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".
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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"
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