Our system of exchange is increasingly convenient - and vulnerable.  A faith-based system today, it wasn’t always that way.  What happened?

In the beginning it was fish for feathers.  I could eat the fish you caught, and you could fletch your hunting arrows with the feathers that I had in trade.  The exchanged items themselves were consumable.  That intrinsic value gave us confidence to make the exchange - a barter system.

Then it was gold (or beads, or wampum) for fish and feathers.  A medium of exchange of little intrinsic value, but representing value, was born.  It improved commerce because it provided flexibility, increased transportability, and stored value.  The widely recognized scarcity of the medium supported its acceptability in trade for fish or feathers.  It was still a barter system because the agreed upon value of the gold as well as the feathers or fish was established at the point of trade.

Then, to concentrate power and get a bigger piece of the action (Give onto Caesar that which is Caesar’s, e.g. taxes) as socio/economic systems emerged, gold and silver were minted as money.  This standardized the value of the hunk of gold you were holding in your hand and added precision to the trade.  This actually improved confidence in the fair valuation of the medium of exchange.  Now you could know, in terms of a widely accepted yardstick (lira, dinar, Yuan, etc.) more precisely the value of my feathers and I could now look at the “Feathers’ Futures Market” and have some confidence that I was getting fair value for my feathers.  This system superceded the barter system.

The big breakthrough came, however, when paper bills and ordinary metal coins became the medium of exchange.  The government (a major manifestation of the system) really got its act together by hording the value of the medium-of-exchange at Fort Knox, and substituting the promise that it would stand behind the paper in your hand.  Dollar-for-dollar gold backing provided the confidence that the worthless “spondulix” rolling off the presses at the mint was “as good as gold”.  A critical point in the evolution of money/trade/commerce had been reached.  You are now holding no real value in your hands, but I will accept your dollars and coins, even though I can’t eat them, for my feathers.  Why?  Because I am confident that the government realizes that its survival depends on making good on its promises.

Then the slight-of-hand began.  The gold backing eroded to a Quarter-on-the-dollar, and then was eliminated in the 1970’s.   The government’s printing presses were now unrestrained.  The temptation to unleash the presses 24-7 was too great for the denizens of planet DC.  This contributed substantially to the hyperinflation of the late 70’s.  Confidence in the coin-of-the-realm declined alarmingly.

The solution was innovative systemic updates, consisting largely of smoke-and-mirrors and more slight-of-hand.  Confidence was restored and the Federal Reserve emerged as the “neo-gold” standard.  Because of that, I’m supremely confident our money is worth the paper it is printed on.  And I can live with that, so long as you and the Central Bank of China keep the faith.

A potential threat to that confidence, however, is the ingenious credit mechanisms that are being spawned daily to promote consumer spending and borrowing further into the future (e.g., no down payment - interest only mortgages), and commerce flowing (e.g., please oh please  keep buying our T-bills Central Bank of China).  But I digress: while that tests the resilience of the system, and is an interesting subject in its own right, it is just an aside to the main theme here: the evolution of “the confidence game”. 

Now the system is gradually taking the paper and coins out of your hands.  Instant credit, direct deposit of your paycheck, and automatic bill payments are examples of transactions where you don’t even have to be aware of the transfer of the electronic impulses that represent your financial and economic value within the system.  You are not quite superfluous to this systemic pumping of your economic and financial lifeblood, but you are gradually being taken out of the loop and put on the sidelines. 

That is convenient, and convenience is good.  It is, however, incumbent upon anyone that wishes to have controlling interest in their life to examine their level of confidence in this increasingly complex (and therefore increasingly vulnerable) system that is managing your “wealth in absentia”.

I have confidence that you and I will never be caught in a Katrina.  Fish for feathers anyone?