, real world value is not represented in the value of the coins and bills we use everyday. In some cases the value perception is off. And in other cases the value perception is non-existent all together. And that ultimately erodes trust in the agreement itself.
So much so it is already leading us to other constructs.
Of course, there is the most obvious one to point out: the Sharing Economy. The idea is that you don't have to possess goods as long as you share them with others. For instance, you don't have to pay a lot of money for a car. You just pay whenever you use it. You don't pay for ownership, you just pay for access.
On the surface, this ultimately leads to cost reduction; a good thing. But deeper still, it leads to people having a different sense, a different imaginary idea of what value is: we don't value ownership that high anymore. And instead of calculating the value of a car at say ten thousand dollars, it is now calculated at say 100 dollars: the amount you actually spend on it when shared. In essence the agreement of value has now changed in the minds of those who share.
For some people this is hard to fathom. We're witnessing political divides because some people are so used to the ownership outlook, they just find it hard to imagine that the world would still function in such a shared economy. They think it's some socialist scheme. They are quite wrong however. Because others are becoming billionaires because of it.
The average 30 year old or younger tends to have a radically different idea of value and ownership than older generations. For many people I speak to everyday, the idea of owning a car or a house is far fetched, even crazy. Their entire mindset is based on flexibility, not possession. They even view relationships in the same way. This may be scary for some (sometimes for me too I'll admit) but that kind of thinking is here to stay and then some. It's growing, out of necessity in a world with ever more people, and ever less resources. It's fueled by survival instinct. And thus, whether you like it or not, is unstoppable.
A very interesting development related to this is also the rise of what I'd like to summarize as the Mindfulness Movement, full of yoga, veganism, Eastern philosophies and whatnot. This group consists mostly of people who have reached the top tier of Maslow's Pyramid in areas, countries and communities where access to food, housing, water and other necessities lower down on Maslow's hierarchy of needs, is no longer a problem. The development that we are seeing in this group is that possession such as jewelry, cars or expensive electronic equipment, has lost significantly in value. But it's more than that. This group is actively exchanging mental insights on a daily basis. And they do it for free mostly.
Yes, there is a strong idealistic component to this movement. But as I said earlier, it's also about survival. All generations below the Baby Boomers have less access to money to buy goods. We are seeing these generations starting to experiment with sharing everything. From their point of view, that makes sense. In their imaginary construct of value possession is no longer a must, which leads to the sharing of knowledge, mental insights and wisdom as their primary currency. Self enlightenment is their Bugatti Veyron.
Of course, this group is still the exception to the rule compared to the rest of the world, but it's a noteworthy development nonetheless. And it is gaining a lot of steam.
A circular business experience
This concept of the circular economy is also gaining popularity in the business world. Again this is fueled by survival instinct. The main idea behind a circular economy is better resource management. Yes, the end goal may be ideologically driven, but the means is just a re-evaluation of resources. One strives to not let any resource go to waste, especially if it is waste. From a business point of view this makes perfect sense.
That whole fluffy 'Save the World' argument is great, sure. But in the end it's all about better resource management. In other words: cost reduction. In our minds, this is what changes: we used to see things as disposable, but in circular thinking, we now view it as valuable. Yes, yes... whoop tee doo people... it's better for the environment. But most of all, it's better for your company wallet.
The experience economy is another example, where possession of goods becomes less important than the collection of worthwhile memories. In our minds we are again devaluing possession to a certain degree, while upping the value of happiness. Even our entire system of law, that is mostly based on the first Roman era practices of 'protection of possession laws', first designed to protect retired soldiers' land ownership, has to be reviewed in these societal changes. We need to literally make new laws based on sharing, not on ownership. Laws that had largely stayed the same for over two millennia. Talk about a shift in thinking.
But we can move even further from these concepts, into entirely new ones.
Completely new currencies - energy
Energy is one of them. Right now, we are in a race to get to cleaner and more efficient energies that are infinite , while ditching finite resources. As noted, even Wallstreet has joined that race with their investment policies. And that's not out of the goodness of their hearts. Or because they wish for a greener world. It's because it's a damn smart investment.
Wind, water, thermal and solar energy are infinite. Or at least until we're going to expand into the galaxy (there's that billion dollar space agency again, sorry...). And everyone who controls a better source of new energy, is always history's winner.
From the harvesting of fire, the invention of the wheel, the Bronze Age weapons, to the oars of the Greek, allowing them to ship things even when their was no wind, or the aqueducts and viaducts of the Romans, the aforementioned wind and watermills issuing a Dutch Golden Age, the start of the English coal based industrial era, to the Americans straightening out electricity and creating nuclear energy, to the recent Grüne Wende (Green Shift) in Germany... every civilization that has made an energy leap, became the undisputed winner of their times.
And now, with renewable energy being everything, including a way to save ourselves, we are seeing the first signs of it being used as an exchange method. Consumers can give energy 'back' to the big providers when they harvest it themselves. Energy, as a currency, may be in its infancy even. And at the very least, we can say it is on the rise in our minds as valuable. In theory, more valuable, more trustworthy - and more real - than money. Energy as a story construct, is on the rise.
Completely new currencies - data
But perhaps most exciting (or frightening) is the rise of data as a currency, where we actually exchange information for information. Or goods and services for data. This may sound like science fiction. But isn't this what we are doing already everyday? Maybe now, at the end of the exchange, a currency or a purchase is involved still. But it's not necessary. We are already exchanging data for data everyday.
In a funny way, it reminds us of Star Trek, the sci-fi series in which currency has indeed become information, knowledge and data as the means to share and gain things such as food, water, shelter and other necessities. In that story, money does not exist anymore. You might think it fantasy, but that mobile phone you are holding right now, while you are walking through those sliding doors, were also their fantasy. If the story is strong enough, it becomes reality eventually remember?
To summarize, we are seeing shifts occurring in currencies but more importantly, we are seeing shifts in how we view currencies and exchanges in our minds' constructs. And at the tale end of this argument, it all comes down to the question:
What do we trust as a currency?
The story of money
I really don't have an answer to be honest. I have some opinions sure. But mostly I'm merely observing the trends, and I don't know where it will lead exactly. I'm aware that many of you will probably have read this article through their own lens. Some of you will have judged it through the political eyes of right-wing or left-wing thinking. Others will have judged it with a superior knowledge of banking systems and economies that I do not possess. Still many of you will have judged my words from a holistic point of view. And without a doubt some of you will have been irritated by my observations. And on all of those individual points I would probably lose an argument with the entire lot of ya.
But one argument I think I will win, regardless of what you may think or feel about that reality: trust in the agreement on the imaginary construct we call money, is in a shift for the first time in a very, very long time.
Money may be losing its value.
Love, as always.
And plant trees people. Plant trees. (Just imagine money grows on them...)