A Shell Game
A man walks into a car dealership and wants to buy a car. After choosing a suitable one, he would like to take it for a test drive first. So besides his data, he leaves an additional $500 security deposit to the car seller and takes the keys. The $500 should also be a down payment if he decides to buy the car directly after the test drive.
While the customer is driving the car, the car salesman, confident that the car will be sold, goes to the nearby TV shop and pays his remaining debt of $500 for the flat-screen TV he purchased just yesterday.
The minute the car salesman leaves, the TV salesman gives the $500 to his best friend who happens to be in the shop as well, the No. 1 respected roofer in town who recently made some repairs to the roof of the TV salesman.
However, since the roofer had to buy a trailer (for $500) from the car salesman to transport all the needed material, he in turn goes right next door to the car dealership and pays his $500 bill to the car salesman (who could swear he just saw the roofer in the TV store).
Ten minutes later our first friend comes back from the test drive and explains that unfortunately he doesn’t want to buy the car after all. The car salesman gives him the $500 deposit back and the man leaves in his own car.
Conclusion: All debts are paid, no one has the money (but a new TV, a new trailer, and a new roof).
Follow The Money:
Does this story look a little confusing to you? Maybe it reminds you a bit like a shell game? However, this circulation had at least a relative positive outcome.
What we will examine in the future more thoroughly: A healthy personal mental attitude towards money is important in order to be able to make solid financial decisions. Sure. But the technical basics of how everything works shouldn’t be any less important in order to know what is really going on and not to be fooled.
Because this sort of shell game like in the above example is played every second anywhere in the world. And people who can’t follow this flow and lack the insights have a hard time to succeed financially long term.
So let’s take a small step back into the past to eventually find out what money is really doing and how everything works:
It All Started With Trading:
Before there was official money, people traded things within their small communities. So if you were living during prehistoric times, you might have been able to trade like 5 apples for 1 bread. And let’s say 1 bread was also worth 3 fish. If the person with the apples (you) wanted to have fish for the family, you first had to trade 5 apples to get the bread and then give the bread to the fisherman – because the fisherman didn’t like apples and accepted only bread.
Now this can get very tricky: Someone who owns two goats wants 10 fish and a distant neighbor needs 8 apples and 2 breads for the pigs (which will be traded for a cow next week) but can only offer 1 pig if he gets a b
asket full of strawberries.
After all, the more parties were involved and the more complex it got, money was eventually THE invention.
Because in the end, money is nothing but a tool to transfer ownership on something “real”, like apples, gold, computers or services.
Money itself has no value, and as long as we can all agree that money is the No.1 tool by which it is possible to get (buy) literally all things in exchange, the entire economic system works. That’s why it is also in our best interest (and should be), that money is a stable and reliable asset anywhere in the world – and that it stays that way. Imagine what the world would be like if we didn’t have a reliable commodity like money that we can use to measure and compare the value of a product or service.
A New System Is Born:
Ok, this won’t solve our above “problem”, however, if it seems that money can be traded for services and things just back and forth and is a zero-sum game in the end. Because, of course, it is not!
Basically, there are two forms of money: covered and uncovered money. Covered money can always be linked to a real good, like gold.
When gold and silver became legit trading tools in our history, it was only obvious that more accumulated gold and silver was quite dangerous to carry around for people – or to simply store it at home. And now it starts to get a bit more interesting:
Because of this, such things as depositories (the “ancestors” of our banks) were built, where people could bring their treasures and get a receipt with the fixed price of their gold in exchange. But after time, people also realized that it was quite annoying to always go back to the depository to exchange their receipts back for their gold when they wanted to purchase something.
So, people agreed for the sake of simplicity that these receipts (the “ancestors” of our money) could also be accepted as a payment. The gold was still in the depository and available all the time and had the exact fixed amount as on the receipt. Why bother going there and carry the heavy stuff around? Just take the receipt! As easy as that.
The Ultimate Glitch:
But what have the owners of these depositories (depots) have found out after some time (and probably under heavy thunder and lightning)? Which greedy opportunity did just open up here? Are you evil (or clever) enough to find a first small glitch in this system? A glitch that is nowadays so anchored that it represents one of the greatest threats to our entire financial system? A glitch that made the inventors rich – incredible rich….
With more thunder and lightning this evilness will be revealed in Part 2. In the meantime take your guesses (hint: you will also see what the so called uncovered money is about and where the money from your bank account actually comes from).
Also check out and get your copies on the philosophical-financial books by Nicholas Taleb in my book section here
Picture copyrights:
1) „Shell Game“ by emilykbecker licensed under CC BY-NC-ND 2.0 ; 2) „Apples“ by fotografeleen licensed under CC BY-SA 2.0
3) „Day 332“ by pasukaru76 licensed under CC0 1.0 ; 4) „L’impeto della Natura“ by Echoes89 licensed under CC BY-NC-ND 2.0