Pull Out Your Money Right Now
I must admit that I feel foolish. With my education, business, parenting, and life experiences in general, it took me 37.5 years to realize that one of our most powerful relationships that we have as humans is our relationship to money, the choices we make around money, and our taken for granted assumptions about money. Money is not value, money communicates value. If that last sentence seems fuzzy, good, your brain is doing what I hoped it would do and we’ll unpack that sentence throughout this article.
Money might as well be a family member, boss, friend, or enemy. Giving it human characteristics and acting like it is a person might help us understand how it both enables and constrains most things we do and gives a glimpse into what we think is good/bad, right/wrong, worth pursuing/worth avoiding (i.e., our value systems). I am a bit embarrassed to have a Ph.D. and have published a fair amount of academic mumbo jumbo articles that other academics may have glanced at, but I have never formally thought through or written about the pervasive presence of money in human relationships and lives, even though money clearly impacts our values, how we choose to organizes our lives, and what we choose to do with our time.
MY GIFT = YOUR MONEY MATRIX MOMENT
So I bring you a simple offering with this article, which is the first in a series of seven articles, and that is your Money Matrix Moment.
If something was emerging that would change everything that you think you know about a subject, would you want to know more or not? Would you take a red pill to learn about an uncomfortable truth that shakes up how you currently view the world or would you take a blue pill to remain blissfully unaware and ignorant of the changes until you can’t ignore them anymore, when your world thrusts them upon you whether you want it to or not? The choice is yours.
So if you are taking the red pill, pop that sucker in your mouth, wash it down with a tasty beverage (said like Jules from Pulp Fiction), and get ready to get reacquainted with your old friend and begin thinking about what gives your friend its power, why we like it so much, and how it can change form without changing function.
OXYGEN
Putting all politics aside, let’s imagine scientists starting warning us that a big change was happening to atmospheric oxygen, it was undergoing some weird mutation that they had never seen before. As soon as those headlines hit, most humans wouldn’t hesitate to educate themselves about this change. As the saying goes, “Necessity is the mother of invention (and action)”, and a change to oxygen could lead to death, so people would swiftly learn as much as possible about that change to prevent the grim reaper from knocking on their door.
Important changes are occurring to the oxygen of our economy, and aside from industry insiders, self-described experts, journalists, bloggers, pundits, and people with skin-in-the-game, I don’t hear many regular folks trying to understand these changes. In fact I hear most regular folks, the people who live in my neighborhood and a lot of my friends and family members, either completely unaware of the changes or completely dismissive of them. I am sure the changes are not on their radar for the goings-on of their daily lives or the changes sound far-fetched or scary (because they don’t understand the technological language in which the changes are talked about ) and it’s easier to think that our current view of money will continue forever…but it will not. History has taught us that money has changed many times, and it is currently changing at its edges, and (I believe) is about to change much more rapidly at its core.
This is important because money touches so many aspects of our lives that if we don’t grapple with these changes, our oxygen might get cut off. When we need to make difficult decisions, its better to do so with a brain full of oxygen and a wallet full of money with purchasing power (more on that later).
I want to give you an oxygen tank and mask that helps you remain calm, take deep breaths, and make sense of financial changes that will be unfolding from a position of power and confidence rather than of vulnerability, fear, powerlessness, or worse, nihilism.
Money boils down to trust and trust boils down to strong belief in something. So what is it, exactly, that we trust when we use money?
This article is for regular folks. People without financial or technological subject matter expertise, our friends, our cousins, our grocers and barbers, maybe even ourselves. This article is for people who haven’t made the time to think deeply about money.
PULL OUT SOME MONEY RIGHT NOW
No really. Take 23 seconds and pull out some form of money and set it next to you while you read the rest of this article. Connect what you are reading to what you can see or feel. What did you grab? Credit card? A $20 bill? $100 bill…baller! Login to mobile banking ? Grab a checkbook (Hi dad)? How many of you grabbed some seashells or gold coins? Why not?
These objects were money for many societies but have fallen out of favor. Who grabbed a crayon or a stuffed animal? My kids use these things as a form of money even though they don’t know that’s what they are doing. So in order to understand some of the shifts taking place in the financial world today, we need to think about how money has changed and stayed the same over time.
Are bananas money? Not really because we can eat them, we can’t eat that dollar bill in front of us and expect it to keep us alive. We can try to use bananas as money in a society but they actually serve a greater purpose and that is that we can literally consume it to give us nutrients to help keep us alive. Plus there are certain features of money that make certain forms of it more useful than others. We might be able to get away with buying goods and services that cost $25 or less in bananas but by doing so we also limit ourselves in other ways. What about things that cost less than a whole banana? Or buying a house? We would most likely have to carry around some kind of banana bag. Oh yeah, what if we wanted to buy something outside of our immediate community, now we have to mail (shipping costs and extra time) bananas. Oh yeah, and bananas have a short shelf life (but banana bread is so good) and some bananas are better quality than others. So things we can consume to keep us alive probably aren’t the best form of money (tough to divide, size and weight of money, spoilage, lacks consistent purchasing power).
