Money Lender

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Essay attempting to answer

  1. What is money
  2. The need to always earn more
  3. How we acquire wealth
  4. Why institutions need to support investment
  5. Primer on some modes of investment & their functioning

What is Money?

Money is any item or verifiable record that is generally accepted as payment for goods and services. Hence we are ascribing value to the symbol “$" as the unit for measuring the quantity of money.


Historically a barter system was used as a system of exchange goods and services. But I can imagine that one person may not always want the things being received in exchange. That would have led to the need for a common ground or a common medium of exchanging goods. 


That is how objects such as gold, silver and other precious metals became mediums of exchange since we ascribed value to these objects proportional to their rarity. Rarity of an object makes owning it more valuable. After all it is just something extracted from the earth, so is underground water. Which brings to question why did we use metals in the first place as a common medium? Might as well have used wood, leaves which were more widely available to exchange. 


Given the context of what money is it is only human nature to want more money to be able to purchase more goods, services or experiences. In the current world we live in, we are enticed by so many things we want to buy, experience that all expect something in return - Money.


Why do we need money?

  1. Sustain - Make enough to afford ever increasing prices of necessities
  2. Grow - Expenditures which aren’t a necessity

Why do we need increase our earnings over the years just to sustain?

Prices of commodities that we consider as bare necessities may not always remain constant. They keep rising, raising cost of living. People have dependents they need to provide for and the risings costs of living adds further financial burden.


Why would prices of necessities increase in the first place?

  1. Scarcity of goods (given a constant demand)
    Example: Wood required to build house is a limited resource if not replenished. Scarcity of wood will raise the prices even if the number of people demanding it remain unchanged.
  2. Increased demand (given a constant output)
    Example: Growing population raises demand for food, but if the farms cannot keep up with the demand, prices rise.

Disclaimer: Content and examples stated in this post have been simplified for the purpose of understanding.

Money Lender-ing


As individuals we can acquire money mostly in the following ways

  1. Provide a service to others in exchange for others (eg. Deliver Food, Barista)
  2. Make something and sell it in exchange for money (eg. Farmers)
  3. Profit off something or what someone else is doing

Profiting off what someone else is doing is what the intention of this article is.


How can an individual earn more?

Work multiple jobs, have a side gig. But this is constrained by the finiteness of time.


Why do businesses need to earn more? And the need for investment as a tool.

Given the rising prices of items, my employees need more money for themselves. Employees spend more on items than before and we expect the business to provide for that. If the employer is paying everyone more, less is left to grow the business and hence it needs to make more money as well. Two questions arise here

  1. Why do I need more money to grow the business?
  2. How do I get more money to grow the business?

Why do I need more money to grow the business?

As explained above, businesses need to meet ever rising costs of operating the business. To compensate for the rising costs, the revenues must rise as well. They can increase revenues by acquiring new customers, manufacturing more products and varieties to meet the demand, cut costs (that is not the point of focus here though). Hence the case for more money. Also corporations are battling inflation at the same time via employees as well as through the business itself.


How do I get more money to grow the business?

Without money in the first place, I cannot increase production nor spend efforts to acquire new customers. So borrowing money from someone is the easiest way. Aka opening up for investment. There we are… Hence investment is an easy way to increase your expendable resources. As a business I borrow money from others to purchase more raw materials, make more products, market them to new customers and in turn increase revenues. So simple.


Why borrow?


Why can’t institutions use their own profits and revenues to keep going?

Institutions can certainly self-sustain without borrowing money. There are a lot of self sustaining organizations, that are not open to lending and borrowing from the public such as Airbnb, Doordash (until recently). However to keep with increasing customer demand, a company needs to borrow to  scaling up the business as well as increasing the costs or just to get through tough times. A company cannot charge an absurd amount per customer to make up for the rising costs of running the business. Hence it tries to raise money in other ways. 


Is it possible to company to not grow? 

Is there an inherent expectation to always grow?

You can argue if there is any need to grow on part of the corporations. Yes, there is. If there are unexplored avenues for growth, new product lines, un-acquired customers, if not one company a new one will offer it causing your company to lose customers to them. In that case, your company is now losing money by loss of customers and rising expenses due to inflation at the same time. This could cause obsolescence.


Hence the motivation for a company to raise capital should be growth & innovation in an ideal world. Profiteering could be a secondary motive or a side effect of growth & innovation. 


Hence the expectation of a company to always grow or have infinite growth seems valid.


What is meant by growth?


Individuals can grow by raising their standard of living


Corporations grow in terms of their revenue. By attracting and retaining more customers to their products, revenues increase which is symbolic for the company's growth.


Governments may grow as well but the primary source of revenue for the government is taxes collected from individuals, corporations and some other sources. Growth for the government is usually indicated by the nations growth overall usually indicated by the GDP & some socio-economic indicators. 


Government offers investment opportunities as well, how do they offer returns?

