Money’s Mostly Digital, So Why Is Moving It So Hard?

Writing by Sam Denby and Tristan Purdy
Editing by Alexander Williard
Animation led by Josh Sherrington
Sound by Graham Haerther
Thumbnail by Simon Buckmaster

References

[dannooo]

Impressed that Sam was able to go from nothing to fractional reserve banking in 3 minutes

[TimeBucks]

He nailed some massive concepts in such a simple way

[mrbetabombs]

My dumb ass thought this video was gonna be about armored trucks moving physical money through cities lol

[iamthinking_]

I've seen a few (ok, maybe just two or three) nutshellish or step-by-step explanations/evolutions of money, but the blender analogy - getting two blenders worth of value out of one value - is the viewpoint that had never occured to me before, thankyou

[BrianPaick]

I kind of love the stock footage of the clay balls. Also, "It sounds like a scam, and maybe it is." Awesome video!

[dacid]

Man. You just explained in 20 minutes everything that took weeks to understand in a high school economics class, and I have way more understanding of the reasoning behind it all! Thank you!

[iainmalcolm]

Great video. I worked in IT for a large UK Nationalised Industry in the 1970's. When we processed the weekly payroll for the manual workers (they were paid cash weekly) part of the process broke down all the payments into all the required notes & coins. These were sent to the company bank branches so that what was required for each location would be withdrawn and then collated at each pay office into individual pay packets every Friday. This was stopped after a few years as all the weekly paid staff were paid by computerised bank transfer.
The stat I was told at the time was that as the cash didn't leave the company account until the Friday (pay day) instead of the Wednesday/Thursday this resulted in saving of around £1, 000, 000 a week just in interest. There was also knock on saving in staff, security costs etc.

[Infinitetrucker]

Managing resources and making good returns is not as easy as it seems, there are a lot of things that aren't well taught in schools. The market crisis gave me my first returns, when people stayed away from hard times I made the most of it..many credits goes to Sir Trevor James Beckerman

[Maxyy]

Best Wendover video in a while. All are great but this breaks down an incredibly complex system.

[knpark]

Fun fact, the etymology for 'money' in Korean(돈) is 'to circulate'(돈다). It's just like the word currency, a fancy word for money, sharing its roots with current, as in flow of something. It is kind of cool, because other languages often use the material or the mint it was made for their word root.

[Naviss]

No matter how complex the topic or subject, Wendover does such a fantastic job breaking it down.

[LucaWatts]

Great video, super helpful, interesting and explanatory. I’m also loving the longer form!

[UselessDuckCompany]

There is a technical layer under this that I find fascinating, I deal with it sometimes as in my day job I work with airline/hotel loyalty currency systems. A lot of these bank systems still run on old mainframe infrastructure that uses nightly batch files, rather than API calls. It's crazy really, and it is what can make it take 24 hours+ to process a transaction. These file formats are so old that they still have special characters in them that relate back to the days of punch cards.

[googiegress]

The initial question "how was the value created", you missed that the watermelon grower added fruit credits to the system by growing fruit. All the fruit growers do. But in that specific loan transaction, the melon grower spent 2500 in interest but presumably grew more than 9000 credits worth of watermelons; if she grew only 9k, then when she took in the 7500 loan and paid out 9k she broke even. So let's say she actually grew 10k credits but wouldn't have been able to without the irrigation loan of 7500. Meaning that in that complete transaction, the bank earned 1500 profit, the melon grower earned 1000, and the bank received back the original 7500 loan (it was just playing with other peoples' money here).

But the melon grower didn't just put clay balls in the ground and turn on the sprinklers. She had to work. If she replanted last year's seeds, and you live in an area where water is free, she still needs to physically plant, harvest, and bring the melons to market. So one source of the "added value" is her labor.

The melon grower is using land. Either she owns it, or she's renting it. Regardless, the space used to grow melon and the fertility of the soil represent a source of value, a resource which can be used to add value to the system.

The bank can't operate without the work of people. Someone has to research whether the melon grower is an appropriate borrower, whether the loan purpose is worthwhile, actually offer the loan, do the paperwork, receive the repayment, and do that paperwork, send out the interest payments to depositors, serve those depositors' needs like deposits and withdrawals, etc. All that labor, and the place where the bank is located, represent the same labor and real resources which allow the bank to make that 1500 credits.

