In Banks We Trust

Niall Ferguson was on The Colbert Report yesterday and I was excited to hear him say that, basically, money is trust. Since most money is kept in banks, and since banks don’t have your money sitting in a safe somewhere[1], then money is an abstract entity that only exists as a numeric concept that you trust a bank to maintain accurately.

It’s almost like money exists in a quantum state until you go to the ATM.

He went on to point out that money is only worth what everyone agrees that it is worth. I don’t think enough people are aware of this fundamentally psychological law of economics. Perhaps if there were some way we could all convince ourselves that our dollars are worth more, we could reverse inflation. But getting 300 million humans to agree on anything is a tall order. And yet, we all generally agree on what $1.00 can buy. Perhaps economics is a form of mass hypnosis?

Getting everyone to agree on something reminds me of my other pet theory: that all forms of government might be equally successful if only everyone involved agrees to support the system and thoroughly commit to its ideals. The only reason monarchies and dictatorships fail so often is that they’re the forms of government most susceptible to corruption. Communism might have worked if everyone involved, politicians and people, were committed to the ideals. But power corrupts every time, and while the USA certainly has its share of corruption, it still has one of the best systems devised for distributing power to prevent corruption. You won’t come up with anything better as long as human beings are involved.

Speaking of corruption, this reminds me that the root of Bernie Madoff’s Ponzi scheme is this: people simply trusted him.

1.) As we all learned from George Bailey.