Trust, Confidence, and Money
I’m Andy Temte and welcome to the Saturday Morning Muse! Start your weekend with musings that are designed to improve financial literacy around the world. Today is June 7, 2025.
This week, we’re going to return to the main story arc and talk about the evolution of money through time—specifically, why trust and confidence are paramount to the health of any economic system and why governments have historically been the primary issuers of money.
Trust, Confidence, and the Velocity of Money
As we’ve discussed in previous episodes, the reliability of whatever we decide to call money is based on trust between trading partners. If I decide to mint my own coins for use in trade relationships with other parties, my trading partners will only trust the value my coins as a medium of exchange, unit of account, store of value, and standard of deferred payment insofar as they trust me. Remember, that under the credit theory of money, the coins I’m stamping (or minting) represent a promise I’ve made to repay a debt.
If I give a trader coins to purchase whatever they’re selling me, the trader must have confidence that they will be able to use those same coins in a future transaction with their trading partners—the trader gives their trading partners coins in return for goods. In turn, their trading partners must have confidence that the coins I originally minted and gave to my trading partner possess the four properties of money (medium of exchange, unit of account, store of value, standard of deferred payment) to use in transactions with their trading partners, and so on, and so on…
It should be a bit clearer now that money—the coins I minted—represent a debt. I gave the coins to my trading partner in return for goods I needed. These coins then circulate amongst other trading partners to allow other traders to receive goods they need without directly bartering physical goods for physical goods. The coinage I minted, will only hold their value—be a store of value—if there’s trust and confidence within and across the trading community. Specifically, that I, the issuer, will pay whoever shows up at my doorstep in the future with the coins I minted with something of equal value to the initial trade that started the circulation process.
We use the word circulate when we talk about the economic use of coinage and currency because money flows from trader to trader over time. Like anything that flows—water, lava, clouds, and even glacial ice—the velocity or speed of the flow matters.
When referring to money, its velocity is a measure of economic activity in an economy. In our simple example where I minted some coins to buy goods from my trading partner, those same coins were used by other traders in future transactions to buy goods that they need. The number of times my coins were used in transactions over a specific period of time (typically measured over a year) is called the velocity of money.
For example, it I minted 50 TemteCoins—my hypothetical coin—in return for two cows and then my trading partner uses those 50 TemteCoins to buy grain from someone else, and then that someone else uses 50 TemteCoins to buy what they need, then the velocity of money is 3x. A total of 150 TemteCoins worth of transactions occurred when only 50 physical TemteCoins exist. Said more succinctly, 50 physical TemteCoins supported an economy worth 150 TemteCoins.
Money and the Law
Now none of this works if trust and confidence in the TemteCoin breaks down. If the TemteCoins I mint make their way back to the issuer (me) and I don’t honor the original debt I created with the initial transaction with my trading partner, then trust and confidence in the system I created will collapse. TemteCoins will be worthless as word spreads amongst the trading community that I reneged on my obligation—the coins will only be as valuable as the metal I used to stamp my name on them, and my reputation as a reliable trading partner will be toast.
It’s clear from our simple example that relying on the word of an individual is problematic, so governments got involved to improve trust and confidence in early trading systems. Indeed, we can’t talk about the evolution of money without making clear the link between early advances in legal frameworks and the development of money. Money and the law are tightly linked.
The earliest known legal framework is the Code of Hammurabi—established in the 18th century BCE by the Babylonians. Babylon was located in modern day Iraq and you might have heard of the Babylonian Empire when you were growing up—you know, the Tower of Babel and its tale of excessive pride? Anyway, the Code of Hammurabi codified laws on the treatment of all sorts of societal issues—land, marriage, personal property, physical violence, and commerce. It had detailed instructions on the treatment of loans and trade, fraud, and the obligations of debtors and creditors. Put simply, it’s the first written example of laws enacted by a government to control what we would think of as money.
Next week, we’ll discuss specific types of money and the governments that issued them. We’ll talk about the Romans, the Chinese, and money in medieval Europe with an eye toward the bad things that happen when governments collapse and trust and confidence in the money they’ve issued is lost.
The Modern Lesson
In a modern context, the US dollar has been the dominant currency of reserve since the end of World War II. A reserve currency is defined as a foreign currency that is held by central banks for use in international transactions and investments.
Toward the end of the war, in July of 1944, Allied countries gathered in Bretton Woods, New Hampshire to prepare for the post-war era and to establish the economic framework that would govern commercial relationships between Allied nations. It was agreed that the US dollar would be the foundation of this new economic system, essentially turning the US dollar into the dominant reserve currency for central banks around the world.
This system depends on the stability of the US economy and the US dollar. Banks, investors, traders, and consumers rely on the “full faith and credit” of the US Government to pay its debts on time and uphold the trust and confidence the global financial system has placed on the US Government and as an extension the US dollar.
As we briefly discussed last week, the US Government has issued an unsustainably large amount of debt to pay for decades budget deficits—it spends more than it collects in taxes. If we don’t get our national debt under control, central banks, investors, traders, and consumers will lose trust and confidence in the US dollar and its status as reserve currency to the world will be lost.
Unfortunately, we don’t have time today to talk about all the really bad things that would happen if the US defaulted on its debt and trust and confidence in the US dollar as the foundation for the global banking system eroded. A luminary in this space that I recommend you follow is Ray Dalio. Ray’s new book, How Countries Go Broke: The Big Cycle is an advanced, but approachable treatise on what happens when trust and confidence in a global power are lost.
Until next week…
Grace. Dignity. Compassion.
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Reference Sites:
https://en.wikipedia.org/wiki/Bretton_Woods_system
https://en.wikipedia.org/wiki/Reserve_currency
https://en.wikipedia.org/wiki/Babylon