What I'm getting at is that the labor and real assets represent the source of value-adding.

The bank may create phantom money to lend beyond its deposits. In Adam Smith's time it was appropriate to lend no more than 7x your deposits, else you risk a run on the bank. Today, large banks can get away with lending a lot more than that. Lending 0.75x your deposits is laughable. This money-creation through lending is incredibly powerful but it is a risk. As we saw in the melon example, 10, 000 real melons actually got created because (a) the bank made a loan available, (2) the bank and the grower were willing to take a risk, and (c) the grower was willing to employ her land and labor to make the melons. If the loan hadn't happened, the grower would have not fully employed their labor and land.

So from the macro perspective, money is a government's way to make the economic exchanges happen smoothly, hoping to get all the labor and real assets in the country as fully employed as possible. All the people who labor and earn money can take care of their own needs instead of relying on public or government support. And the more goods are available, the more can be reinvested in improving the productivity of labor and real assets (making next year even more productive), and a surplus can be exported in exchange for additional value.

At the micro level you can see this happen with a household's finances. A family with no assets or education can go out and get subsistence-level jobs and then pay rent on a small bad apartment.
1. If they have tons of kids, they can employ those kids in labor. This is what families around the world have done.
2. If one of them works to gain experience on the job, they might be promoted to a higher paying position or negotiate for a better wage because of greater productivity.
3. If one of them can get an education that allows them entry into a higher-paying job, they would be willing to take a loan to get that education.
4. if they buy some materials to make something at home as a small business and sell it for extra money, the limitation is often how much they can spend on the materials, marketing, distribution. Because it's such a small operation, big companies don't want to work with them. And there are inefficiencies to working in such a small scale. But if they can get a small business loan to increase their operation's size, they can maximize their labor input and take advantage of efficiencies of scale.
5. An extended family can come together to share expenses. Instead of the marriage-age / working-age adults always moving out from their parents' home, they could stay on. The elder takes care of the kids, the young adult goes out to work, and in this way the elders are still able to perform valuable labor and the young adults don't have to spend money on out-of-family childcare. This and the next one overlap a bit with the concept of keeping money local, because the more transactions that can happen before the money gets sent out of the community, the more that community benefits from the money.
6. Several households could join together to share skills and burdens. The most common version of this in the US is roommates, where four single people can split the rent on a large dwelling and it's way cheaper for each than if each one rented a studio apartment. They must share common areas and be good neighbors for it to work. And they must rely on each other to pay their respective portions. A more involved version would be four families joining together in a deal where each night one family cooks for all four, and each day each family watches the children of all four, which frees up 75% of the time that would take for each household for those tasks on rotation. The more things like this they can share, the more they all benefit. An even deeper version would be a commune where the households exchange labor without exchanging money, allowing them to benefit from each others' skills and work even though they are too money-poor to be able to ever afford those services and also underemployed meaning their labor would otherwise lie fallow.

Heck, just a shared fence line is a sharing of burdens. One fence can be built for 1000 credits, but if it's between two lots then both properties benefit from it, whereas a fence built at the back of a lot that doesn't face anything important only benefits the one side of the fence.

[damianbailey]

This was an amazing video. I'm not sure which I'm more impressed with: 1) explaining a topic I thought I knew but didn't 2) that the fruit trading video was made for this topic or 3) that someone found footage of that exact fruit trading scenario. Stellar job!

[osmmanipadmehum]

Nice,
I would like to see someone attempt a video on how exactly the currency exchange rate of some currency is calculated by tracing the number all the way to who decides or calculates it, and how and why.

[Atabascael]

As someone who worked on implementing SWIFT for a bank, I can only say it is impressive how detailed your explanation is.

[emercer]

As someone who's been a fan of the channel for a while and working at Wise for almost a decade now, I'm very happy to see us mentioned in a Wendover video.

[Liam-iqqe]

What an absolutely INCREDIBLE video!!! This was explained so well, the visuals were both stunning and extremely helpful for understanding. Keep up the great work!

[BCKREVENGE]

This is by far the most educational video on banking I’ve ever seen and it’s blowing my mind. Fantastic work!