Sidenote: There are lots of fancy terms associated with money that economists (money studyers and counters) throw around and you can Google them. They aren’t important to our discussion or your life, unless you talk to your butcher about economic salability, fungibility, and divisibility. We live in an age of political correctness where we stumble over ourselves to try not and offend anyone, lots of identity politics going on. But the #1 domain of political correctness is money/finance. The amount of jargon and unnecessary complexities that have been invented to talk and think “properly and professionally” about money is mind boggling. Another example of our human ingenuity. We anesthetize, scrub, sanitize, and remove all semblance of normality for what money means and how we are trying to use it to do things for us. If you don’t agree, what’s it like filling out the paperwork when financing a car or purchasing a home. It’s a maze of ridiculousness and hours of paperwork.
In our banana example, we were talking about using bananas as money, we were not talking about bartering with bananas. Bartering is a process that doesn’t actually involve money because it is when we exchange one thing or service for another thing or service. Trading a banana for a pair of shoes. While useful on a small scale, pretty difficult to employ in a global economy where most things we buy are traveling thousands of miles to get to us. So our ancestors eventually shifted away from using barter as a way to organize their economy (the series of transactions and choices people make during daily living) to using money as a way to organize the economy.
The chronological changes associated with the form of money, in a simplified form, look something like this:
(Barter) → Seashells → Metal → Paper → Plastic and Magnets → Digital Bits
People used seashells as money for a while. Then those fell out of fashion for similar reasons to our bananas. Then humans discovered metal in mountains and began creating coins. You can imagine that they had a lot of different sizes and weights for their coins, most coins were unique rather than universal. Over time the coins got standardized and became a more reliable source of money and harder to forge. Fast forward to today and you are familiar with the rest: dollar bills, credit cards, and online banking (Paypal, Venmo, mobile banking accounts).
The process for coins becoming universal did not happen quickly or easily. When enough people saw the benefits of knowing that 10 different coins can actually have the exact same value, it made doing business and making choices easier. We take for granted the idea that two different $10 bills are both worth the same amount. Prior to our current money system, it was not always that way. People had to worry about fake coins and coins of different sizes and different weights having different values. They had to carry scales.
So how did the process of money becoming interchangeable occur (being able to use and exchange one gold coin for one exactly like it)? You had two forces driving this process simultaneously: (a) regular people doing business with each other and (b) governments wanting to protect the public interest, expand its power, and create a more cooperative society. Having a stable and interchangeable supply of money is an important feature of a stable society. If you have stable money you can count things more precisely, figure out what’s doing well, figure out what’s struggling, and make changes to improve things more easily. With an unstable money supply it is harder to get correct information to make good decisions on a large scale.
Eventually the groups of humans who took power over their fellow citizens (or were elected) saw the benefits of controlling what their citizens used as money. No matter the politics of a government, all governments are constantly expanding their power and reach. There is nothing wicked or conspiratorial in this, it is just something we do as humans in any endeavor we pursue. Whether we form businesses, universities, churches, or social groups, we all look for ways to expand our influence, our message, our beliefs — our power.
And when a government has the ability to legally wage violence on behalf of its citizens to safeguard its way of life through its military and police forces, it makes sense to control the tool that keeps members of that defense system paid and happy. It’s hard to have a strong defense force (military, police) if you can’t pay them. So over time humans figured out the fastest way to expand power (and values) is to control the supply of money.
There is no more absolute power than the power over money because having that power controls the ways in which people can exchange value (buy things, sell things) and what most people in that society consider valuable in the first place. Once a country has a moderately stable money supply, that makes it much easier for people to lead healthier and happier lives in general and allows people to cooperate and collaborate in new ways. A stable money supply is the oxygen that keeps society breathing. If you disagree, look at what emerges from extreme poverty — the answer is simple — fear, hunger, ignorance, and loss of purpose. When you mix those ingredients up you get a progression of violence, starting with civil unrest (protesting in the streets), then informal violence, and finally formally organized and state-sanctioned violence.
To avoid the cascade of violence (and reduce their power), governments backed gold because it was such a reliable and stable source of money, everyone on the planet agrees it has value (and always has). But gold doesn’t have an unlimited supply so if you are a government it is difficult to pull off some of the things you might want to do because you have limited money. The birth of the “dollar bill” solved this problem. So now a government could legally issue paper money instead of gold to its citizens and promise it kept an equal amount of gold in its vaults thereby “backing up” the paper money supply. And this system worked pretty well for a long time across the globe. This worked in spite of the fact that gold’s physical supply chain (i.e., moving it from one place to another) adds major costs and becomes problematic when lots of people want to buy it (demand spikes). And then government officials had an even brighter Aha (Gotcha?) Moment when they realized that people eventually trusted the government’s paper money to the point of not needing gold to equally back it up anymore. So they disconnected those two tools.
