What is money?

« Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. » Warren Buffett

Nowadays, money is mostly invisible. People think they have money but they actually technically don’t.

In fact, the concept of credit is the main reason why money is invisible. In order to reach our goals, for example getting a car or an apartment, we contract loans from banks. We cannot deny the fact that it is part of human nature to have a tendency to over-spend and consume.

The average person gets into debt in order to consume more and more; that is what runs economic development. Throughout time, humans have generated what we call “economic cycles” by creating debt.

« All money is a matter of belief. » Adam Smith

“In reality, most of what people call money is actually credit. The total amount of credit in the USA is about 50 trillion dollars and the total amount of physical money is only about 3 trillion dollars.” Ray Dalio*

It is generally agreed that credit is not necessarily a bad thing; it is essential to economic development, to move money from point A to point B where it is needed. In contrast, poverty has often more to do with the lack of financial institutions, not with efficient credit networks and reliable banks.

« Money won’t create success, the freedom to make it will. » Nelson Mandela

However, before financial innovations allowed money to become a sophisticated credit system and before the world faced economic cycles and depressions like that of 1929 and 2008, what was money?

Money and more precisely the concept of transactions was instinctively created by human beings. In fact, the earliest signs have been found on clay tablets in Mesopotamia (second millennium BC). The image below shows a contract which implies the two sides of a transaction, the transaction date and the object quantity (for example, 200 sheeps).

« Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like. » Will Rogers

Economic crises like those we have experienced in recent history could not happen with such basic levels of transactions because of the idea people had about its concept and its low complexity during the second millennium BC.

Who is Ray Dalio ?

Ray Dalio is a well-known investor and entrepreneur. He is the founder of the world’s biggest hedge fund firm, Bridgewater Associates, which manages $160 billion.

As a student in business and economics, I am sure you’ll enjoy this video of him in which he delivers a brief yet thourough explanation of how the economic machine works. Here is it!

Jonathan Malatialy