Yes governments offer investment objects such as bonds or treasuries, even though running a country is not a business in its true form. Government revenue is acquired via taxes it collects from corporations and individuals. Taxes are laws set forth by the governing body which allows them the right to collect money from you if you live on a piece of land governed by them and if you are earning money. Governments use these funds to:

  1. Build or purchase defense equipment for our safety.
  2. Maintain facilities such as roads, railways, natural recreation areas

Hence for government to raise capital by issuing bonds, lies an inherent expectations for investors that it (the government) will collect more taxes in the future either by increasing taxes or improving the standard of living thereby collecting a higher amount of tax.

Self sustaining on their revenues and profits could act as an inhibitor to growth.



Disclaimer: Content and examples stated in this post have been simplified for the purpose of understanding.


Investment for Individuals


To profit off another person’s labour we need to give something to get something in return. There is no case for free money. That is where investment comes into the picture. Investing is simply lending money. 


Example - I would lend money to my friend to build a bike and and he/she in turn would sell it for a profit, off which I would take a share in return for my initial investment. Similarly I could lend money to an institution in return for expected profits in future. What we establish with the institutions a contract and they are liable on their part to uphold their part of it, unless of course they go bankrupt or have devious intentions to start with. So for expected future profits, we are assuring ourselves of the increased future money to buy things then.


It is always prone to risks, my friend can fail to sell the bike, may be due to lack of demand or bike being of inferior quality. Hence my initial investment may not get the expected return or I may not get any return at all. 


What if you don’t keep up with the inflation?

If I am not able to keep up with the rising costs of living, I would be left with less and less money after meeting my basic needs. That reduces my ability to spend time on leisure activities or be able to afford items for leisure. Life becomes pretty much boring then.


How much should be invested for the future?

Enough to sustain your current standard of living at the projected future date. That is where a lot of companies that manage retirement accounts come into the picture. 

They require you to input your current income level and expenses and project how much you should get each month in future after you retire. They make the calculations based on estimated rates of inflation and other economic factors. Once again they require you to set aside some part of your existing income in their accounts, which is invested by them and returned to you in future.


Investment Risks

Investing money in an institution comes with risks similar to lending money to a stranger such as

  • What if the stranger is not able to repay the principal amount?
  • What benefit do I get in return for lending the money?
  • What if the stranger has no intention of returning the amount?

We always lend money to people we trust and people capable of repaying it. Similarly it goes with institutions. Investment is a risky if not done cautiously. 


How should you select where to invest in?

Selecting the right companies (or friends) to invest in, is important. After all we do expect to get returns in excess of what we put in initially. There are countless resources on the web to start off into investments. But, similar to donating money to causes you believe in, you can invest in companies you believe in. Of course simply believing in a company will not yield returns.


Modes of Investment


Why do we have a variety of investment objects or securities?

  • Stocks
  • Bonds
  • Bank Account
  • Derivatives

Let’s start with the simplest one and something easy to understand. 


Bonds - Institutions issue bonds to raise money. There could be a myriad reasons behind trying to raise capital such as - financing a new piece of expensive equipment, researching a product, paying for expenses of employees and so on. It's an agreement between the issuer and the lender, that allows the issuer to the bond (The Institution) to borrow money from other entities (individual investors or other institutions) in exchange for an interest paid at regular intervals and an expiry date when the original amount lent must be returned. Hence bonds in general seem like a sensible form of security that allows companies to raise money to clear debt or dive in other ventures.


Stocks - Institutions release ownership of certain part of their company and allow others to own that piece of the pie. Just like bonds, the motivation would be to raise capital for other ventures. What benefit would the investor or the person buying the share of the pie get? The value of the company as it grows, the size of the pie increases and so does your own share of the pie. 

Hence the company was able to get money in addition to what it makes as revenue and use that for research and facilitating growth.


Derivatives - Their values are based off prices of an underlying asset. You can read more about on the inter-webs. You can read a lot more by running an internet search.


Bank Account - Keeping your money in a bank account and not lending it to others keeps your money safe from fluctuations or risks associated with lending. Banks provide this service for you to safely store your money and make it accessible whenever you want.


Why do banks offer interest and entice incoming customers using that?


So how are banks able to offer you more money than you put in? After all you should be paying them, because the bank is providing a service - keeping your money safe. Banks earn in some of the following ways:

  • Investing some part of the money customers deposit and those earning off those
  • Lend money to customers at an interest rate (eg. home loans, auto loans)
  • Fees for services the bank provides (eg. ATM withdrawal fee)

So that is how banks offer you a part of their own earnings as interest and convince us to use their offerings. Since more money favors more lending and hence more likelihood f.


PS - This is in now way an article to encourage investing. It is risky, so tread carefully.



Disclaimer: Content and examples stated in this post have been simplified for the purpose of understanding.



Further Reading & References