In fact, a former president enacted Executive Order 6102 that made it illegal to own gold, asking all citizens to turn in their gold in exchange for government-issued paper money. And just like that, a group of humans snapped its fingers and went from a sound, stable money supply on the gold standard to government fiat money. You can think of fiat as “I said so money” because that is the logic it is built on. Paper money is money because governments legally mandate it as money. Gold never had to be legally mandated as money, people across the globe and across time just used it as such. Not the case for our beloved paper money. A better descriptor of what happened would be “Do As I Say, Not as I Do Money” because the U.S. government made gold an unacceptable tool of exchange, made it illegal for its citizens to own large quantities of it, while simultaneously being the biggest gold hoarder in the world.
Can you imagine the daily chaos that was occurring when the government was trying to convince people that these pieces of paper were the same as the gold coins in their pocket or telling business owners to accept paper payments in addition to metal coins? We haven’t lived through this kind of chaotic economic environment because we’ve always had the luxury of a stable U.S. dollar serving as the world’s reserve currency.
But money that serves as the global reserves (what most countries place their trust and confidence into because they believe that money has value and that country pays its debts) has a very finite lifespan throughout history, in fact most global reserve currencies only last around 100 years. The U.S. dollar has been the global reserve for over 90 years. Every new generation of humans chooses to forget the lessons we can learn from history, probably because we think our generation and technologies are unique and different and will carve our own path (human hubris at its best). The first U.S. dollar was printed in 1914 and it took several decades for it to become accepted as the way the world spends money. It has remained that way for one reason: other countries have trust and confidence in the United States paying its debts. Because of this most countries keep billions of dollars in their own reserves and this has allowed the U.S. dollar to serve as the oxygen for the global economy.
So now we’ve completed our very imprecise and brief history of money and how the U.S. dollar has become the world’s reserve currency. We must now address a more fundamental question: what is the purpose of money?
THE PURPOSE OF MONEY
Money is innate to who we are as humans. We crave a way to exchange things with each other, to collaborate and achieve more socially, and to do that in the easiest way possible requires a tool that makes those transactions as simple and frictionless as possible. As I’m teaching my 7 year old, at its core money is and must be a “tool of exchange.” Money allows humans to achieve more with people in their own community and across the globe, it allows us to contribute to human flourishing and creativity and innovation on a much grander scale than without a “tool of exchange.”
Money is a good that is meant to be exchanged for other goods rather than be consumed or to be used in the production of other goods. You can’t bake a cake or engineer a car using money in the baking process or in the factory, but money does allow you to buy/invest in the ingredients and machines that allow those things to happen. Money also allows us to keep precise records of the actions we are taking that involve transactions with other people. We can keep (or choose not to keep) very accurate dealings of what we buy and sell with others. This is also useful for more cooperation, collaboration, and human flourishing because reliable records help us solve disputes more quickly and prevent disputes from occurring.
More important than record keeping, money is a Vehicle of Value, it’s how we move value (what we think is good/right/admirable) from point “A” to point “B.” Most of you (hopefully) have a savings account in a bank, in an online Fintech company (i.e., financial technology), or under your mattress at home. When you put $10 in that savings account, you are doing so under the belief that when you take it out, you can buy about the same amount of goods with it that you can today. Heck, it would be great if that money magically gained value and you could buy more goods with it.
Accounts do exist that pay you money to store your money but over time banks have slashed their rates tied to savings accounts and don’t provide very good incentives to let them use our money to make money for themselves (by giving other people loans…fractional reserve banking, you should read about this, it’s hilarious). Because of low interest rates on savings accounts, people are constantly looking for better “stores of value,” which you can think of as storing your money in a way that allows the money to hold its value (what it can buy) over time. This is where all asset bubbles come from: 2008 housing and financial, 1990s tech, tulips, silver, 2017 Bitcoin bull market. The list goes on. All bubbles arise from humans trying to (a) make money on their money and (b) trying to find a more stable store of value for their money.
Gold has been the best store of value throughout history. If you think U.S. dollars are a good store of value over the long term (25+ years), just look at how much a gallon of milk, gallon of gas, new car, and new 1,500 square foot home cost in the year you were born versus how much they cost today. This will illustrate inflation, which simply means you can buy less of the exact same goods over time because your fiat money (I said so money) loses value.
This is the most important function of money — purchasing power — people want money because it gives them the power to purchase the goods and services that they think are awesome. Even if people choose to put their money in a savings account instead of buying a product or service, they are still expressing their values because they are trying to buy future security and stability. People can also buy status, and influence, and reputation, but that’s a different article :)
Purchasing power is all that matters. When humans search for more predictable and longer lasting “vehicles of value,” we are hoping that we find a form of money (or some other asset/thing/commodity) that gives us the best chance to buy more stuff, or to grow in an account, or to buy peace of mind, over longer periods of time.
