What It Means to “Trust the System”

Silicon Valley Bank, the financial industry, and how we move forward

Image created via Midjourney

When you’re driving, you have a reasonable assumption that other drivers will follow the rules.

There are laws (like the speed limit and obeying traffic lights) and guidance (maybe not the best idea to speed up to pass when traffic is heavy). Sometimes people break the laws. Sometimes people take risks. And sometimes there are innocent victims as a result.

I’ve been reflecting on the Silicon Valley Bank collapse since it happened. (If you need a detailed explainer, you can read this article). There has been a lot of finger-pointing.

There is no one thing that lead to SBV’s collapse. It was a combination of the bank’s unique clientele, a changing VC-backed tech landscape, rising interest rates, deregulation, and a bad press release. A perfect storm.

But a core concern should be the financial system in the United States. Like driving, it is built on trust. A series of laws, guidance, and relying on the fact that most people are trying to do the right thing most of the time.

If that trust shatters, the system will collapse. That’s been the biggest risk of the SVB failure.

The philosophy of money

German philosopher Georg Simmel is credited with codifying the idea of money as a sort of collective delusion.

In 1900 he published the book The Philosophy of Money and in it, he wrote, “An object does not gain a new quality if we call it valuable; it is valued because of the qualities it has.”

We accept that paper money has value because we collectively agree that it does. We accept that the balance displayed in our banking app is correct and available if we need to withdraw money.

That’s one of the reasons that the crypto market has struggled. There’s no collective acceptance that cryptocurrency has value. The colossal fallout of FTX, the bankruptcy filings of multiple exchanges, the massive devaluation of Bitcoin, and large layoffs at Coinbase have done little to help the cause.

The FDIC was created during the Great Depression, in part, to restore confidence in the…