What is… money?

A meeting earlier this week with a chap from Visa Europe spurred a whole load of thoughts about money – and actually what it is…

First, some remarkable stats gleaned from the session: one in every six euros spent in Europe in retail (ie excluding things like mortgage and bill payments) is spent via Visa’s clearing systems (Visa is a membership organisation who provide the technology plumbing between merchants, banks and customers). Another one out of six is spent on other card systems. The remaining four-sixths are spent in cash. How that cash is spent varies across different parts of the continent varies greatly – less than 3% of transactions in the Nordic countries are in cash – in Spain the number is 80%. Remarkably as well, apparently there are more 500 Euro notes in circulation that 5s, 10s and 20s combined. You can draw your own conclusions as the reason for that…

There is an awful lot of competition hotting up to try and claw into the four sixths of spend that’s currently in cash. The mobile phone industry, with technologies like NFC and e-wallets, but also through the various transaction mechanisms (monthly bills, top-ups, marketplace accounts and so on) that already exist in the space. Existing players in the industry are joined by startups like Square and iZettle. There are also entirely new alternatives to cash springing up, from bartering exchanges through to the frankly mind-bending Bitcoins.

Underpinning all of this is that the basic idea of money is one that is a system of trust. Before money, we would trust that a sheep or a horse or a bushel of wheat was what it was, and exchanged based on barter thus ensued. However, carry a couple of sheep in your pocket didn’t exactly make for a convenient night in the pub (fun, maybe, but not convenient) and therefore tokens that represented a notional value of something (often gold) started to become the way in which we transacted and traded.

Those physical tokens in turn were replaced by notional values held on ledger books and then the bits and bytes of computer systems. We trust banks to hold our virtualised wealth, and to transact between each other to enable us to carry out our financial lives. The events in the banking industry since 2008 are so significant not only because of the money lost through various speculative activities, but also because money, banks and trust are so intrinsically intertwined.

This is also why cash is so pervasive and perpetuates. In a transaction between two people in cash, neither has to have any trust in each other because the money, issued by a central bank (as long as it is genuine) is trusted by both. Replacing trust in banknotes with electronic payment mechanisms means trust in the identity of each other (and whoever the body is that is providing identity), and trust in the payment mechanisms of each other. It’s way, way more complicated than a bit of paper with the Queen’s head printed on it…

4 thoughts on “What is… money?

  1. “In a transaction between two people in cash, neither has to have any trust in each other because the money, issued by a central bank (as long as it is genuine) is trusted by both”

    Hmm. I have a 50 million Zimbabwean dollar note that perhaps you’d be prepared to trust?

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