I’m pretty sure that the title of this post has made most of my readers think immediately of private jets, flamboyant sports cars, and luxury mansions. In this article, however, I would like to talk about a different flavour of lure associated with money, yet even more intriguing and fascinating, at least for me.
Pretty soon in our life, we learn that money is necessary to buy everything. No matter the form it takes—banknotes, credit cards, cheques, etc.—, we need this mysterious thing called money to carry out almost every economic transaction. The use of money is such a part of our everyday life that nobody wonders what goes on behind the scenes. Most of us take it for granted that this is how things are. That’s what had happened for me until I graduated and began my professional career. After starting to work full-time, I began to look at money in a different way because I became fully responsible for the management of my finances. My insatiable curiosity has done the rest by pushing me to dig into the subject of how money works.
Of course, I’m not qualified at all to give a lecture about money, which is one of the most debated and studied topics in the field of economic sciences. Nevertheless, I have read several books and documents on this subject—and its corollaries such as wealth and debt—trying to understand the mechanisms governing the functioning of money. Even though it is an invention and not a discovery, to a certain extent, its evolution reminds me of the progression of the “queen of the sciences”, physics. Money appeared presumably thanks to an ingenious and intuitive insight addressing practical problems related to bartering for goods and services. Anyway, the point is that the initial idea has evolved dramatically over the centuries. It has relentlessly increased its degree of abstraction and has become a more and more sophisticated concept, just like many theories in physics—for example, thinking about the journey that allowed humanity to progress from classical mechanics to the theory of relativity. From this evolutionary perspective, it seems that money has completed this process, in a certain sense. In its modern form, in fact, it has lost any kind of connection with tangible assets and has turned into a pure, fully virtual good. It is stored somewhere as a bunch of electrons imprisoned in the non-volatile memory of an unspecified, unknown computing machine. In this regard, money is just like software, which is a virtual good par excellence.
When it comes to understanding the function of money, the 2008 financial crisis had positive implications, besides dramatic consequences. I refer to the public debate around the nature of money—and financial systems in general—that has surfaced since then. Thanks to this catastrophic event, the globalized financial network has shown its fragile nature. This network is characterized by dense and ramified connections among banks, financial firms, and companies. Because of this intricate structure, all of us have realized how it can be extremely difficult to isolate an emerging problem to prevent it from infecting other sectors of the global economy. That’s why the sub-prime crisis spread well beyond the boundaries of the US, affecting most Western countries. What concerns this post specifically is that the 2008 crisis had other relevant consequences. To some extent, it served as a wake-up call for a pretty large number of citizens all around the world. They started to reflect about the intrinsic nature of money and to question the role of its intermediaries, which are the only agents authorized to provide financial services. For instance, the images of long lines of customers at the British Northern Rock bank unmasked vividly and violently the functioning of the fractional-reserve mechanism, which I suppose was unknown to most of bank account holders until that moment (technically speaking, this event was a bank run).
Regarding the role of financial intermediaries, they are often perceived as inefficient economic agents that don’t provide any tangible added value in spite of charging generous commissions. For this reason, the birth of the Bitcoin and the following cryptocurrencies can be seen as a response to this iniquitous treatment. One of these currencies’ goals—if not the goal—is to dismantle completely any financial institution, so that individuals and private companies gain full control of their money. Putting it differently, from the perspective of digital coins’ founding fathers, you should become the bank yourself. And like never before, this seems not only feasible, but also right at our fingertips, thanks to the complete virtualization process I described above. This was just proven by a recent fact that shocked the financial community. A few weeks ago, an international consortium—headed by Facebook—announced the birth of Libra, a new electronic currency that will be based on a privately-owned digital ledger (please note that this is not a permissionless blockchain). At first glance, this announcement might not seem so revolutionary. From the consumers’ point of view, it just might look like a thinly disguised replacement of intermediaries. Some of the biggest players in the traditional payment services market are in fact members of the Libra association as well, such as Mastercard, PayPal, Visa etc. With good reason, arguably so, from the individuals’ freedom perspective, Libra is a step backwards with respect to previous cryptocurrencies, which are based on true permissionless blockchains instead. On the other hand, the Libra digital coin might represent a frontal attack against the traditional banking system, at least in the realm of micropayments. Its new financial platform threatens to become by far the largest, world-scale “bank” ever, even if it does not charge any commission for payments and other money transfers whatsoever. Because it is likely that charging commissions is not the real goal of Libra, rather, its purpose could be to profile a large share of the entire world population financially and commercially, thanks to the fact they would know almost everything about users’ financial operations and purchasing habits. This information would be an invaluable asset to leverage—for instance, to determine customers’ merit of credit. In addition, such information could also be resold to other companies and organizations. In case the Libra garners a substantial success, somebody might be afraid that it could become powerful enough to jeopardize the power of central banks. In other words, this would mean it could even threaten the monetary sovereignty of countries. Of course, I don’t have a crystal ball and don’t know if the Libra will succeed or not. Anyway, because of its size and its transnational nature, it is likely that it will pose unprecedented issues in terms of regulation in the financial world. For all these reasons, we might be witnessing the drafting of a new, disruptive chapter in the long book of money history.
To conclude, I think that money is indeed one of the most impacting inventions in the history of mankind, for better or worse. Seen as a lubricant of economic transactions, money has been outstandingly effective. It has allowed the growth and the development of thriving economies, contributing to the creation of well-being and widespread wealth, at least in the Western world. But, its ethereal nature makes it so intellectually intriguing. Practically speaking, money is nothing. It is just a convention, a promise, an immaterial tool albeit astonishingly powerful. Nowadays, it seems money has developed its full potential, thanks to the fact that it has turned out to be a completely immaterial asset. As such, modern money has an extraordinary potential to fulfill effectively and efficiently four main functions: medium of exchange, unit of account, store of value, and standard of deferred payment. For these reasons, it represents another brilliant, genius creation delivered by human intellect, which is still the most penetrating, prolific, and powerful force in the known universe. That’s why I consider the intrinsic, virtual essence of modern money as its primary and true lure.
 This post is a blatant example of how high the intermediary costs charged by traditional financial institutions can be. To briefly summarize the occurrence I’m referring to, I got in touch with a Canadian citizen named Paul who needed to transfer 30 Euros from his bank account to an Italian one. To carry out this operation, he would have had to pay 50 dollars, that is the commission would have been greater than the sum to transfer! To avoid this unreasonable cost, I transferred 30 Euros from my Italian bank account to the final bank account free of charge because this was not an international transfer. Then, Paul transferred the same amount of money from his Paypal account to mine. At the end of the day, Paul paid just a few dollars for the international Paypal transfer only.
 These are the four functions that define money itself, according to Wikipedia.
Featured image: Copyright Tyler Olson
Editing assistance by Dr. Emily Braswell.