What is money?
Posted on October 1, 2021
I just read this headline (I’m writing on Wednesday afternoon.) that the Senate may agree to increase the debt ceiling. That would avoid a government shutdown, no payments of Social Security and, potentially, the default of US payments of its debt obligations: interest on billions of US Treasury Notes and Bills: Republicans are expected to back a bill to avert a shutdown …. That would avoid what I think would be a DISASTROUS event: the loss in faith and trust in dollar. I give my opinion as to what a US default might mean.
== Money is a fiction =
Years ago I read the book Sapiens: A Brief History of Humankind by Yuval Noah Harari. I learned a lot. I originally saw videos before the book was translated to English in a course at Coursera. I no longer find the course. I think these are the same videos from 2013.
Only mammals have a neocortex – “new bark” covering over our older, more primitive brain. Humans have a very large neocortex and the ability to imagine much more than any other mammal. Our ancestors in Africa needed to imagine. Those that first had this capacity could see reality, go back to their band, describe place where they just saw a dead elephant. They could imagine how to cooperate to be able to scavenge meat and keep other predators away. Those best at this found more food, lived longer, and had more off-spring. That’s part of evolution.
Our brain builds imagined realities largely based on stories. National boundaries, basic human rights, corporations granted the rights as individuals, and rules and laws are imagined realities that guide how we act. Our economies would not work if corporations didn’t exist in our imagination. They need capital to grow. They tell a story of how money you invest with them will be used to fuel their imagined growth. We imagine how much more valuable this company will be in the future, and we invest.
Money is an imagined reality. A fiction. It did not exist before the advent of agriculture. Money is something that is valuable, because I think you think it is valuable. You think money is valuable because you think I think it is valuable.
Almost all money in history stamps or prints images of famous dead people to give an image of importance, trust and value. We imprint images of the power-center of government on our money. We state on our paper money, “This Note is Legal Tender for All Debts, Public and Private.” Sounds good, but what the heck does that really mean? The implication is that our US government backs our money.
This is a great podcast about how money is an invented, imagined reality, “The Invention of Money” from This American Life. This first episode tells how a change in the story about money changes its value: “The Lie that Saved Brazil.”
== The story if we don’t pay our debts ==
If the government defaults on its obligations, we’re changing the story that gives value to money. That different story can convince others that our money is not that valuable. I remember that banks failed to pay interest on overnight lending in September of 2008. The trust that banks had in other banks was shaken. Paul O’Neill, former Secretary of the Treasury in 2001-2002, was quoted in our local paper as saying our economy “could have evaporated” at that point. I’ll never forget that word, EVAPORATED.
Conclusion: Money is an imagined reality – a fiction. Governments go to great extent to build a story as to why you can trust their money. My stomach churns when US politicians talk about not extending a somewhat arbitrary debt ceilings for legislation they’ve already passed. They’re playing with FIRE. They run the risk of changing the story as to why money has value. That could be a DISASTER for all of us.