Potential Money

Last week I wrote about fiat money, and its fantastical symbolic value based purely on a collective faith in our ability to create value – a faith in the human mind. Without any intrinsic value, money can only realize value by interacting with the human mind. So how can we think about this in a more formal way?

To me money is a kind of meta-energy. In physics, energy is defined as the capacity to do work or effect a change – a change in position or form. This is a fairly simple analogy since money can be used to build, distribute and reshape our environment in so many ways. When we lend or invest money, it is largely for this potential. The key word here though is ‘potential’.

The potential energy of a system is typically defined in terms of the relative position of its components – the structural arrangement of a mass or object within a force field. Take for instance the potential energy of a ball that is held at the top of a very steep hill. Its potential energy is not simply its mass but is the product of its mass, the force of the gravitational field and its height or distance from the surface (m x g x h). Place the same ball on the same hill on the moon and its potential energy is immediately less. Out there in space, out of the influence of the gravitational fields, the ball has virtually no potential energy at all.

Money, it occurs to me, is not that different.