In less than 2 decades, post-industrial society has transformed itself into the Information Age. As information becomes a fundamental resource, radical consequences arise not only in the economy, but in the very weave of society.
In the very first chapter of his book, Bernard Lietaer asserts that our most ancient information systems are monetary systems (money was first invented to keep track of financial dealings), so it is no surprise to find money in the vanguard of computerized cyberspace. It is predictable that fundamental changes will arise, not only in systems for payment with conventional money, but in new types of money which arise.
In the forties, IBM's first president, Thomas Watson, apparently predicted that the world would require the construction of perhaps five computers. By 1975 fifty thousand of them were in operation, and in 1997 more than 140 million, in addition to 170 million notebooks, and innumerable computer parts in items of daily use: any automobile had come to include more information processing power than the first spaceship to land on the moon in 1969.
The simple reason for this explosive proliferation was that never before had the price of any industrial product fallen so far, so fast. We had become accustomed to the idea that a $2000 portable computer had more computing power than the largest macro-computers costing millions of dollars twenty years before. If the efficiency and costs of automobiles had followed this trajectory in the US, we would have been driving from one coast to the other on a pint of gasoline at a cost of under a dollar.
When the steam engine replace waterwheels, its initial cost was not much lower than the water wheels: it took sixty years (1790-1850) for its price to fall by half. In the same way, it took from 1890-1930 for the price of electricity to fall by half. Moore's law, named after the president of Intel, is that every 18 months the speed of computing doubles, and the cost falls by half.
The internet is only one facet of this revolution. Bill Gates is quoted as saying that the internet will be even more revolutionary than the PC. Here are some illustrative cost comparisons. To send a 42 page document airmail New York to Tokyo takes 5 days, and costs $7.40. The same document could arrive withing 24 hrs. using a private courier service for $28.85. Email sends the same document in 2 minutes, for 9.5cents, so there is no surprise in the volume of internet traffic doubling every 100 days.
In 1980 copper cables were used for telephone transmission of one page of information per second. A fine filament of fiber-optic cable could transmit 90,000 books per second at the time this book was written. The costs of transmission were falling in parallel with the growth of bandwidth. High speed, high capacity networks create a broad band world in which it becomes cost effective to maintain a permanent connection to the internet both at home and at work.
While it is wise to maintain some skepticism as regards all this development, and volumes are written aboaut it, this book considers the meaning of such an "information revolution" and what opportunities arise thereby for monetary choices in the near future. To this end, this fourth chapter is organized in five sections:
The nature of information
Consequences for the economy and society
Consequences for money
Consequences for banks and financial institutions
A possibility for Wisdom in the Information Age?
Thursday, April 21, 2011
Monday, April 11, 2011
The end of chapter three
The need for permanent growth
The chief oversimplified assumption in the tale of the "eleven discs" is that everything carries on during the course of the year in the same way it has been doing. In actuality we don't live in a world where the population, production, and the availability of money are unchanging. In the real world each of these things changes more or less, and the money system only prevents the first component of growth from paying a dividend. In this regard, the process has ancient and long-forgotten religious roots. In many historic societies, "the first fruits of the harvest" were sacrificed as an offering to the gods.
This dynamic means that it is more difficult for us to discern what's going on in our own relationship to the eleven discs. Nevertheless, in the real material world, the payment of permanent compound interest is a mathematical impossibility (note the following blue paragraph)
Joseph's penny, or the mathematical impossibility of compound interest
Indefinitely compounding interest is a mathematical impossibility in the real world. For example, if Joseph had invested one penny at 4% compound interest the day Jesus was born, by the time America declared independence its value would have grown to the equivalent of a ball of gold with half the weight of planet earth. By the time this book was written, it would be worth 2252 balls of gold the weight of the earth.
If the compound interest was at 5%, by the year 2002, Joseph's penny investment would have reached the astounding value of 470 thousand million balls of gold the weight of the earth.
From this dynamic perspective, even if real standards of living are unchanged, the monetary system requires continuous economic growth. The level of interest rate establishes the the level of growth needed for the standard of life just to stay the same. This need for permanent growth is something we take for granted, and generally we don't realize that it has something to do with the charging of interest, and with our monetary system.
3)Concentration of wealth
A third feature of the systematic effect of "interest bearing" on society is the continuous transfer of wealth from the great majority to a tiny minority. The wealthiest individuals and organizations own financial instruments which return interest. They obtain a permanent income from whoever requires a loan to make something happen. The best study on this transfer of wealth from one social group to another was done in Germany in 1982, when interest rates stood at 5.5%. It sorted all Germans into ten groups by income, each encompassing 2.5 million homes or family units. During that year, the transfers between groups was a gross total of 270 billion German marks in interest paid and received. To show this in raw form it's useful to graph the net effects in the form of net transfers (interest received minus interest paid) for each of the ten income groups.
These are net transfers of interest among ten income groupsThe main transfer of interest comes from the middle class (categories 3 through 8): each of these groups paid about 5000 million German marks to category 10. Even homes with lower income (category 1), who generally don't have easy access to credit, transferred 1800million marks in interest to the top group. The net effect was that the top 10% of family units received that year a net transfer of 34,200 million marks in interest from the rest of society.
The graph clearly show the systematic nature of the transfer of wealth from the lower 80% of income earners to the top 10%. This transfer was the result of exclusive use of one monetary system, and was entirely unrelated to how intelligent or hardworking the individuals of the study were (which is the classical argument used to justify the great differences among the wealth of different groups)
I have found no study which addressed the transfer of interest between different sectors of US society, but the census give us some idea of the total redistribution of wealth in the last twenty years. The total results are much more serious than in the case of Germany. Unfortunately, information available in the US does not permit us to isolate the wealth transfers attributable to the payment and receiving of interest as it impacts total redistribution of wealth. In the next figure, interest paid and received is compared with all other forms of investment income, such as rents and dividends. This data does not support John Kennedy's thesis that "a rising tides lifts all boats". In the final analysis, not all boats are lifted as much.
In the US, the only income group which has increased its percentage of total income in the last twenty years is the top earning 5% of families. In practice, the next lower income group has maintained its income. All the rest have suffered a reduction in their portion of the national pie. See the graph of net changes of income from 1975-1995 to understand this better. Between those years, the combined income of all US homes grew from $2700 billion to $4500 billion in constant 1995 dollars. Nevertheless, the benefits of this growth were not equally spread: the wealth of the richest 5% grew by a spectacular 54.1%, absorbing the majority of that newly created wealth, to the notable loss for the 60% occupying middle income status.
This graph represents the participation of US homes by income, in the "growth of the national pie"The cumulative effect of this process explains the surprising imbalance that exists in the US distribution of wealth. Financial wealth is by definition the accumulation of income over long periods of time. The final result is growing financial inequality. At the time the book was written, the top 1% of Americans owned the same amount as the bottom 92%...since that time, the figure has continued to skew to the top. This process of concentrating wealth continues impacting all the levels of wealth. Between 1983 and 1989, the value of equity held by the 500 richest families in the US went from $2.5-$5 billion dollars. On a world scale, the top 447 wealthiest people in the world own more than the pooled earnings of half the world's population. The three wealthiest individuals on the planet have total wealth equal to the GDP of the poorest 48 countries.
The great panorama of reality
Stephen Jay Gould, the evolutionary scientist described the noteworthy ability of evolution to create, on average, a little more than it destroys. He called it the "Great Asymmetry". The biosphere cumulatively creates complexity with growth, contrary to the action of entropy in physics. The human species participates in this evolutionary process through its economic activity.
Inside this grand perspective, money is the evolutionary information system which demonstrates the contribution of humanity to the "Great Asymmetry" It is the equivalent of "social DNA". The Modern Age gave rise to a monetary system that implemented its ideal of continuous economic progress through hierarchy and central control.
Changes in DNA have a vital role in mutation and evolution, even though they are not immediately visible. In the same way, changes in the monetary system are capable of reconfiguring values and priorities in the post-industrial, post-modern world.
Was it on account of their concern for social justice and stability that the three most important great religions (Judaism, Christianity and Islam) unanimously forbade the charging of interest?
It is interesting to note that since the charging of interest was legitimized, almost all countries created some ways of redistributing the wealth in social programs. Some of these programs, such as Social Security and Medicare, are increasingly criticized for their inefficiency. Would this be a result of the excessive efficiency of the monetary system, the inefficiency of the social networking system, or both?
What follows
The three indirect consequences of interest- competition, the necessity of permanent growth, and the concentration of wealth- are the hidden engines put in place to get us through the Industrial Revolution. The good and not-so-good results of this seemingly minor matter of an interest bearing system are attributable to this hidden and misunderstood foundation.
According to a growing consensus, the Industrial Era is coming to an end. We have set out on the unknown ocean of the Information Age. It is curious that currency experiments have arisen in dozens of countries, without attracting much attention from either the media or academia. From my point of view, these innovations offer real possibilities for correcting little by little the excesses and imbalances of the current monetary system without revolution or violence. Even more valuable is the fact that these new complementary currencies, when acting alongside the existing dominant financial system generate new wealth in both the financial and social sectors. They have also demonstrated that it is possible to address some of our most urgent and recalcitrant social problems without the need for new taxes or regulations. It is not coincidental that these new currencies generally don't share the four key features of the current dominant monetary system described in this chapter. For one thing, they don't include the payment of interest.
It is worth remembering the words of John F. Kennedy,
"Those who stand in the way of peaceful revolution ensure the inevitability of violent revolution."
The chief oversimplified assumption in the tale of the "eleven discs" is that everything carries on during the course of the year in the same way it has been doing. In actuality we don't live in a world where the population, production, and the availability of money are unchanging. In the real world each of these things changes more or less, and the money system only prevents the first component of growth from paying a dividend. In this regard, the process has ancient and long-forgotten religious roots. In many historic societies, "the first fruits of the harvest" were sacrificed as an offering to the gods.
This dynamic means that it is more difficult for us to discern what's going on in our own relationship to the eleven discs. Nevertheless, in the real material world, the payment of permanent compound interest is a mathematical impossibility (note the following blue paragraph)
Joseph's penny, or the mathematical impossibility of compound interest
Indefinitely compounding interest is a mathematical impossibility in the real world. For example, if Joseph had invested one penny at 4% compound interest the day Jesus was born, by the time America declared independence its value would have grown to the equivalent of a ball of gold with half the weight of planet earth. By the time this book was written, it would be worth 2252 balls of gold the weight of the earth.
