WHEN my daughter Jemima was just four years old she gave me a homemade Father's Day card. Tucked inside was a voucher she had made at kinder. It said: "The bearer of this voucher is entitled to (fill in the blank) free hugs from (fill in the blank) Jemima. This voucher may be presented at any time and never expires".
She is now 11 and I'm pretty sure she has no idea I have kept and treasured it. One day when I really need a hug, probably when the two of us are in the middle of a blazing terminal row, I'm going to cash it in, but until then it sits on my shelf and gives me a bit of a warm feeling every time I look at it. To me it has real value and the reason it has value is because I completely trust my daughter to deliver the free hugs when I present the voucher. It has "currency" because we love and trust each other and in that realisation you begin to understand money.
Under the gold standard, the UK pound and the currencies of the empire used to have the same currency as my daughter's voucher because the bearer could present a pound sterling banknote to the Bank of England and be given gold in return.
In the shadow of that promise, a promise from the bedrock financial institution of the British Empire, the paper on which that promise was written had value because it represented a promise from a trustworthy institution to deliver something of set value.
The empire came off the gold standard in 1931, and since that day the currency we use in Australia, as you will see if you have a look, now represents not gold, but an assurance from the governor of the Reserve Bank of Australia and the Secretary of the Treasury of Australia that "This Australian note is legal tender throughout Australia and its territories". In other words, if a debt is owed then this note may be used to legally satisfy that debt in Australia and its territories.
Well, that's good enough for me. It means that if someone refuses to take my notes or give me notes, and demands or tries to deliver something inconvenient like goats instead of dollars to satisfy a debt, Glenn Stevens will back me up and Glenn Stevens is the sort of chap I can trust.
The integrity of all Australian money would be at stake if he didn't and the consequences of that would be simply appalling for Glenn, let alone the rest of us. Basically, if Glenn gave me a voucher for free hugs I'd rank the value of that very close to Jemima's.
And that's money, a relationship between two people. It used to have a hard currency value, gold, but now it is worth no more or less than the strength and integrity of the relationship of the holder and the promisor and the confidence of the party holding the paper that the other party will deliver on whatever they promise.
On that basis it might amuse you to begin assessing how much "money" you really have in terms of the relationship you possess with it, rather than its face value. Rarely is a dollar worth a dollar. For instance:
You lend $1 to the village idiot. How much is it worth now?
You put $2000 into a TAB account. What would your spouse value it at?
You give $10,000 to the CEO of an exploration company.
You borrow $500,000, add $100,000 of cash and buy a $600,000 house (double or triple these numbers depending on your suburb). How much is your $600,000 worth now, or next year?
You put $1 million of superannuation money, your future, in the hands of a flotilla of managed fund managers across the world who you've never met. How much is your million dollars worth now?
You buy ?205 billion of Greek bonds.
The Greeks have done untold damage to the original implication of the word "bond". Money is a relationship based on trust, whether it's with the village idiot or the property market, and the easiest way to add value is to constantly assess and improve the relationships you commit your money to.
Jemima and I work on our relationship every day because you don't get free hugs taking relationships for granted, not in this market.
Frequently Asked Questions about this Article…
What does the article say money really is for everyday investors?
The article explains that money is fundamentally a relationship based on trust — a promise from a payer to a holder. It uses a homemade voucher and historical examples to show that the real value of money depends on confidence in the person or institution who promises to deliver.
How did the gold standard shape the value of currency, and what changed?
Under the gold standard, banknotes could be exchanged for gold, so their value rested on a tangible promise from institutions such as the Bank of England. The article notes that after countries came off the gold standard (the empire left it in 1931), modern currency now represents an assurance from national authorities rather than a fixed commodity.
Who backs Australian banknotes and makes them legal tender, according to the article?
The article points out that Australian notes carry an assurance from the governor of the Reserve Bank of Australia and the Secretary of the Treasury that the note "is legal tender throughout Australia and its territories," meaning debt can be legally satisfied with those notes.
Why does trust in institutions and people matter when you invest?
Trust matters because the real value of your money and investments depends on the trustworthiness of the counterparty. The article contrasts lending to an unreliable person, handing money to unknown fund managers, or buying property with borrowing — showing that identical face values can mean very different real outcomes depending on the relationship and reliability of the other party.
What everyday examples does the article use to show how relationship affects money value?
Examples include a child’s voucher (trusted promise), lending $1 to the "village idiot," placing $2,000 in a TAB account, giving $10,000 to an exploration company CEO, taking on a mortgage with borrowed cash, and putting $1 million of superannuation in the hands of a flotilla of managed fund managers you’ve never met. Each example highlights how trust changes the effective value.
What warning about bonds and sovereign risk does the article give to investors?
The article mentions buying large amounts of Greek bonds as an example that sovereign bonds can betray the original implication of a "bond." It warns that even instruments traditionally seen as safe depend on the issuer’s credibility, so sovereign risk can damage expected value.
How does the article suggest everyday investors should approach their investments in a tough market?
It advises investors to constantly assess and improve the relationships they commit their money to. That means being mindful of who promises returns or guarantees — whether institutions, fund managers or counterparties — and not taking those relationships for granted.
What practical actions does the article imply investors can take to protect the value of their money?
While not prescribing detailed tactics, the article implies everyday investors should vet the people and institutions handling their money, be wary of entrusting large sums to unknown managers, monitor counterparties (like lenders or fund managers) regularly, and work to strengthen financial relationships so the promises behind their money remain credible.
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