Amidst a Deluge

Kathleen Breitman once defined finance as being the technology used to exchange contractually defined cash flows. That’s a great definition; certainly a much more descriptive and specific one than what the dictionary itself offers: “the management of large amounts of money, especially by governments or large companies.” What the world of finance boils down to is maximizing the number of discrete pieces of the cash flow generation process. In doing so, the discrete pieces can be traded and precisely valued across space and time. We can see the technology of “finance” at work in a simple example showing how debt works.

Debt is nothing more than the trading of pieces of cash flow on an open market – if I’m a potato farmer in 1,053 A.D. and need to plant potatoes across my large plot of land, but don’t have enough money available right now to buy enough seed potatoes to populate my land, then I’m completely out of luck. I’ll be constrained in my seed purchase by the amount of money I’ve currently got. That is unless someone else is willing to look at what I’m planning on doing in the future and purchase my seeds for me. When someone else takes a look at my process, they’ll see that I’ll be planting a large amount of seeds in a field, tending to them as they grow into potatoes, and then harvesting them to sell at the market in 3 months. It seems like a pretty good plan.

If I can convince someone that I’ll be able to reasonably fulfill all of these steps, and I have a believable estimate for how much a full potato yield will earn at market based on expected market conditions, then my potential counter-party will start to get interested. I’ve been planting, growing, and selling crops my whole life, after all, so this seems like a safe enough venture for my counter-party. But why would they pay for my seed potatoes and tie up their money for 3 months before getting it back?