If the compound interest was at 5%, by the year 2002, Joseph's penny investment would have reached the astounding value of 470 thousand million balls of gold the weight of the earth.
From this dynamic perspective, even if real standards of living are unchanged, the monetary system requires continuous economic growth. The level of interest rate establishes the the level of growth needed for the standard of life just to stay the same. This need for permanent growth is something we take for granted, and generally we don't realize that it has something to do with the charging of interest, and with our monetary system.
3)Concentration of wealth
A third feature of the systematic effect of "interest bearing" on society is the continuous transfer of wealth from the great majority to a tiny minority. The wealthiest individuals and organizations own financial instruments which return interest. They obtain a permanent income from whoever requires a loan to make something happen. The best study on this transfer of wealth from one social group to another was done in Germany in 1982, when interest rates stood at 5.5%. It sorted all Germans into ten groups by income, each encompassing 2.5 million homes or family units. During that year, the transfers between groups was a gross total of 270 billion German marks in interest paid and received. To show this in raw form it's useful to graph the net effects in the form of net transfers (interest received minus interest paid) for each of the ten income groups.
The graph clearly show the systematic nature of the transfer of wealth from the lower 80% of income earners to the top 10%. This transfer was the result of exclusive use of one monetary system, and was entirely unrelated to how intelligent or hardworking the individuals of the study were (which is the classical argument used to justify the great differences among the wealth of different groups)
I have found no study which addressed the transfer of interest between different sectors of US society, but the census give us some idea of the total redistribution of wealth in the last twenty years. The total results are much more serious than in the case of Germany. Unfortunately, information available in the US does not permit us to isolate the wealth transfers attributable to the payment and receiving of interest as it impacts total redistribution of wealth. In the next figure, interest paid and received is compared with all other forms of investment income, such as rents and dividends. This data does not support John Kennedy's thesis that "a rising tides lifts all boats". In the final analysis, not all boats are lifted as much.
In the US, the only income group which has increased its percentage of total income in the last twenty years is the top earning 5% of families. In practice, the next lower income group has maintained its income. All the rest have suffered a reduction in their portion of the national pie. See the graph of net changes of income from 1975-1995 to understand this better. Between those years, the combined income of all US homes grew from $2700 billion to $4500 billion in constant 1995 dollars. Nevertheless, the benefits of this growth were not equally spread: the wealth of the richest 5% grew by a spectacular 54.1%, absorbing the majority of that newly created wealth, to the notable loss for the 60% occupying middle income status.
The great panorama of reality
Stephen Jay Gould, the evolutionary scientist described the noteworthy ability of evolution to create, on average, a little more than it destroys. He called it the "Great Asymmetry". The biosphere cumulatively creates complexity with growth, contrary to the action of entropy in physics. The human species participates in this evolutionary process through its economic activity.
Inside this grand perspective, money is the evolutionary information system which demonstrates the contribution of humanity to the "Great Asymmetry" It is the equivalent of "social DNA". The Modern Age gave rise to a monetary system that implemented its ideal of continuous economic progress through hierarchy and central control.
Changes in DNA have a vital role in mutation and evolution, even though they are not immediately visible. In the same way, changes in the monetary system are capable of reconfiguring values and priorities in the post-industrial, post-modern world.
Was it on account of their concern for social justice and stability that the three most important great religions (Judaism, Christianity and Islam) unanimously forbade the charging of interest?
It is interesting to note that since the charging of interest was legitimized, almost all countries created some ways of redistributing the wealth in social programs. Some of these programs, such as Social Security and Medicare, are increasingly criticized for their inefficiency. Would this be a result of the excessive efficiency of the monetary system, the inefficiency of the social networking system, or both?
What follows
The three indirect consequences of interest- competition, the necessity of permanent growth, and the concentration of wealth- are the hidden engines put in place to get us through the Industrial Revolution. The good and not-so-good results of this seemingly minor matter of an interest bearing system are attributable to this hidden and misunderstood foundation.
According to a growing consensus, the Industrial Era is coming to an end. We have set out on the unknown ocean of the Information Age. It is curious that currency experiments have arisen in dozens of countries, without attracting much attention from either the media or academia. From my point of view, these innovations offer real possibilities for correcting little by little the excesses and imbalances of the current monetary system without revolution or violence. Even more valuable is the fact that these new complementary currencies, when acting alongside the existing dominant financial system generate new wealth in both the financial and social sectors. They have also demonstrated that it is possible to address some of our most urgent and recalcitrant social problems without the need for new taxes or regulations. It is not coincidental that these new currencies generally don't share the four key features of the current dominant monetary system described in this chapter. For one thing, they don't include the payment of interest.
It is worth remembering the words of John F. Kennedy,
"Those who stand in the way of peaceful revolution ensure the inevitability of violent revolution."
Sunday, April 3, 2011
Chapter Three ...second of three parts
National currencies
These days, it's difficult to imagine money that isn't issued by some country, or, in the case of the Euro, some group of countries. Nevertheless, it is useful to remember that the concept of a national currency is only a couple of centuries old. The great majority of currencies throughout history were issued privately, by some sovereign, or some other local authority.
Notwithstanding, the creation of a national money is one of the most powerful tools available for fomenting a national awareness. It is a daily proof of the existence of borders between countries, which otherwise are only to be seen by looking at an atlas. A recent example is that after the breakup of the Soviet Union, one of the first acts by newly independent republics was the issuing of their own money. "A common money system is a shared information system that makes it possible to evaluate what is coming in and what is going out" (Charles Handy: The Empty Raincoat, 1995) Sharing a money creates invisible but very powerful links within all sectors of a country, and reinforces a boundary between "what is ours" and "what is theirs". In this way one of the objectives of the euro (the common currency which, in January 1999 replaced the individual currencies of eleven nations) was to stimulate a more unified European consciousness.
The universal adoption of national currencies should not obscure the fact that until 1971 international commerce had a transnational currency-gold. After that time, the US dolllar became the world currency , which had a negative impact on everybody, even the US
Recently, non-geographic communities have emerged, like the internet, and had a significant impact on the internatioal monetary system. In chapters 4 and 8 I will deal with this theme.
Fiat Money
The simple question "Where does money come from?" leads us directly into the world of magic. Money not only appears and disappears, but is literally created out of nothing. To understand this, it is necessary to loook beyond appearances. At first sight, national moneys seem to come from the central banks: in the case of the USA, the Federal Reserve, or the Secretary of the Treasury, but this is not in fact the case. If we want to know where it comes from, we need to take a peek up the magician's sleeve.
If one wants $20 cash, what does one do? One goes to the bank and asks for it. The teller, or the ATM has a look at one's account, and if the balance is sufficient, out comes the cash. No balance, no cash.
In fact, money is what one has in the bank account, since one will only get any if that balance is positive. In the same way, the Central bank issues to one's bank whatever amount one's bank requests, but debits the bank's account accordingly.
So where does the money in one's account come from? Usually from a salary, a pension, or some other deposit. But where does one's employer get the money to deposit? As president Truman famously asked "in the last resort, where does each bill come from?"
Bank debt
In the last chapter I alluded to a fact which may seem surprising. Every dollar, euro, or other national currency in circulation originates as a bank loan. For example, if one meets the requirements for obtaining a mortgage of $100,000 to buy a house (remember this book was written in the nineties) puts a credit into one's account and literally creates the $100,000 out of nothing. This is the real origin of money. Of course, bank loans are supposed to be backed by some guarantee of the borrower's ability to repay the loan: property, a house, a car, some profitable business, etc. Once the credit is granted and the deposit made, one can write a check to the seller of the property, who in turn deposits it into his bank account, and the money begins to circulate indefinitely, right up until someone repays a loan, at which point the money returns to the nothingness from which it arose.
One of the differences between Eastern and Western philosophies is that in the east, nothing is the explicit origin of all things, while in the west, we always summon up God, the Word, the One as prime mover. You could say that in the west we have hidden the emptiness at the center of the monetary system. Could that be a reason for its hypnotic powers?
According to the Radcliffe Commission set up by the British Parliament, "Cash in circulation is that portion of the national debt on which no interest is paid." This simple process by which money is created is given the appropriate name"fiat" money, from the Latin "let there be". "Let there be light" were the first words spoken by God in the bible. The following line goes "He made the light and he saw that it was good" Here we stand before a truly divine function, the creation of something out of nothing by the power of the word.
There is no doubt whatever that the next time we respectfully request a loan, we will experience some intimidation before the banker! In the same way that the magician needs a handkerchief to flutter over his top hat before the rabbit appears, the banker has another veil. During the money creating process, our attention will be directed to boring technical details: the details which drive competition between banks, deposit requirements, and the role of the Federal Reserve in optimizing the system. All these details, like the magicians handkerchief, have the perfectly valid purpose: to regulate the amount of fiduciary money that each bank is allowed to create (that is, the number of rabbits that the magician can pull out of each hat!)
A particularly interesting aspect of this scheme, which dates to pre-Victorian England- is that it allows societies to resolve two apparently contradictory intents: on the one hand, reinforcing the national state, while on the other trusting to the initiatives of private enterprise and in the competition between them. Specifically, this paves the way for privatizing the creation of national money, which theoretically is a public function, as a privilege held in common by the banking community, at the same time as it maintains a competitive pressure on the individual banks for the deposits of cients.
Jackson and McConnell summarize in a few words another important aspect in the constitution of "fiat money" systems: "The money created from bank debt gets its value from the relationship between its usefulness and its scarcity". Said another way, for a "fiat money" system based on bank debt to work, scarcity must be introduced and artificially maintained. This is one of the reasons that our existing system does not self-regulate, but requires the active intervention of central banks to maintain scarcity. It can also be said that the central banks compete amongst themselves to maintain the scarcity of their national currrencies on the international market. This serves at the same time to support the scarcity as well as the relative value of the money.
Further along, we will see that other types of money called "mutual credit systems" do exist, which self-regulate better than national money, and whose value rests on the goods and services existing within the community which accepts them. These currencies, rather than being artificially scarce, can be sufficient to the needs of the community.