Money also buys time, or at least buys you different ways to spend your time. Each of us is actually two different people, the person experiencing an immediate event in the present — like you reading this right now — and a person remembering what we did in the past. Because of this we are using money to buy experiences and emotions for our “present selves” and we are buying stories and memories to preserve our emotions for our “future selves.” This is why we take so many pictures as we go through life, we are valuing our “future selves” over our “present selves.”
To summarize, money is a tool of exchange, a precise record keeper (unit of account), a vehicle of value (store of value), and gives people purchasing power. I believe you should judge money not by what country issued it but by how many people use it and for which of the above purposes. The most useful money fulfills all the purposes we mentioned.
To revisit something we said earlier: money is not value, money communicates value. Whether you spend it, save it, or neglect it, you are communicating things to other humans about what you think is good/right/desirable. Most of us just don’t consciously think about what we are communicating in terms of how we use our money, but that is indeed what we are doing. I am sure you have heard of the phrase “vote with your dollars,” which means you are choosing/electing to purchase goods and services from certain businesses over others. Your choice is revealed in how you spend your money, much like your political choice is revealed in what candidate you vote for. No matter what we do with our money, we are communicating what we value through those decisions, even if those decisions are to do nothing with our money (neglect it).
So what are you communicating by how you spend, save, neglect, share, donate, and generally use your money?
THE OSTRICH AND INNOVATION
We all know what eventually happens to someone who makes the choice to put their head in the sand and ignore the changes going on around them. They eventually get their ass shot off — and this is known as Ostrich Syndrome. Most of us don’t like to change, especially changing something as personal as how we think about and use our money. But those changes are a-coming whether you want them to or not. Innovation doesn’t slow down or stop because we have our lives organized in ways that make us comfortable and happy. And if we don’t pay attention to those innovations as they incrementally (and eventually exponentially) emerge, we will be gasping for air with a mouth of sand while the financial world passes us by. I don’t want that for me or for you.
While I know innovation never ends, I don’t think technological innovation (i.e., building new tools, toys, and systems) is inevitable on its own. I think technological innovation is inevitable only as result of helping humans scratch that itch we can’t reach: our need to find and fix problems. Humans are problem finders and fixers, we want higher quality, better comforts, extended lives, and pervasive improvement in all spheres of our lives…not to mention we like more of just about everything. And because of this never-ending process — our case of The More’s — we will continue to create and bump into new problems. And we will invent new technologies (tools) to solve these emerging problems and we will use our new tools to begin to tinker with older problems that we’ve just gotten comfortable with and that our old tools couldn’t fix. As we build more tools and toys, we build more infrastructure to build more tools and toys. And that’s why societies look vastly different over just a few generations.
Technological progress is an outcome of our innate human need to solve problems, flex our creativity through innovation, contribute to the world, and create meaning in our lives. Money makes this whole process easier, but money is not value, it only communicates what you value. What problems you choose to tackle or leave alone says something about you.
Money is a tool of exchange and a vehicle of value, so what are you exchanging your money for? What value are you creating with your money?
Money cuts to the core of who we are as humans. A stable form of money allows us to be more secure in working with and buying things from other humans. This type of collaborative innovation is much less bumpy with stable money. But in the last 12 years lots of people have been gasping for air. It is my opinion that as of today (May 3, 2020) we are just getting started down a difficult economic path that will last longer than any previous recession any of us have experienced. The current monetary system is all that most of us know but its not the last one we will know. Innovation doesn’t stop.
Maybe there’s a better way. No, there is and always will be a better way. That’s the human way. So take a deep breath, fill your lungs and big ole brain with some oxygen, and let’s put that red pill to work and discover what money is going to look like in the future — in our future.
Author Disclosure
My goal with this first article is to give readers a different take on a taken for granted tool that you use everyday to help you make choices that better align with your life’s goals, whatever they may be. Enjoy your journey.
References
Ferguson, N. (2008). The Ascent of Money: A Financial History of the World.
Hayek, F.A. (1945). The Use of Knowledge In Society. American Economic Review. https://www.econlib.org/library/Essays/hykKnw.html
Kahneman, D. (2011). Thinking, Fast and Slow.
PHOTO CREDITS
Pill Photo: https://web.nmsu.edu/~gchavez7/page1.html
Money Photo: https://www.pbs.org/wgbh/nova/article/history-money/
Executive Order Photo: https://www.usgoldbureau.com/gold-confiscation
Ostrich Syndrome Photo: https://www.postaltimes.com/postalnews/apwu-president-mark-dimondstein-the-ostrich-syndrome/
