Sapiens: A Brief History of Humankind

Current US banking law permits the bank to repeat this exercise seven more times. The contractor would eventually have $10 million in his account, even though the bank still has but $1 million in its vaults. Banks are allowed to loan $10 for every dollar they actually possess, which means that 90 per cent of all the money in our bank accounts is not covered by actual coins and notes.² If all of the account holders at Barclays Bank suddenly demand their money, Barclays will promptly collapse (unless the government steps in to save it). The same is true of Lloyds, Deutsche Bank, Citibank, and all other banks in the world.

It sounds like a giant Ponzi scheme, doesn’t it? But if it’s a fraud, then the entire modern economy is a fraud. The fact is, it’s not a deception, but rather a tribute to the amazing abilities of the human imagination. What enables banks – and the entire economy – to survive and flourish is our trust in the future. This trust is the sole backing for most of the money in the world.

In the bakery example, the discrepancy between the contractor’s account statement and the amount of money actually in the bank is Mrs McDoughnut’s bakery. Mr Greedy has put the bank’s money into the asset, trusting that one day it would be profitable. The bakery hasn’t baked a loaf of bread yet, but McDoughnut and Greedy anticipate that a year hence it will be selling thousands of loaves, rolls, cakes and cookies each day, at a handsome profit. Mrs McDoughnut will then be able to repay her loan, with interest. If at that point Mr Stone decides to withdraw his savings, Greedy will be able to come up with the cash. The entire enterprise is thus founded on trust in an imaginary future – the trust that the entrepreneur and the banker have in the bakery of their dreams, along with the contractor’s trust in the future solvency of the bank.

We’ve already seen that money is an astounding thing because it can represent myriad different objects and convert anything into almost anything else. However, before the modern era this ability was limited. In most cases, money could represent and convert only things that actually existed in the present. This imposed a severe limitation on growth, since it made it very hard to finance new enterprises.

Consider our bakery again. Could McDoughnut get it built if money could represent only tangible objects? No. In the present, she has a lot of dreams, but no tangible resources. The only way she could get her bakery built would be to find a contractor willing to work today and receive payment in a few years’ time, if and when the bakery starts making money. Alas, such contractors are rare breeds. So our entrepreneur is in a bind. Without a bakery, she can’t bake cakes. Without cakes, she can’t make money. Without money, she can’t hire a contractor. Without a contractor, she has no bakery.

Humankind was trapped in this predicament for thousands of years. As a result, economies remained frozen. The way out of the trap was discovered only in the modern era, with the appearance of a new system based on trust in the future. In it, people agreed to represent imaginary goods – goods that do not exist in the present – with a special kind of money they called ‘credit’. Credit enables us to build the present at the expense of the future. It’s founded on the assumption that our future resources are sure to be far more abundant than our present resources. A host of new and wonderful opportunities open up if we can build things in the present using future income.

If credit is such a wonderful thing, why did nobody think of it earlier? Of course they did. Credit arrangements of one kind or another have existed in all known human cultures, going back at least to ancient Sumer. The problem in previous eras was not that no one had the idea or knew how to use it. It was that people seldom wanted to extend much credit because they didn’t trust that the future would be better than the present. They generally believed that times past had been better than their own times and that the future would be worse, or at best much the same. To put that in economic terms, they believed that the total amount of wealth was limited, if not dwindling. People therefore considered it a bad bet to assume that they personally, or their kingdom, or the entire world, would be producing more wealth ten years down the line. Business looked like a zero-sum game. Of course, the profits of one particular bakery might rise, but only at the expense of the bakery next door. Venice might flourish, but only by impoverishing Genoa. The king of England might enrich himself, but only by robbing the king of France. You could cut the pie in many different ways, but it never got any bigger.