Interest
The final characteristic shared by our national currencies is the bearing of interest. The belief is newly arisen that the bearing of interest is intrinsic to the creation of money, whereas we forget that it definitely has not been this way during most of history. In fact, the three biblical religions (Judaism, Christianity and Islam) emphatically forbade the charging of ANY interest on money loaned. Today, only Islam maintains this prohibition. We forget that the Catholic church condemned the charging of interest as the sin of usury until the nineteenth century. (I'll post his aside about this in the next blog)
The impact of interest
The consequences of charging interest are the most difficult to understand and the least known of the four key features of our system. The effect on society is general and powerful, and merits more detailed analysis. The charging of interest in a monetary system has three effects:
1)Indirectly, the charging of interest systematically foments competition among the participants in the system.
2)The need to pay interest is a constant stimulus to the need for permanent economic growth, even while real standards of living are stagnant.
3)Interest concentrates wealth, burdening the great majority of taxes for the benefit of a tiny minority.
The fomenting of competition
Here is an Australian tale, which illustrates the workings of interest in our monetary system, and the way it stimulates competition amongst all those who participate in the system.
Once upon a time there was a village in the Australian outback where people used barter for all their transactions. On market days they came with chickens, eggs, hams, and bread and spent a long time bargaining amongst themselves for whatever they wanted to exchange.
At important times of the year, such as during harvest, or if someone's barn was damaged by a storm, it was customary to help each other out, as the custom had been forever. Everyone knew that when they had a problem, their neighbors would lend a hand.
One day, a stranger wearing elegant shiny black shoes and a white hat showed up on market day, and watched their goings on with a sardonic smile on his face. When he saw a farmer chasing six hens that he intended to trade for a ham, he could no longer contain himself: "Poor people, so primitive" The farmer's wife, who heard him, asked "Do you think you could do a better job than my husband catching these chickens?", to which he replied, "no indeed, but there is a much better way to handle the whole matter". "Oh really," said the farmer's wife, "what is that?" The stranger said, "Meet me over there under that tree, and bring me a cow hide. Have all the other families come too, and I'll show you a better way."
When they brought him the cow hide, he set about cutting it into perfect circles, with a stamp on each one. Then he offered each family ten discs, and explained that each one represented the value of a chicken. He said "Now you can trade the discs instead of running after those pesky chickens."
His argument was very convincing, and the people were impressed.
Once every family had received their ten discs, the man added, "In a year, I'll be back. I'll sit under this very tree, and I'll expect each of you to come with eleven discs. The eleventh disc will be a demonstration of your appreciation for how much easier I've made your life." The six-chicken farmer asked, "How are we going to get an eleventh disc?" and the man answered "You'll figure it out".
********
If that year, the population and annual production of the town remain stable, what will have happened? Remember that the eleventh disc was never created. In this way, even if every family takes good care of their affairs, one of every eleven families have to lose all their discs for the other ten families to have the wherewithal for repayment to the man.
From then on, when some family's barn is damaged by a storm, folks aren't as generous as they used to be, and no longer rush to help prevent trouble. It is much easier to trade discs for chickens on market days, but this new fashion, without even meaning to, undervalues traditional collaboration, and instead creates furious competition for getting the extra discs.
This is how our current monetary system ensures competition amongst its participants. The fable illustrates how the eleventh disc, the charging of interest, as a part of the creation of money, impacts the people who use it.
When the bank credits one's account with the $100,000 loan for a mortgage, it only creates the capital. Nevertheless, it expects we will repay $200,000 in approximately twenty years- otherwise we lose the house. The bank does not create the interest, but stimulates us to enter a competitive battle with the whole world to get hold of the $100,000 difference. Since all the other banks operate in exactly the same way, the system guarantees that some people will end up in bankruptcy. In the final analysis, when we repay our loan with interest, we are taking other people's money.
In other words, the indispensable mechanism used to create the scarcity that is essential to the functioning of money created by bank debt is competition for money that was never created, and it bankrupts those who lose.
To recapitulate, the current monetary system obliges us to incur collective debt, and compete amongst each other within the community in order to make the money we need for our transactions.It's no surprise that ideas such as "The outside world is a hard place" and "survival of the fittest" should be taken at face value by nineteenth century Englishmen, and subsequently by everybody else who bought into the system they designed for themselves. Fortunately, today there are a great many demonstrations that allow for less rigid ideas about the "natural world"
These days, it's difficult to imagine money that isn't issued by some country, or, in the case of the Euro, some group of countries. Nevertheless, it is useful to remember that the concept of a national currency is only a couple of centuries old. The great majority of currencies throughout history were issued privately, by some sovereign, or some other local authority.
Notwithstanding, the creation of a national money is one of the most powerful tools available for fomenting a national awareness. It is a daily proof of the existence of borders between countries, which otherwise are only to be seen by looking at an atlas. A recent example is that after the breakup of the Soviet Union, one of the first acts by newly independent republics was the issuing of their own money. "A common money system is a shared information system that makes it possible to evaluate what is coming in and what is going out" (Charles Handy: The Empty Raincoat, 1995) Sharing a money creates invisible but very powerful links within all sectors of a country, and reinforces a boundary between "what is ours" and "what is theirs". In this way one of the objectives of the euro (the common currency which, in January 1999 replaced the individual currencies of eleven nations) was to stimulate a more unified European consciousness.
The universal adoption of national currencies should not obscure the fact that until 1971 international commerce had a transnational currency-gold. After that time, the US dolllar became the world currency , which had a negative impact on everybody, even the US
Recently, non-geographic communities have emerged, like the internet, and had a significant impact on the internatioal monetary system. In chapters 4 and 8 I will deal with this theme.
Fiat Money
The simple question "Where does money come from?" leads us directly into the world of magic. Money not only appears and disappears, but is literally created out of nothing. To understand this, it is necessary to loook beyond appearances. At first sight, national moneys seem to come from the central banks: in the case of the USA, the Federal Reserve, or the Secretary of the Treasury, but this is not in fact the case. If we want to know where it comes from, we need to take a peek up the magician's sleeve.
If one wants $20 cash, what does one do? One goes to the bank and asks for it. The teller, or the ATM has a look at one's account, and if the balance is sufficient, out comes the cash. No balance, no cash.
In fact, money is what one has in the bank account, since one will only get any if that balance is positive. In the same way, the Central bank issues to one's bank whatever amount one's bank requests, but debits the bank's account accordingly.
So where does the money in one's account come from? Usually from a salary, a pension, or some other deposit. But where does one's employer get the money to deposit? As president Truman famously asked "in the last resort, where does each bill come from?"
Bank debt
In the last chapter I alluded to a fact which may seem surprising. Every dollar, euro, or other national currency in circulation originates as a bank loan. For example, if one meets the requirements for obtaining a mortgage of $100,000 to buy a house (remember this book was written in the nineties) puts a credit into one's account and literally creates the $100,000 out of nothing. This is the real origin of money. Of course, bank loans are supposed to be backed by some guarantee of the borrower's ability to repay the loan: property, a house, a car, some profitable business, etc. Once the credit is granted and the deposit made, one can write a check to the seller of the property, who in turn deposits it into his bank account, and the money begins to circulate indefinitely, right up until someone repays a loan, at which point the money returns to the nothingness from which it arose.
One of the differences between Eastern and Western philosophies is that in the east, nothing is the explicit origin of all things, while in the west, we always summon up God, the Word, the One as prime mover. You could say that in the west we have hidden the emptiness at the center of the monetary system. Could that be a reason for its hypnotic powers?
According to the Radcliffe Commission set up by the British Parliament, "Cash in circulation is that portion of the national debt on which no interest is paid." This simple process by which money is created is given the appropriate name"fiat" money, from the Latin "let there be". "Let there be light" were the first words spoken by God in the bible. The following line goes "He made the light and he saw that it was good" Here we stand before a truly divine function, the creation of something out of nothing by the power of the word.
There is no doubt whatever that the next time we respectfully request a loan, we will experience some intimidation before the banker! In the same way that the magician needs a handkerchief to flutter over his top hat before the rabbit appears, the banker has another veil. During the money creating process, our attention will be directed to boring technical details: the details which drive competition between banks, deposit requirements, and the role of the Federal Reserve in optimizing the system. All these details, like the magicians handkerchief, have the perfectly valid purpose: to regulate the amount of fiduciary money that each bank is allowed to create (that is, the number of rabbits that the magician can pull out of each hat!)
A particularly interesting aspect of this scheme, which dates to pre-Victorian England- is that it allows societies to resolve two apparently contradictory intents: on the one hand, reinforcing the national state, while on the other trusting to the initiatives of private enterprise and in the competition between them. Specifically, this paves the way for privatizing the creation of national money, which theoretically is a public function, as a privilege held in common by the banking community, at the same time as it maintains a competitive pressure on the individual banks for the deposits of cients.
Jackson and McConnell summarize in a few words another important aspect in the constitution of "fiat money" systems: "The money created from bank debt gets its value from the relationship between its usefulness and its scarcity". Said another way, for a "fiat money" system based on bank debt to work, scarcity must be introduced and artificially maintained. This is one of the reasons that our existing system does not self-regulate, but requires the active intervention of central banks to maintain scarcity. It can also be said that the central banks compete amongst themselves to maintain the scarcity of their national currrencies on the international market. This serves at the same time to support the scarcity as well as the relative value of the money.
Further along, we will see that other types of money called "mutual credit systems" do exist, which self-regulate better than national money, and whose value rests on the goods and services existing within the community which accepts them. These currencies, rather than being artificially scarce, can be sufficient to the needs of the community.
Interest
The final characteristic shared by our national currencies is the bearing of interest. The belief is newly arisen that the bearing of interest is intrinsic to the creation of money, whereas we forget that it definitely has not been this way during most of history. In fact, the three biblical religions (Judaism, Christianity and Islam) emphatically forbade the charging of ANY interest on money loaned. Today, only Islam maintains this prohibition. We forget that the Catholic church condemned the charging of interest as the sin of usury until the nineteenth century. (I'll post his aside about this in the next blog)
The impact of interest
The consequences of charging interest are the most difficult to understand and the least known of the four key features of our system. The effect on society is general and powerful, and merits more detailed analysis. The charging of interest in a monetary system has three effects:
1)Indirectly, the charging of interest systematically foments competition among the participants in the system.
2)The need to pay interest is a constant stimulus to the need for permanent economic growth, even while real standards of living are stagnant.
3)Interest concentrates wealth, burdening the great majority of taxes for the benefit of a tiny minority.
The fomenting of competition
Here is an Australian tale, which illustrates the workings of interest in our monetary system, and the way it stimulates competition amongst all those who participate in the system.
