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
