Underlying all financial activity are transactions involving money. The term “transactions” means something philosophically different in economics. It stands for exchanges of goods and services. Money, in economic transactions, has only a transactional value. It plays the role of a medium facilitating the exchanges. In financial transactions, however, money becomes the entity that is being transacted. Financial systems essentially move money from savings and transforms it into capital. Thus money takes on an investment value, in addition to its intrinsic transactional value. This investment value is the basis of interest.
Given that the investment value is also measured and returned in terms of money, we get the notion of compound interest and “putting money to work.” Those who have money demand returns based on the investment risk they are willing to assume. And the role of modern financial system becomes one of balancing this risk-reward equation.
We should keep in mind that this signification of money as investment entity is indeed a philosophical choice that we have made over the past few centuries. Other choices do exist — Islamic banking springs to mind, although its practice has be diluted by the more widely held view of money as possessing an investment value. It is fascinating to study the history and philosophy of money, but it is a topic that calls for a full-length book on its own right. Understanding money at its most fundamental level may in fact enhance our productivity — which is again measured in terms of the bottom line, consistent with the philosophy of money that enjoys currency.