Once upon a time there was a village in the Australian outback where people used barter for all their transactions. On market days they came with chickens, eggs, hams, and bread and spent a long time bargaining amongst themselves for whatever they wanted to exchange.
At important times of the year, such as during harvest, or if someone's barn was damaged by a storm, it was customary to help each other out, as the custom had been forever. Everyone knew that when they had a problem, their neighbors would lend a hand.
One day, a stranger wearing elegant shiny black shoes and a white hat showed up on market day, and watched their goings on with a sardonic smile on his face. When he saw a farmer chasing six hens that he intended to trade for a ham, he could no longer contain himself: "Poor people, so primitive" The farmer's wife, who heard him, asked "Do you think you could do a better job than my husband catching these chickens?", to which he replied, "no indeed, but there is a much better way to handle the whole matter". "Oh really," said the farmer's wife, "what is that?" The stranger said, "Meet me over there under that tree, and bring me a cow hide. Have all the other families come too, and I'll show you a better way."
When they brought him the cow hide, he set about cutting it into perfect circles, with a stamp on each one. Then he offered each family ten discs, and explained that each one represented the value of a chicken. He said "Now you can trade the discs instead of running after those pesky chickens."
His argument was very convincing, and the people were impressed.
Once every family had received their ten discs, the man added, "In a year, I'll be back. I'll sit under this very tree, and I'll expect each of you to come with eleven discs. The eleventh disc will be a demonstration of your appreciation for how much easier I've made your life." The six-chicken farmer asked, "How are we going to get an eleventh disc?" and the man answered "You'll figure it out".
********
If that year, the population and annual production of the town remain stable, what will have happened? Remember that the eleventh disc was never created. In this way, even if every family takes good care of their affairs, one of every eleven families have to lose all their discs for the other ten families to have the wherewithal for repayment to the man.
From then on, when some family's barn is damaged by a storm, folks aren't as generous as they used to be, and no longer rush to help prevent trouble. It is much easier to trade discs for chickens on market days, but this new fashion, without even meaning to, undervalues traditional collaboration, and instead creates furious competition for getting the extra discs.
This is how our current monetary system ensures competition amongst its participants. The fable illustrates how the eleventh disc, the charging of interest, as a part of the creation of money, impacts the people who use it.
When the bank credits one's account with the $100,000 loan for a mortgage, it only creates the capital. Nevertheless, it expects we will repay $200,000 in approximately twenty years- otherwise we lose the house. The bank does not create the interest, but stimulates us to enter a competitive battle with the whole world to get hold of the $100,000 difference. Since all the other banks operate in exactly the same way, the system guarantees that some people will end up in bankruptcy. In the final analysis, when we repay our loan with interest, we are taking other people's money.
In other words, the indispensable mechanism used to create the scarcity that is essential to the functioning of money created by bank debt is competition for money that was never created, and it bankrupts those who lose.
What is natural, competition or collaboration?
Professor Imanishi, biosociologist from the Uni versity of Kyoto that the Darwinian concept of nature as a battle for survival has ignored many much more common instances in evolution of symbiosis, shared development, and harmonious co-existence which everywhere prevail. For example, even the human body could not survive long without the symbiotic collaboration of thousands of millions of micro-organisms in the digestive tract.
Elisabeth Sahtouris, a specialist in evolutionary biology demonstrates that predominantly competitive behavior is a feature of juvenile species during their early growth. By contrast, inmature systems such as an old-growth forest, the competition for light is balanced by an intense co-operation among all species. Those species which don't learn to co-operate with those which are interdependent invariably disappear.
Our current money system aims for competition. Thus it is necessary for us to cultivate complementary systems (which we will examine later) in order to balance that competition with collaboration.To recapitulate, the current monetary system obliges us to incur collective debt, and compete amongst each other within the community in order to make the money we need for our transactions.It's no surprise that ideas such as "The outside world is a hard place" and "survival of the fittest" should be taken at face value by nineteenth century Englishmen, and subsequently by everybody else who bought into the system they designed for themselves. Fortunately, today there are a great many demonstrations that allow for less rigid ideas about the "natural world"
Monday, March 28, 2011
Chapter Three- in the first of two parts on money today
As we grow up, we learn about sex and death, but few people ever understand money. Most people think that an understanding of money is to be had from the study of dull subjects like economics and monetary theory, subjects loaded with equations and dense mathematical theory, and without emotional juice. Ironically, as is well understood by those who work in it, the field of money is full of the greatest passion and the strongest emotions: pervasive, violent, volatile, and frighteningly powerful. Until very very recently, with the intention of being "scientific", this underlying emotional background has been systematically ignored by both economic and monetary theorists. Why?
The actual creation of money is largely invisible to the eye, little understood, and as unbelievable as the story of sex when first heard by a small person. Not only do we participate unconsciously in our current money system, but we endow money with the greatest power: the power of money is indeed ancient and magical.
Money is not a thing, but an agreement, and the four key features of our current system, which we completely take for granted, are 1) it's geographic "national" character, 2) created out of nothing ("fiat"), 3)from bank debt, upon which 4)interest is paid.
Most works about money concern what is does: this one addresses what it is. Bernard Lietaer quotes a Clinton representative to the IMF : "Money is magic. Those who work in the Central Bank are magicians. Just like magicians, they prefer not to reveal their tricks" Keynes spoke of the roots of money lost in the mists of time. One of the earliest coins we have is a Sumerian bronze depicting a measure of wheat on one side and the Mother goddess on the other- she whose other responsibilities were fertility and death. To contemplate a dollar bill today is to see an array of ancient and mystical symbols. The workings of the Federal Reserve (and even its building) are hung about with ponderous symbolism. William Greider's best selling history of the Fed is called "Secrets of the Temple", and he says "the Fed does not respond to the people, it speaks for them. Its pronouncements are expressed in mysterious language that people don't understand, although they know its voice to be powerful and important. John Maynard Keynes wrote that more than in any other field of economics, the study of money uses complexity to obscure or evade the truth, but never to reveal it.
One may accept from a friend an IOU for $20, with every confidence of repayment. However the local hardware store will not accept it, even if they know him well. The point is not the confidence you have in your friend, it is the confidence you have that others will have in him. It doesn't matter what you think of the value of a dollar, you have confidence that others will accept it. One's personal belief in something may be obdurately unshakable, but one's belief in the beliefs of others is extremely shaky. It may be affected by the merest whisper of a rumor. If someone at the ends of the earth distrusts the Mexican peso, the Thailand baht, or the Russian ruble we must fear that his neighbors feel the same way. The pieces fall like a game of dominoes, as happened to Mexico in Dec. '94, to Thailand at the end of '97, and to Russia in the summer of '98. Thus money is a "confidence" game, the same way the oracles of Delphi were. Holding at bay these "crises of confidence", a public display of mystery, decorum and majestic ritual are what we have to preserve the long and fragile chain of belief!
To demonstrate that money is not a thing we have only to notice that most of our "money" today is in neither bills nor coin, but in bits and bytes on computers. (Only 3% of the "money" in circulation is in the form of bills.) Since the US left the gold standard in 1971, a dollar has represented the promise of the US government to reimburse whoever presents that dollar with....another dollar.
Here is a simple definition of money: an agreement among the members of a community for use as a method of payment. Each of the highlighted terms is an essential part of the definition. Seen as an agreement, money has a lot in common with political party affiliation, nationality, or marriage. They are all real , even though they exist only in the minds of people. Any agreement is only valid in some community, whether it is the whole world (as is currently the case with the US dollar) or some more limited group (as for example cigarettes used by GIs in the war) The last key function that makes something money is that it can be used for payment.
Note that we are saying "method of payment", not "medium of exchange", a useful distinction. Only modern western culture gives total priority to commercial exchange, leaving aside many other forms of exchange. This lopsided emphasis on commerce is an outlier, far from normal in historic terms, where currency included religious dues and initiations, appreciation for giving birth, marriage portions, and many other social functions. In our time, the currency has many secondary functions, such as accounting unit, reserve of value, speculative instrument, and so forth. But when we consider that many currencies have existed which did not include these functions, for the purposes of this book we consider them secondary.
In summary, a "thing" is the repository of the "magic" of money whenever and wherever some community agrees to accept it as a medium of payment.
The origin of the power of money
Marcel Proust said "things do not have power in themselves, but it is our custom to imbue them with it". James Buchan eloquently described the reason we do so: "a bill symbolizes, and always will, different things to different people: for one, a drink at the bar, for a second, a horse race, for a third, a diamond ring, for a fourth, a charitable donation, for a fifth, payment on a ranch, and for a sixth the possibility of having comfort and security. Money is congealed desire. This process of desire and imagination, taking place millions of times a day, is the motor of our civilization. The objects of human desire are unlimited, or said another way, are only limited by our imagination."
When the money changes, the power changes.
So money is much more than a technical matter. Whenever a money is accepted by a community, and implicit power structure is also accepted. When priests and priestesses represented the ultimate power, temples issued the currency. When kings ran the show, even Aristotle attributed to them "the sovereign power to issue currency". In the Industrial Era, national states became the paradigm of power, and thus automatically the issuers of currency.
In our time, the power of national states is on the ebb, so it ought not to surprise us that non-national monies are arising.Some people think there is only one possible form of money in this modern world, the usual national currency in bills and coins. The magician's first trick as regards money is to make us think we need his help to have any money at all. Unless we confuse the illusion with the facts, this is utterly false. Today, just as in the past, different types of money coexist. One example of such "another" currency is the air miles with which airlines reward their frequent flyers: they are redeemable for much more than air travel. There are other examples which will be reviewed in later chapters. (he says another example is the money that circulates on the internet, but I don't get that at all)
Before looking at alternative, less well known forms of currency, it is valuable to have a clear understanding of the principle characteristics of our traditional national currencies, and the social consequences that they tend to produce.
Money today
All forms of money system facilitate exchanges between people. Whatever money system is set up will invariably use the remarkably stimulating power of that money for a series of additional ends- from enhancing the prestige of the current gods or the government of the time, to particular social purposes.
The principal characteristics of our current system coalesced in pre-Victorian England, before the beginning of the Industrial Revolution. Its legacy-the prevailng monetary system today-seems like the answer to a hypothetical question by the designers: how can we create a monetary system that reinforces our nation state, and concentrates resources so as to support a powerful, systematic, competitive industrial development?
