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Financial empowerment starts with a question
Imagine this, you’ve promised your five-year-old a dollar for helping you with chores on a Saturday. Their eyes light up; they imagine a crinkled green piece of paper. But, if you’re feeling bold try to explain that the money is not just a piece of paper, but a representation of the favor they did for you. It’s abstract—like an invisible note the world agrees has worth. That’s where our conversation begins. Explaining this to a child might seem comically convoluted, yet understanding this concept is integral to achieving true financial empowerment.
Money is not a thing, it’s an abstract system!
First, we have to understand that money isn’t just the physical coins and paper notes we handle (or don’t). No, it’s like a complex system of measurements that societies use to quantify value.
Money, an intangible yet real measure, is akin to inches, meters, and pounds for length and weight. Money represents exchanged value in an economy. Money’s value lies in what it can purchase.
Understanding money’s abstract nature reveals the invisible structure of financial systems and opens a realm where limits are self-imposed through our understanding of its true nature.
Trading Time for ‘Value Credit’
People often say, “Time is money,” but it’s slightly off. What we’re really trading is parts of our life — seconds, minutes, hours, days, weeks of existence — for what I call ‘value credits’ that can be used to exchange for goods and services later.
Time, though, can’t be replaced; money can. Understanding this is crucial to appreciate the value of the hours you spend working.
Each dollar represents a slice of your life that you’ve chosen to trade, and when seen in that light, every purchase takes on a deeper significance. But this shouldn’t be a morbid realization.
Instead, it’s a perspective shift that places a higher premium on what you exchange your life for, and empowers you to make more conscious, value-driven choices in your financial dealings.
Fiat Currency vs. Commodity Currency
Why is it so important to think about money in the abstract? Think about the money in your wallet. Contemporary dollars and euros are examples of ‘fiat currency’.
This means their value is government-backed, rather than tied to physical commodities like gold or silver. They rely on trust in the issuing government, a high-stakes game of collective agreement that can impact economies.
In contrast, ‘commodity currency’ like gold or silver holds intrinsic value from its use in jewelry, electronics, and various other industries over centuries. This natural value makes the currency resistant to inflation and collapse.
Understanding these differences can be eye-opening when considering how we collectively determine the value of our money.
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The Role of Banks
How banks fit into this puzzle, by taking your deposits and making them available as loans to others in the community, neatly demonstrates the creation of ‘new money’. It’s abstract and can lead to a counterintuitive understanding of scarcity, especially when loans and new money creation are in the mix.
This, too, is part of the layered relationship society has with money.
Loans are another example of money’s ethereal nature: one day a $100 loan can create $1000 in the economy through a multiplier effect. This expansion—and possible contraction—of the money supply is a central tenet of macroeconomics.
It can be exhilarating or terrifying, depending on which seat you’re in and understanding the mechanisms at play is to be financially literate in its true sense.
Wrapping Up
In conclusion, grasping the true essence of money—it is really understanding value, that gives us financial empowerment.
It’s the difference between being a player in the game, and a pawn in someone else’s design.
Understanding the nominal and real value exchange, the expansion and contraction of the money supply, and the trust and abstraction at the core of our financial ecosystem can unveil a world of opportunity and risk.
What is money really? It’s not just a question for academics or philosophers—it’s a question that reaches to the heart of our economic lives.
For the personal finance enthusiast and the novice alike, unlocking the secrets of this fundamental instrument can mean the difference between standing control or being controlled by your financial destiny.
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