False Economy - Part II

Money, Money, Money, Money…Money!


Every day we go to work. We work and work and work and work, and at the end of the week or month, we are given a paper check that we take to a bank. The bank adds the numbers on the check to numbers in our bank account and sends us an email or another piece of paper in the mail that tells us our total number of dollars. Sometimes, we write on another piece of paper, a check, to get cash, or more pieces of paper. Ultimately, we can exchange our pieces of paper for goods and services, which is why we spend so much of our time and energy working for paper.

The pursuit of money is a keystone of the American dream. People are defined by their personal net worth, the job they do and the salary they earn. The higher our number, the more accomplished we feel. The number represents our success and value as a person. At some stage in our culture we began confusing money with real wealth.

The use of money is as old as civilization itself. The first form of exchange was barter. People exchanged livestock, grains, crafts and agricultural goods for other things they wanted. Barter is still a viable form of exchange today and is still practiced throughout the world. Barter has some limitations as a form of currency. If the goods one wishes to purchase or exchange are perishable or seasonal, a simple swap may not be realistic. When bartering was not practical, commodity currency was used instead. Commodity currency is a rare or scarce material that is given in exchange for goods. Commodities used for currency have included rare metals, shells, beads, wine and salt. Over time, commodity currency became standardized leading to the development of coinage.

Carrying around pockets full of gold and silver was not always convenient, so eventually, representative currency (paper money) evolved. Representative currency is like an I.O.U. In itself, the currency has no value, but it is a promissory note for something of value. The United States used representative currency until 1933. Until that time, dollars were linked to bullion of gold and silver stored at the U.S. Treasury. Gold and silver certificates represented an equal sum of money in U.S. coffers. During the Great Depression, the government needed to print money to stimulate the economy that it could not back up with bullion reserves, and the gold standard was abandoned.

Most of the world now has fiat currency, which does not represent or act as an exchange for any commodity. Rather, fiat money is printed by governments, and all creditors are legally bound to accept the fiat money to satisfy debts under penalty of law. The value of fiat money varies according to the health of the economy of the government that prints it. If a government prints money in excess of the value of goods in the economy, inflation or devaluation of the currency occurs.

Finally, much of the currency currently in global circulation doesn’t really exist at all. Credit currency resides for the most part in the memory banks of computers and in cyberspace. When we make a charge on our credit cards or take out a loan, banks lend us money they don’t actually have. Fractional Reserve banking is the system that allows banks to lend money in excess of their assets, which means banks can literally create money that does not exist. Usually, this does not pose a problem, as depositors with the bank rarely make a simultaneous run on the bank, and those with debt obligations to the bank pay them off reliably thus replenishing the negative balance of the bank back towards zero. Collateral in the form of goods like houses also ensure that the debt hole of the bank can be filled with something of value.

Banks want to engage in fractional reserve banking because they charge interest and fees and profit from lending money they don’t really have. Bank executives that make a lot of loans are rewarded with big bonuses, so they are inclined to loan money wherever they can. Banks make even more money when they bundle debts together, divide them into shares and sell the shares on the open market. The debt then becomes a speculative instrument like shares of stock and can fetch whatever price people are willing to pay, resulting in more profits for banks and more bonuses for bank executives. The shares can also be rebundled and sold again resulting in more profit, etc. The result is an upside-down pyramid resting on a tip that started when a bank lent money that never existed to begin with.

When the tip of the pyramid becomes unstable because, for example, people paid too much money for houses and now can’t afford to pay back the loan, the whole house of cards collapses revealing a shocking truth. Wall Street business as usual is nothing more than cleverly crafted financial slight of hand, and the complex financial instruments they promote are designed for the sole purpose of amplifying the wealth of the individuals and institutions that created them. While the tax payer picks up the tab for the economic havoc that resulted, those responsible for collapsing the global economy are sitting happily on bank accounts fat with the wealth squeezed out of average citizens before the sham revealed itself.

Much of our economy is based on phantom or illusory wealth. Our currencies are not based on any commodity or standard. We borrow money we don’t have from banks that don’t have it either. When a brave or honest person looks behind the curtain, the wizard reveals himself to be a pathetic old man. Sadly, rather than exploring new economic models, our government is throwing good money after bad with massive bailouts for the very institutions that got us into this situation in the first place.

Most of what makes us truly wealthy cannot be purchased with paper dollars like health, love and companionship, happy children, and a beautiful and functioning habitat. Other wealth is provided by nature and comes in the form of life’s necessities such as nutritious food, shelter, clean air and water, healthcare and energy. Unfortunately, our phantom wealth economy has managed to sequester much of what was once freely provided by nature, making some real wealth now only available to those who have the money to afford it.

While the collapse of the phantom economy has been painful for many, it also creates an opportunity to create a real wealth economy that will serve all of the organisms of the earth rather than a few elite humans. In his book Agenda for a New Economy, David Korten* provides a six-fold framework for such an economy. The real wealth economy would:

1- Provide everyone with the opportunity for a healthy, dignified and fulfilling life.
2- Bring human consumption into balance with Earth’s natural systems.
3- Nurture relationships within strong, caring communities.
4- Honor sound, rule-based market principles.
5- Support an equitable and socially efficient allocation of resources.
6- Fulfill the democratic ideal of one-person, one-vote citizen sovereignty.

It is time to take the economy back.

*Reference
Korten, David, C., 2009. Agenda for a New Economy – From Phantom Wealth to Real Wealth. Berrett Koehler Publishers, San Francisco.