Even if the designers of the system never actually asked such a question, the system they designed shows a remarkable capacity to produce these results. All the countries of the world, independent of their level of development or political orientation, adopted this pre-Victorian English construct. Even the communist countries engaged its key features, except that their banks, instead of being private, were held in the hands of the state, which, as it turned out, made absolutely no difference.
The four key features of the design
All the currencies of the Industrial Era share four features that arose gradually and came first to be seen in England between the seventeenth century and the beginning of the eighteenth. Our current money system was not the product of a group of cigar smoking conspirators in a back room. There was a gradual evolution in habits of payment and banking practice. Remarkable changes occurred in ways of thinking and reaction to collective crises, such as the need to finance wars, and political reactions to the South Seas Bubble of the 1720s. These more or less conscious choices on the parts of the governing elites as well as the masses of people developed a system congruent with the Zeitgeist of pre-Victorian England with the priorities and mentality of an island nation out to expand its empire all around the world.
Many of the features of our current money system do go all the way back to the loans offered by medieval goldsmiths, or to the Renaissance banks of Lombardy and Tuscany. Nevertheless,other ancient traditions were set aside and replaced with new ones more congruent with with the Zeitgeist. For example, the charging of interest, prohibited more than twenty centuries for moral and legal reasons, suddenly became a normal and accepted practice.
While payment and banking technologies have gone on changing and improving over the years, the fundamental objectives of our money system don't appear to have been re-evaluated since those pre-Victorian times. As regards the background objectives of the financial system, the economic engine running our current daily life is the same one that propelled us so efficiently through the Industrial Revolution.
Our everyday money system has four key features that have remained unquestioned. Money depends 1) on a geographically limited national state, 2) is a "fiat" currency (that means "created out of nothing") by 3)bank debt, upon which 4) interest is charged.
It may seem obvious or trivial, but the consequences of each of these features is not generally understood or clear. In examining these features more closely we can discover a rich array of new possibilities. So we will look at each one in turn.
National currencies
These days, it's difficult to imagine money that isn't issued by some country, or, in the case of the Euro, some group of countries. Nevertheless, it is useful to remember that the concept of a national currency is only a couple of centuries old. The great majority of currencies throughout history were issued privately, by some sovereign, or some other local authority.
Notwithstanding, the creation of a national money is one of the most powerful tools available for fomenting a national awareness. It is a daily proof of the existence of borders between countries, which otherwise are only to be seen by looking at an atlas. A recent example is that after the breakup of the Soviet Union, one of the first acts by newly independent republics was the issuing of their own money. "A common money system is a shared information system that makes it possible to evaluate what is coming in and what is going out" (Charles Handy: The Empty Raincoat, 1995) Sharing a money creates invisible but very powerful links within all sectors of a country, and reinforces a boundary between "what is ours" and "what is theirs". In this way one of the objectives of the euro (the common currency which, in January 1999 replaced the individual currencies of eleven nations) was to stimulate a more unified European consciousness.
The universal adoption of national currencies should not obscure the fact that until 1971 international commerce had a transnational currency-gold. After that time, the US dolllar became the world currency , which had a negative impact on everybody, even the US
Recently, non-geographic communities have emerged, like the internet, and had a significant impact on the internatioal monetary system. In chapters 4 and 8 I will deal with this theme.
Fiat Money
The simple question "Where does money come from?" leads us directly into the world of magic. Money not only appears and disappears, but is literally created out of nothing. To understand this, it is necessary to loook beyond appearances. At first sight, national moneys seem to come from the central banks: in the case of the USA, the Federal Reserve, or the Secretary of the Treasury, but this is not in fact the case. If we want to know where it comes from, we need to take a peek up the magician's sleeve.
If one wants $20 cash, what does one do? One goes to the bank and asks for it. The teller, or the ATM has a look at one's account, and if the balance is sufficient, out comes the cash. No balance, no cash.
In fact, money is what one has in the bank account, since one will only get any if that balance is positive. In the same way, the Central bank issues to one's bank whatever amount one's bank requests, but debits the bank's account accordingly.
So where does the money in one's account come from? Usually from a salary, a pension, or some other deposit. But where does one's employer get the money to deposit? As president Truman famously asked "in the last resort, where does each bill come from?"
Bank debt
In the last chapter I alluded to a fact which may seem surprising. Every dollar, euro, or other national currency in circulation originates as a bank loan. For example, if one meets the requirements for obtaining a mortgage of $100,000 to buy a house (remember this book was written in the nineties) puts a credit into one's account and literally creates the $100,000 out of nothing. This is the real origin of money. Of course, bank loans are supposed to be backed by some guarantee of the borrower's ability to repay the loan: property, a house, a car, some profitable business, etc. Once the credit is granted and the deposit made, one can write a check to the seller of the property, who in turn deposits it into his bank account, and the money begins to circulate indefinitely, right up until someone repays a loan, at which point the money returns to the nothingness from which it arose.
One of the differences between Eastern and Western philosophies is that in the east, nothing is the explicit origin of all things, while in the west, we always summon up God, the Word, the One as prime mover. You could say that in the west we have hidden the emptiness at the center of the monetary system. Could that be a reason for its hypnotic powers?
According to the Radcliffe Commission set up by the British Parliament, "Cash in circulation is that portion of the national debt on which no interest is paid." This simple process by which money is created is known by the impressive name of "Fiat" currency
The actual creation of money is largely invisible to the eye, little understood, and as unbelievable as the story of sex when first heard by a small person. Not only do we participate unconsciously in our current money system, but we endow money with the greatest power: the power of money is indeed ancient and magical.
Money is not a thing, but an agreement, and the four key features of our current system, which we completely take for granted, are 1) it's geographic "national" character, 2) created out of nothing ("fiat"), 3)from bank debt, upon which 4)interest is paid.
Most works about money concern what is does: this one addresses what it is. Bernard Lietaer quotes a Clinton representative to the IMF : "Money is magic. Those who work in the Central Bank are magicians. Just like magicians, they prefer not to reveal their tricks" Keynes spoke of the roots of money lost in the mists of time. One of the earliest coins we have is a Sumerian bronze depicting a measure of wheat on one side and the Mother goddess on the other- she whose other responsibilities were fertility and death. To contemplate a dollar bill today is to see an array of ancient and mystical symbols. The workings of the Federal Reserve (and even its building) are hung about with ponderous symbolism. William Greider's best selling history of the Fed is called "Secrets of the Temple", and he says "the Fed does not respond to the people, it speaks for them. Its pronouncements are expressed in mysterious language that people don't understand, although they know its voice to be powerful and important. John Maynard Keynes wrote that more than in any other field of economics, the study of money uses complexity to obscure or evade the truth, but never to reveal it.
One may accept from a friend an IOU for $20, with every confidence of repayment. However the local hardware store will not accept it, even if they know him well. The point is not the confidence you have in your friend, it is the confidence you have that others will have in him. It doesn't matter what you think of the value of a dollar, you have confidence that others will accept it. One's personal belief in something may be obdurately unshakable, but one's belief in the beliefs of others is extremely shaky. It may be affected by the merest whisper of a rumor. If someone at the ends of the earth distrusts the Mexican peso, the Thailand baht, or the Russian ruble we must fear that his neighbors feel the same way. The pieces fall like a game of dominoes, as happened to Mexico in Dec. '94, to Thailand at the end of '97, and to Russia in the summer of '98. Thus money is a "confidence" game, the same way the oracles of Delphi were. Holding at bay these "crises of confidence", a public display of mystery, decorum and majestic ritual are what we have to preserve the long and fragile chain of belief!
To demonstrate that money is not a thing we have only to notice that most of our "money" today is in neither bills nor coin, but in bits and bytes on computers. (Only 3% of the "money" in circulation is in the form of bills.) Since the US left the gold standard in 1971, a dollar has represented the promise of the US government to reimburse whoever presents that dollar with....another dollar.
Here is a simple definition of money: an agreement among the members of a community for use as a method of payment. Each of the highlighted terms is an essential part of the definition. Seen as an agreement, money has a lot in common with political party affiliation, nationality, or marriage. They are all real , even though they exist only in the minds of people. Any agreement is only valid in some community, whether it is the whole world (as is currently the case with the US dollar) or some more limited group (as for example cigarettes used by GIs in the war) The last key function that makes something money is that it can be used for payment.
Note that we are saying "method of payment", not "medium of exchange", a useful distinction. Only modern western culture gives total priority to commercial exchange, leaving aside many other forms of exchange. This lopsided emphasis on commerce is an outlier, far from normal in historic terms, where currency included religious dues and initiations, appreciation for giving birth, marriage portions, and many other social functions. In our time, the currency has many secondary functions, such as accounting unit, reserve of value, speculative instrument, and so forth. But when we consider that many currencies have existed which did not include these functions, for the purposes of this book we consider them secondary.
In summary, a "thing" is the repository of the "magic" of money whenever and wherever some community agrees to accept it as a medium of payment.
The origin of the power of money
Marcel Proust said "things do not have power in themselves, but it is our custom to imbue them with it". James Buchan eloquently described the reason we do so: "a bill symbolizes, and always will, different things to different people: for one, a drink at the bar, for a second, a horse race, for a third, a diamond ring, for a fourth, a charitable donation, for a fifth, payment on a ranch, and for a sixth the possibility of having comfort and security. Money is congealed desire. This process of desire and imagination, taking place millions of times a day, is the motor of our civilization. The objects of human desire are unlimited, or said another way, are only limited by our imagination."
When the money changes, the power changes.
So money is much more than a technical matter. Whenever a money is accepted by a community, and implicit power structure is also accepted. When priests and priestesses represented the ultimate power, temples issued the currency. When kings ran the show, even Aristotle attributed to them "the sovereign power to issue currency". In the Industrial Era, national states became the paradigm of power, and thus automatically the issuers of currency.
In our time, the power of national states is on the ebb, so it ought not to surprise us that non-national monies are arising.Some people think there is only one possible form of money in this modern world, the usual national currency in bills and coins. The magician's first trick as regards money is to make us think we need his help to have any money at all. Unless we confuse the illusion with the facts, this is utterly false. Today, just as in the past, different types of money coexist. One example of such "another" currency is the air miles with which airlines reward their frequent flyers: they are redeemable for much more than air travel. There are other examples which will be reviewed in later chapters. (he says another example is the money that circulates on the internet, but I don't get that at all)
Before looking at alternative, less well known forms of currency, it is valuable to have a clear understanding of the principle characteristics of our traditional national currencies, and the social consequences that they tend to produce.
