Fallacy of Money - with all credit to Yuval Noah Harari - from his book Sapiens

I've always been fascinated about truth. Objective Truth & Subjective Truth being the ones we are all generally familiar with. Objective truth refers to reality as it exists independently of any conscious awareness, personal biases, or subjective opinions, with Subjective being rooted in a concept rooted in the idea that reality is experienced, interpreted, and understood through an individual's personal lens.

Well it appears there is another truth. Intersubjective truth. This is a concept in philosophy and sociology that describes a shared reality. It refers to things that are treated as "fact" or "true" not because they exist independently in the physical universe, but because a large group of people collectively agree to believe in them.

Yuval Noah Harari introduces this truth to his readers with a very simple description or explanation of money. Money is a great example of Intersubjective truth. It exists because we all believe in it even thought the physical pieces of paper or coins we pass around, along with the electronic transactions themselves, have no inherent value. Money works because we inherently believe in it and so does all of society - hence intersubjective truth.

The rest of this post is an extract from the book giving a great example of how money is created even as it doesn't exist. If you're interested - keep reading. If not - Stop Now.
Thanks again to Yuval Noah Harari for this story - 'Sapiens' is highly recommended along with his follow up 'Nexus'.

Economics is a notoriously complicated subject.  To make things easier, let's imagine a simple example.

Samuel Greedy, a shrewd financier, founded a bank in Eldorado California.  A Stone, an up and coming contractor in Eldorado finishes his first big job receiving payment in cash to the tune of $1 million.  He deposits this sum in Mr. Greedy's bank; the bank now has $1 million in capital.  In the meantime, Jane McDoughnuts, an experienced but impecunious Eldorado chef, thinks she sees a business opportunity.  There's no really good bakery in her part of town, but she doesn't have enough money of her own to buy a proper facility complete with industrial ovens, sinks, knives and pots.  She goes to the bank, presents her business plan to Greedy and persuades him that it's a worthwhile investment.  He issues her a $1 million loan by crediting her account in the bank with that amount.  McDoughnuts now hires Stone, the contractor, to build and furnish her bakery.  His price is $1 million which she pays him with a check drawn on her account.  Stone deposits it into his Greedy bank account.

So how much money does Stone have in his bank account?  Right: $2 million.  How much cash is actually in the bank vault?  Yes, $1 million.  It doesn't stop there.  As contractors are wont to do, two months into the job stone informs McDoughnut that due to unforeseen problems and expenses, the bill for constructing the bakery will actually be $2 million.  Mrs. McDoughnut is not pleased but she can hardly stop the job in the middle.  So she pays another visit to the bank & convinces Mr. Greedy to give her extra credit.  He puts another million dollars in her account.  She transfers the money to the contractor's account.  How much money does Stone have in his account now?  

He's got $3 million.  But how much money is actually in the bank?  Still just $1 million.  In fact, the same $1 million dollars that's been in the bank all along.  Currently, current US banking law permits the bank to repeat this exercise seven more times.  The contractor would eventually have $10 million in his account, even though the bank still has but $1 million in its vaults.  Banks are allowed to lend $10 for every dollar they actually possess, which means that 90% of all the money in our bank accounts is not covered by actual coins and paper.  If all the account holders at Barclays Bank suddenly demand their money, Barclays will promptly collapse unless the government steps in to save it. 

The same is true of Lloyds, Deutsche Bank, Citibank and all other banks in the world. Sounds like a giant Ponzi scheme, doesn't it?  But if it's a scam, the entire modern economy is a fraud. The fact is that it's not a deception, but rather a tribute to the amazing abilities of the human imagination.  What enables banks and the entire economy to survive and flourish is our trust in the future.  This trust is the only support for most money in the world.

In the bakery example, the discrepancy between the contractor's account statements and the amount of money actually in the bank is Mrs. McDoughnut's bakery.  Mr. Greedy has put the bank's money into the business, trusting that one day it would be profitable.  The bakery hasn't baked a loaf of bread yet, but McDoughnut's and Greedy anticipate that a year hence it will be selling 1000s of loaves rolls, cakes and cookies each day at a handsome profit.  Mrs. McDoughnut will then be able to repay her loan with interest.  If at that point Mr. Stone decides to withdraw his savings and Greedy will be able to come up with the cash.  The entire enterprise is thus founded on trust in an imaginary future. The trust that the entrepreneur and the banker have in the bakery of their dreams, along with the contractors' trust in the future solvency of the bank.  

We've already seen that money is an astounding thing because it can represent myriad different objects and transform anything into almost anything else.  However, before the modern era, this ability was limited.  In most cases, money could represent and convert only things that actually existed in the present. This imposed a severe limitation on growth, since it made it very hard to finance new enterprises.  Consider our bakery again.  Could McDoughnut get it built if money could represent only tangible objects?  No.  In the present, she has many dreams but no tangible resources.  The only way she could get her bakery built would be to find a contractor willing to work today and receive payment in a few years time, if and when the bakery starts making money.  Alas, such contractors are rare breeds.  So our entrepreneur is in a bind.  Without a bakery, she can't bake cakes.  Without cakes, she can't make money. Without money, she can't hire a contractor.  Without a contractor, she has no bakery. 

Humankind was trapped in this predicament for 1000s of years.  As a result, the economy has remained frozen.  The way out of the trap was discovered only in the modern era, with the appearance of a new system based on trust in the future.  In it, people agreed to represent imaginary goods, goods that do not exist in the present with a special kind of money they called credit.  Credit enables us to build at the present at the expense of the future.  It's founded on the assumption that our future resources are sure to be far more abundant than our present resources.  A host of new and wonderful opportunities open up if we can build things in the present using future income.