Money today
All forms of money system facilitate exchanges between people. Whatever money system is set up will invariably use the remarkably stimulating power of that money for a series of additional ends- from enhancing the prestige of the current gods or the government of the time, to particular social purposes.
The principal characteristics of our current system coalesced in pre-Victorian England, before the beginning of the Industrial Revolution. Its legacy-the prevailng monetary system today-seems like the answer to a hypothetical question by the designers: how can we create a monetary system that reinforces our nation state, and concentrates resources so as to support a powerful, systematic, competitive industrial development?
Even if the designers of the system never actually asked such a question, the system they designed shows a remarkable capacity to produce these results. All the countries of the world, independent of their level of development or political orientation, adopted this pre-Victorian English construct. Even the communist countries engaged its key features, except that their banks, instead of being private, were held in the hands of the state, which, as it turned out, made absolutely no difference.
The four key features of the design
All the currencies of the Industrial Era share four features that arose gradually and came first to be seen in England between the seventeenth century and the beginning of the eighteenth. Our current money system was not the product of a group of cigar smoking conspirators in a back room. There was a gradual evolution in habits of payment and banking practice. Remarkable changes occurred in ways of thinking and reaction to collective crises, such as the need to finance wars, and political reactions to the South Seas Bubble of the 1720s. These more or less conscious choices on the parts of the governing elites as well as the masses of people developed a system congruent with the Zeitgeist of pre-Victorian England with the priorities and mentality of an island nation out to expand its empire all around the world.
Many of the features of our current money system do go all the way back to the loans offered by medieval goldsmiths, or to the Renaissance banks of Lombardy and Tuscany. Nevertheless,other ancient traditions were set aside and replaced with new ones more congruent with with the Zeitgeist. For example, the charging of interest, prohibited more than twenty centuries for moral and legal reasons, suddenly became a normal and accepted practice.
While payment and banking technologies have gone on changing and improving over the years, the fundamental objectives of our money system don't appear to have been re-evaluated since those pre-Victorian times. As regards the background objectives of the financial system, the economic engine running our current daily life is the same one that propelled us so efficiently through the Industrial Revolution.
Our everyday money system has four key features that have remained unquestioned. Money depends 1) on a geographically limited national state, 2) is a "fiat" currency (that means "created out of nothing") by 3)bank debt, upon which 4) interest is charged.
It may seem obvious or trivial, but the consequences of each of these features is not generally understood or clear. In examining these features more closely we can discover a rich array of new possibilities. So we will look at each one in turn.
National currencies
These days, it's difficult to imagine money that isn't issued by some country, or, in the case of the Euro, some group of countries. Nevertheless, it is useful to remember that the concept of a national currency is only a couple of centuries old. The great majority of currencies throughout history were issued privately, by some sovereign, or some other local authority.
Notwithstanding, the creation of a national money is one of the most powerful tools available for fomenting a national awareness. It is a daily proof of the existence of borders between countries, which otherwise are only to be seen by looking at an atlas. A recent example is that after the breakup of the Soviet Union, one of the first acts by newly independent republics was the issuing of their own money. "A common money system is a shared information system that makes it possible to evaluate what is coming in and what is going out" (Charles Handy: The Empty Raincoat, 1995) Sharing a money creates invisible but very powerful links within all sectors of a country, and reinforces a boundary between "what is ours" and "what is theirs". In this way one of the objectives of the euro (the common currency which, in January 1999 replaced the individual currencies of eleven nations) was to stimulate a more unified European consciousness.
The universal adoption of national currencies should not obscure the fact that until 1971 international commerce had a transnational currency-gold. After that time, the US dolllar became the world currency , which had a negative impact on everybody, even the US
Recently, non-geographic communities have emerged, like the internet, and had a significant impact on the internatioal monetary system. In chapters 4 and 8 I will deal with this theme.
Fiat Money
The simple question "Where does money come from?" leads us directly into the world of magic. Money not only appears and disappears, but is literally created out of nothing. To understand this, it is necessary to loook beyond appearances. At first sight, national moneys seem to come from the central banks: in the case of the USA, the Federal Reserve, or the Secretary of the Treasury, but this is not in fact the case. If we want to know where it comes from, we need to take a peek up the magician's sleeve.
If one wants $20 cash, what does one do? One goes to the bank and asks for it. The teller, or the ATM has a look at one's account, and if the balance is sufficient, out comes the cash. No balance, no cash.
In fact, money is what one has in the bank account, since one will only get any if that balance is positive. In the same way, the Central bank issues to one's bank whatever amount one's bank requests, but debits the bank's account accordingly.
So where does the money in one's account come from? Usually from a salary, a pension, or some other deposit. But where does one's employer get the money to deposit? As president Truman famously asked "in the last resort, where does each bill come from?"
Bank debt
In the last chapter I alluded to a fact which may seem surprising. Every dollar, euro, or other national currency in circulation originates as a bank loan. For example, if one meets the requirements for obtaining a mortgage of $100,000 to buy a house (remember this book was written in the nineties) puts a credit into one's account and literally creates the $100,000 out of nothing. This is the real origin of money. Of course, bank loans are supposed to be backed by some guarantee of the borrower's ability to repay the loan: property, a house, a car, some profitable business, etc. Once the credit is granted and the deposit made, one can write a check to the seller of the property, who in turn deposits it into his bank account, and the money begins to circulate indefinitely, right up until someone repays a loan, at which point the money returns to the nothingness from which it arose.
One of the differences between Eastern and Western philosophies is that in the east, nothing is the explicit origin of all things, while in the west, we always summon up God, the Word, the One as prime mover. You could say that in the west we have hidden the emptiness at the center of the monetary system. Could that be a reason for its hypnotic powers?
According to the Radcliffe Commission set up by the British Parliament, "Cash in circulation is that portion of the national debt on which no interest is paid." This simple process by which money is created is known by the impressive name of "Fiat" currency
Saturday, February 19, 2011
The central banks of the central banks: international money flows
Two supranational organizations exist for co-ordination among world's banks. The larger is the International Monetary Fund. It was created in 1945 to supervise the agreements of Bretton Woods and audits all the world's banks: its 182 member banks (the central banks of their respective countries) can turn to it for loans when things go bad. Originally it made loans for the rebuilding of postwar Europe. It has come to be known for strong-arming third world debtor countries into cutting spending on health care and education in order to repay loans and is often seen as an organization of financial enforcers. It's head office is in Washington & the US has had a highly dominant position.
The second organization for the co-ordination of the world banking system, the Bank for International Settlements in Basel, consists of central bankers from its ten founding countries, plus Swizerland. It began after the First World War to administer German reparation payments, and became a place where important questions could be addressed with the greatest discretion. No politicians, no treasury secretaries, and no heads of state are invited to join its debates. This club of central bankers, whose clients are other banks, holds its discussions in the greatest secrecy. It puts out a highly respected annual report on the state of the world's financial system.
The system in question has become increasingly unresponsive to measures available to the IMF and BIS. Explosive developments in the currency markets imply a shift of power out of the hands of even the largest of the nation states and into the financial market casino. When the president of France, Francois Mitterand, attempted reforms which were not to the taste of the financial markets in the eighties, he was forced to stop. The British and Scandinavian governments were similarly cowed by the markets in 1992, the Mexican government in 1994, the governments of Thailand, Malaysia, Indonesia and South Korea in 1997, the government of Russia in 1998. Billions of speculative investment dollars can flow into or out of a country in seconds- and does. More recently the governments of Greece and Ireland have been struck. This "hot money" has become a kind of world government, and has inexorably eaten away the power of sovereign national states. In addition to causing such a power shift, the speculative money flourishes maximally where there is highest volatility- the opposite to the wishes of central bankers for stability.
In the sixties, proponents of floating exchange rates theorized that with the "discipline of the free market " volatility in currency exchange would disappear. A study by the OECD in 1995 showed that the opposite had happened. It is not really so hard to see why volatility rises with increased volume of trading. If, in 1986 when the daily volume was $60 billion, 5% of currency traders disliked our currency and sold, it meant a $3 billion move against our currency. The central bank could manage what they call an "open market" operation to buy back that currency and stop the fall. With volumes of currency trading many times greater today, no central bank has enough money to do so any longer. This is what Ben Bernanke, the chief of the Federal Reserve, meant last week when he said that "capital flows are once again posing some notable challenges for international macroeconomic and financial stability."
(In 1944, the Bretton Woods conference created five institutions, another of which is the World Bank. It exists to provide loans to developing countries for capital development with the aim of reducing poverty. Until recently, that has not been seen as part of the central system for financial management)
The value of our money is currently determined by a global casino where over 98% of trades are speculative. Those who save money or have a retirement plan are exposed to this risk, even if they don't personally invest. Their banks invest, and so do their pension funds. Those who have no savings are equally exposed when their tax money is used up to prevent the collapse of the financial system, and is not available to pay for garbage collection, schools, public libraries and so forth. Our money is a system of symbolic mutual confidence, and many past civilizations have fallen along with their money. Rather than debating interest rates, the threat of inflation, or the gold standard, we need to rediscover our communities and the kind of world in which we want to live together. I recommend the website of Bernard Lietaer.
The second organization for the co-ordination of the world banking system, the Bank for International Settlements in Basel, consists of central bankers from its ten founding countries, plus Swizerland. It began after the First World War to administer German reparation payments, and became a place where important questions could be addressed with the greatest discretion. No politicians, no treasury secretaries, and no heads of state are invited to join its debates. This club of central bankers, whose clients are other banks, holds its discussions in the greatest secrecy. It puts out a highly respected annual report on the state of the world's financial system.
The system in question has become increasingly unresponsive to measures available to the IMF and BIS. Explosive developments in the currency markets imply a shift of power out of the hands of even the largest of the nation states and into the financial market casino. When the president of France, Francois Mitterand, attempted reforms which were not to the taste of the financial markets in the eighties, he was forced to stop. The British and Scandinavian governments were similarly cowed by the markets in 1992, the Mexican government in 1994, the governments of Thailand, Malaysia, Indonesia and South Korea in 1997, the government of Russia in 1998. Billions of speculative investment dollars can flow into or out of a country in seconds- and does. More recently the governments of Greece and Ireland have been struck. This "hot money" has become a kind of world government, and has inexorably eaten away the power of sovereign national states. In addition to causing such a power shift, the speculative money flourishes maximally where there is highest volatility- the opposite to the wishes of central bankers for stability.
In the sixties, proponents of floating exchange rates theorized that with the "discipline of the free market " volatility in currency exchange would disappear. A study by the OECD in 1995 showed that the opposite had happened. It is not really so hard to see why volatility rises with increased volume of trading. If, in 1986 when the daily volume was $60 billion, 5% of currency traders disliked our currency and sold, it meant a $3 billion move against our currency. The central bank could manage what they call an "open market" operation to buy back that currency and stop the fall. With volumes of currency trading many times greater today, no central bank has enough money to do so any longer. This is what Ben Bernanke, the chief of the Federal Reserve, meant last week when he said that "capital flows are once again posing some notable challenges for international macroeconomic and financial stability."
(In 1944, the Bretton Woods conference created five institutions, another of which is the World Bank. It exists to provide loans to developing countries for capital development with the aim of reducing poverty. Until recently, that has not been seen as part of the central system for financial management)
The value of our money is currently determined by a global casino where over 98% of trades are speculative. Those who save money or have a retirement plan are exposed to this risk, even if they don't personally invest. Their banks invest, and so do their pension funds. Those who have no savings are equally exposed when their tax money is used up to prevent the collapse of the financial system, and is not available to pay for garbage collection, schools, public libraries and so forth. Our money is a system of symbolic mutual confidence, and many past civilizations have fallen along with their money. Rather than debating interest rates, the threat of inflation, or the gold standard, we need to rediscover our communities and the kind of world in which we want to live together. I recommend the website of Bernard Lietaer.
Thursday, February 10, 2011
The "flow" of money!
Currency functions as a central nervous system: by its "flow" it sets the value of all other assets in a given community. Bonds are an attractive investment so long as the money in which they are denominated is stable and maintains its value: that is, when inflation is low or falling. Stocks fall when interest rates rise, and when an economy is in trouble, its interest rates can be expected to rise dramatically as the central bank tries (by offering high rates) to tempt investors (who notice the country's trouble) from taking their money out. The effect of currency value on real estate is more indirect. On the one hand, real estate is a well known "hedge against inflation", meaning that it keeps its relative value. Another way of saying "hedge against inflation" is that as the value of the currency falls, the price of real estate rises in a compensatory degree, so one is "hedged" or protected. Nevertheless, an individual in financial difficulties who can't pay his mortgage easily loses money if he can't wait for his price and has to sell right away. That is what is meant by real estate being a non-liquid asset....it can't immediately be turned into cash (liquid money!) After the 1929 crash, real estate values fell as much as stock value. At that time, the only assets that retained value were treasury bills...that is, the bonds of the US government, which could not declare bankruptcy, and could print more money if it needed. In his book "How Credit-Money shapes the Economy: the United States in a Global System", Professor Robert Guttmann says the only way we could see another real depression would be through collapse of the currency.
The interconnectedness of financial markets means that currency collapse is a contagious disease. Such befell the currency of Thailand in 1997, when it fell 42%. This was followed by falls in the currencies of 9 other countries: four fell less than 42%, but the Indonesian currency fell 80% and the Russian currency 86%
Banks have always been "special". The nature of their classical business was to take in (low risk) deposits for which they paid a small interest to depositors , and loan out this money at a higher interest rate to entrepreneurs, that is to say, people who were willing to risk entering or expanding some business. This has always called for bankers to assess those who take loans. If they make good calls, they keep the profits, but when they lose, depositors lose as well. These days the government insures depositors, so the tax-payers lose when the bankers succumb to the temptation of higher profits and make risky loans. The profits of the banks stay with the banks, but the problems of the banks become everybody's problems, as we have clearly seen in 2008.
No one has ever figured out how to keep the banks under control, but "central banks" have been one attempt at it. Central banks were so called because they were usually located in the capital of whatever country, and they had a monopoly on the emission of "legal tender" for that country. When some local bank got itself in trouble, the central bank could be called upon for a loan -"the lender of last resort". This arrangement could prevent "runs on the bank" (such as the one prevented by Jimmy Stewart as a banker in "It's a Wonderful Life" where the local community itself saved the day and does not need to call upon the central bank)
From time to time the central banks themselves gave way to temptation and the bank of one country might discretely bail out the bank of a neighboring country when it managed to get itself into trouble (The Bank of France bailed out the Bank of England in 1825, and in 1860 the Bank of England bailed out the Bank of France in return) Such episodes were infrequent, and hushed up. The Federal Reserve System in the US was created in 1913 on the model of these earlier central banks. It wasn't until the Bretton Woods in 1944 that modern central banks formally took specific responsibilities- a formal commitment to being a lender of last resort for smaller banks, and the control of inflation.They do this indirectly: they set the interest rates that other banks must pay, and they buy and sell treasury bills. In the past thirty years, more and more economic turmoil has spilled over from one country to another, so that the International Monetary Fund and the Bank for International Settlement have been increasingly involved in attempts to contain the contagions. This is far from the "world government" that so frightens to many people. More about them next time.
The interconnectedness of financial markets means that currency collapse is a contagious disease. Such befell the currency of Thailand in 1997, when it fell 42%. This was followed by falls in the currencies of 9 other countries: four fell less than 42%, but the Indonesian currency fell 80% and the Russian currency 86%
Banks have always been "special". The nature of their classical business was to take in (low risk) deposits for which they paid a small interest to depositors , and loan out this money at a higher interest rate to entrepreneurs, that is to say, people who were willing to risk entering or expanding some business. This has always called for bankers to assess those who take loans. If they make good calls, they keep the profits, but when they lose, depositors lose as well. These days the government insures depositors, so the tax-payers lose when the bankers succumb to the temptation of higher profits and make risky loans. The profits of the banks stay with the banks, but the problems of the banks become everybody's problems, as we have clearly seen in 2008.
No one has ever figured out how to keep the banks under control, but "central banks" have been one attempt at it. Central banks were so called because they were usually located in the capital of whatever country, and they had a monopoly on the emission of "legal tender" for that country. When some local bank got itself in trouble, the central bank could be called upon for a loan -"the lender of last resort". This arrangement could prevent "runs on the bank" (such as the one prevented by Jimmy Stewart as a banker in "It's a Wonderful Life" where the local community itself saved the day and does not need to call upon the central bank)
From time to time the central banks themselves gave way to temptation and the bank of one country might discretely bail out the bank of a neighboring country when it managed to get itself into trouble (The Bank of France bailed out the Bank of England in 1825, and in 1860 the Bank of England bailed out the Bank of France in return) Such episodes were infrequent, and hushed up. The Federal Reserve System in the US was created in 1913 on the model of these earlier central banks. It wasn't until the Bretton Woods in 1944 that modern central banks formally took specific responsibilities- a formal commitment to being a lender of last resort for smaller banks, and the control of inflation.They do this indirectly: they set the interest rates that other banks must pay, and they buy and sell treasury bills. In the past thirty years, more and more economic turmoil has spilled over from one country to another, so that the International Monetary Fund and the Bank for International Settlement have been increasingly involved in attempts to contain the contagions. This is far from the "world government" that so frightens to many people. More about them next time.
Sunday, January 30, 2011
Who wins when we "complexify" life?
In addition to revolutionizing the banking system and accelerating the international movement of money, it was the power of computing that made possible the explosive development of a whole new wave of sophisticated "products" called "financial derivatives" in the nineties. Since 2008, we have all heard about them, and they are usually hard to understand.
The essence of these "products" is supposed to be the opportunity to tease apart the different elements of risk, and market them separately. For example, if one buys the yen denominated bonds of a Japanese company, there are at least three separate risks involved. There is the risk that the value of the yen will change relative to one's own money. There is the risk that Japanese interest rates will change (at the discretion of the Japanese central bank. Remember that the value of one's bond, which pays a certain interest rate, will fall if the general interest rates in the community move up) There is the risk that the company itself is poorly managed, and defaults on its agreement to pay interest on its bonds. As an investor, you may be comfortable with your ability to judge the management of the company, but not so sure of your ability to assess the forces at work moving the Japanese central bank's position on interest rates, and not so sure you understand the forces operating on the value of the yen.
Bernard Lietaer compares this with a technology that would allow you (instead of just going to a concert) to choose your favorite tenor, your favorite violinist, your favorite conductor, and have them interpret your favorite opera. If you knew what you were doing, you might come up with a fantastic performance. Similarly, you might create a stupendous investment portfolio- you could buy shares in the company and shelter yourself against the volatility in the currency and interest rates. However, when it comes to separating the elements of risk for your personal investment portfolio, it seems that most people are really not up to this level of complexity.
In fact, it seems to me that we have all now heard way too much about financial derivatives. It seems to me that even most of the so-called professionals (in AIG, and Lehman brothers, etc.etc. etc/) didn't know what they were selling. Those who end up holding the most risk are usually the least capable of managing it, but in our recent financial melt-down, even those who were supposed to be sophisticates didn't know what they were doing. "Financial engineers" developed complex mathematical formulas about risk, and in the end, they choose to live in a world that has very little contact with ordinary human life. So they missed the big picture and we all went down the financial drain.
Once upon a time, a local bank offered local mortgages to people in the community who were thought to be a good bet to repay their loan. In those far off days, people had to come up with a sizable down payment as well, for the purpose of demonstrating their competence in the world of money. During the recent real estate bubble, banks "packaged" large numbers of mortgages ("pooled" them) and sold them off in "sections". A very small percentage of mortgage holders traditionally defaulted, and the "sections" could be sold for different prices depending on whether the buyers were willing to take a higher risk or wanted a lower one. The buyers who were willing to take a higher risk got higher interest. And so forth. But as we have seen, the end result was often that nobody knew who owned one particular mortgage (since they had all been pooled)
Bernard Lietaer wrote that these financial derivatives have come to stay, because used correctly, they are highly profitable. That part rings true for what I see as the shark pool of the professional financial world, whose interest appears to be profit no matter what the cost. He also says that used correctly financial derivatives are a benefit to society. I must say, the benefit is not clear to me, but I will keep reading. We are not going to put the computer genie back in the box, and there has always been more complexity than any of us can manage.
The essence of these "products" is supposed to be the opportunity to tease apart the different elements of risk, and market them separately. For example, if one buys the yen denominated bonds of a Japanese company, there are at least three separate risks involved. There is the risk that the value of the yen will change relative to one's own money. There is the risk that Japanese interest rates will change (at the discretion of the Japanese central bank. Remember that the value of one's bond, which pays a certain interest rate, will fall if the general interest rates in the community move up) There is the risk that the company itself is poorly managed, and defaults on its agreement to pay interest on its bonds. As an investor, you may be comfortable with your ability to judge the management of the company, but not so sure of your ability to assess the forces at work moving the Japanese central bank's position on interest rates, and not so sure you understand the forces operating on the value of the yen.
Bernard Lietaer compares this with a technology that would allow you (instead of just going to a concert) to choose your favorite tenor, your favorite violinist, your favorite conductor, and have them interpret your favorite opera. If you knew what you were doing, you might come up with a fantastic performance. Similarly, you might create a stupendous investment portfolio- you could buy shares in the company and shelter yourself against the volatility in the currency and interest rates. However, when it comes to separating the elements of risk for your personal investment portfolio, it seems that most people are really not up to this level of complexity.
In fact, it seems to me that we have all now heard way too much about financial derivatives. It seems to me that even most of the so-called professionals (in AIG, and Lehman brothers, etc.etc. etc/) didn't know what they were selling. Those who end up holding the most risk are usually the least capable of managing it, but in our recent financial melt-down, even those who were supposed to be sophisticates didn't know what they were doing. "Financial engineers" developed complex mathematical formulas about risk, and in the end, they choose to live in a world that has very little contact with ordinary human life. So they missed the big picture and we all went down the financial drain.
Once upon a time, a local bank offered local mortgages to people in the community who were thought to be a good bet to repay their loan. In those far off days, people had to come up with a sizable down payment as well, for the purpose of demonstrating their competence in the world of money. During the recent real estate bubble, banks "packaged" large numbers of mortgages ("pooled" them) and sold them off in "sections". A very small percentage of mortgage holders traditionally defaulted, and the "sections" could be sold for different prices depending on whether the buyers were willing to take a higher risk or wanted a lower one. The buyers who were willing to take a higher risk got higher interest. And so forth. But as we have seen, the end result was often that nobody knew who owned one particular mortgage (since they had all been pooled)
Bernard Lietaer wrote that these financial derivatives have come to stay, because used correctly, they are highly profitable. That part rings true for what I see as the shark pool of the professional financial world, whose interest appears to be profit no matter what the cost. He also says that used correctly financial derivatives are a benefit to society. I must say, the benefit is not clear to me, but I will keep reading. We are not going to put the computer genie back in the box, and there has always been more complexity than any of us can manage.
Monday, January 10, 2011
Why are we seeing all this speculation?
The extraordinary growth of speculation began in 1971, when Richard Nixon removed the link between the dollar and gold. Bernard Lietaer was one of the few to originally understand and profit mightily from the newly unregulated market, as he recounts in "Credentials of a Flying Fish"
In the eighties Margaret Thatcher and Ronald Reagan deregulated the financial markets, and the Baker Plan extended this deregulation to sixteen developing countries. The deregulation permitted a much wider group of players to trade in the currency markets.
Michael Durbin, author of “All About High-Frequency Trading," is quoted in the New York Times (Jan 2011) as saying that most of the industry is legitimate and benefits investors, but " the rules need to be strengthened to curb some disturbing practices....markets are there for capital formation and long-term investment, not for gaming.” In fact, gaming has long since overtaken the markets, with great increases in volatility. This is contrary to what was expected and hoped for by the original deregulators, who really did believe that "the invisible hand of the market" would encourage stability. Stability is the enemy of traders, whose profits come from fluctuations.
On one hand, technological change (computers and the internet) has led in some ways to a fairer market. To-day, broker's commissions are often negligible, one can execute a trade from a mobile anywhere on the planet, and much more information is available about companies to anyone who cares to read.
On the other hand, no one, including the regulators, knows how to manage the unparalleled speed, volume and volatility of these markets. Speaking in December 2010, Bart Chilton, a member of the futures trading commission, addressed the advent of what he called "Star Trek gee-whiz high frequency trading. technology.... one of the most game-changing and tumultuous shifts we have ever seen in financial markets.”
The Welsh economist Glyn Davies researched 5000 years of monetary history for his 1994 book, A History Of Money From Ancient Times To The Present Day. He concluded that there had been only two truly "game-changing" developments. At the end of the Middle Ages, the printing of paper money superceded the minting of coin, and banks took over the privilege of issuing money from monarchs. Today, with the development of electronic transfer of funds, a great battle is underway to control these new forms of money. Banks have become computerized telecoms, while telecoms, credit card processors, and internet merchants have discovered they can offer the same services as banks. Nobody knows what the consequences will be.
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Wednesday, January 5, 2011
Your treasure will be safe
"Sell what you have and give to those in need. This will store up treasure for you in heaven! And the purses of heaven have no holes in them. Your treasure will be safe--no thief can steal it and no moth can destroy it."-Luke 12:33
My parents considered debt a fearful state- always to be avoided. Their families had been administrators, military adventurers, farmers and merchants in England, Africa, and America. They were part of that remarkable historical anomaly, the "middle class". In Ontario, in the 1950s, we learned that the rise of the middle class had provided an unusual and valuable stability to society. As a child, I thought that class distinctions were a matter of history. It wasn't until I went to McGill University in 1960 that I discovered the continued existence of an actual "upper class" whose fathers went on golfing holidays to Scotland, and whose siblings all attended a certain few schools.They seemed irrelevant to me.
My parent's families both had another stream, though: a stream of priests, nuns, and monastics, who followed Luke's advice, and whose attitude to the accumulation of wealth lay like a shadow across our acquisitive natures. When I entered medical school it was a kind of compromise with the call to the convent. I just wasn't willing to have a life without men, although it never occurred to me that medicine was an avenue for creating wealth. It was the opportunity to be of service without the requirement to relinquish all the pleasures of life!
Now that Bernard Lietaer's own website makes his remarkable contribution directly available to my friends, this blog is going to shift away from whatever constraint I felt about translating "The Future of Money". I am still following the book, because I want to really understand it. Some version of it ought to be an elementary school textbook about money. However, I am knitting up my own version as I go along. For the moment, the question is what to do about the accumulation of wealth. By sticking to my family's ideas of avoiding debt, I have accumulated some wealth: now I confront that perennial problem of the wealthy-what to do with it?
It is time we taught everyone money basics. There is a middle class mindset, and a lower class mindset, and both are steeped in ignorance of our money system. My college friends, the children of the wealthy, had some knowledge about real estate, bonds, trust funds, investing, and so forth. The girls had studied such things as interior decorating, and required husbands who could finance periodic skiing trips to Switzerland. They were generous and unworried. They lived with plenty, and imagined a life of plenty. In spite of my own accumulation of wealth, I do not think that way.
A review of the means available for storing up one's earthly treasures creates an excellent background for understanding what is going on while our financial system does its endless alarming contortions.
In my lifetime cash has been a very poor way to store value. Between 1971 and 1996 the US dollar fell to 25 cents in value. This was not a particularly bad performance by the US.... it came17th out of 108 currencies- during that period the winner was Germany (100-42) and the loser Brazil (100-0) There have been some periods when money held value, but it's basically not a good plan to put cash under your mattress. Land was the traditional store of value ever since the hunter gatherers settled down to farming. With the arrival of the Industrial Era major wealth came to be associated with shareholding in enterprise-stocks and bonds. In recent times, both property ownership and stock-holding have led people to enormous losses.
Who seems left to be winning? Those would be the winners in the global casino created by deregulation and computerization in the past 30 years. Huge winners, huge losers, there is no safety here. If we desire some safety, we may need to rediscover our care for one another. This will likely be very interesting (there is an old saying "May you not live in interesting times") We live in interesting times.
My parents considered debt a fearful state- always to be avoided. Their families had been administrators, military adventurers, farmers and merchants in England, Africa, and America. They were part of that remarkable historical anomaly, the "middle class". In Ontario, in the 1950s, we learned that the rise of the middle class had provided an unusual and valuable stability to society. As a child, I thought that class distinctions were a matter of history. It wasn't until I went to McGill University in 1960 that I discovered the continued existence of an actual "upper class" whose fathers went on golfing holidays to Scotland, and whose siblings all attended a certain few schools.They seemed irrelevant to me.
My parent's families both had another stream, though: a stream of priests, nuns, and monastics, who followed Luke's advice, and whose attitude to the accumulation of wealth lay like a shadow across our acquisitive natures. When I entered medical school it was a kind of compromise with the call to the convent. I just wasn't willing to have a life without men, although it never occurred to me that medicine was an avenue for creating wealth. It was the opportunity to be of service without the requirement to relinquish all the pleasures of life!
Now that Bernard Lietaer's own website makes his remarkable contribution directly available to my friends, this blog is going to shift away from whatever constraint I felt about translating "The Future of Money". I am still following the book, because I want to really understand it. Some version of it ought to be an elementary school textbook about money. However, I am knitting up my own version as I go along. For the moment, the question is what to do about the accumulation of wealth. By sticking to my family's ideas of avoiding debt, I have accumulated some wealth: now I confront that perennial problem of the wealthy-what to do with it?
It is time we taught everyone money basics. There is a middle class mindset, and a lower class mindset, and both are steeped in ignorance of our money system. My college friends, the children of the wealthy, had some knowledge about real estate, bonds, trust funds, investing, and so forth. The girls had studied such things as interior decorating, and required husbands who could finance periodic skiing trips to Switzerland. They were generous and unworried. They lived with plenty, and imagined a life of plenty. In spite of my own accumulation of wealth, I do not think that way.
A review of the means available for storing up one's earthly treasures creates an excellent background for understanding what is going on while our financial system does its endless alarming contortions.
In my lifetime cash has been a very poor way to store value. Between 1971 and 1996 the US dollar fell to 25 cents in value. This was not a particularly bad performance by the US.... it came17th out of 108 currencies- during that period the winner was Germany (100-42) and the loser Brazil (100-0) There have been some periods when money held value, but it's basically not a good plan to put cash under your mattress. Land was the traditional store of value ever since the hunter gatherers settled down to farming. With the arrival of the Industrial Era major wealth came to be associated with shareholding in enterprise-stocks and bonds. In recent times, both property ownership and stock-holding have led people to enormous losses.
Who seems left to be winning? Those would be the winners in the global casino created by deregulation and computerization in the past 30 years. Huge winners, huge losers, there is no safety here. If we desire some safety, we may need to rediscover our care for one another. This will likely be very interesting (there is an old saying "May you not live in interesting times") We live in interesting times.
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