-Caveat Lector- from; http://www.transaction.net/money/book/rethink2b.html <A HREF="http://www.transaction.net/money/book/rethink2b.html">Rethinking Money, I.2</A> ----- Chapter 2: Today's money Money is like an iron ring we put through our nose. It is now leading us wherever it wants. We just forgot that we are the ones who designed it. Of all the possible monetary systems, today's has a number of key characteristics that we have gotten so used to that we might believe them indispensable for any modern money system. Let's start with the simple question: what is it for, what are the objectives we try to achieve? All money systems have in common to facilitate exchanges among people. But given the remarkable persuasiveness of money, whenever a specific money system is designed it has invariably been loaded with a host of other objectives as well (sometimes conscious, sometimes quite unconscious): from prestige of the ruler, to collective socio-economic motivations. ------------------------------------------------------------------------ Four Key Design Features Let me make immediately clear that I do not claim that some conspiratorial group of eighteenth-century English gathered in a dark smoked-filled backroom (yes, they were already smoking then: the dominant currency in the American colonies was tobacco) to come up with the current money system. What happened instead is a slow gradual evolution of payment and banking habits, interspersed with dramatic changes in reaction to personal insights and/or collective crises (such as the need to finance wars, or the political reactions to the South Sea Bubble of the 1720's). Such a combination of more- or less-conscious choices by the many and the few tuned the money system to the Zeitgeist, literally the "Spirit of the Time".(12) Many aspects of the modern money system can be traced straight back to the lending customs of the late medieval goldsmiths, or to Renaissance banks from Tuscany and Lombardy (even the word "bank" itself derives from the banco or bench where these Italian financial transactions took place). But just as many of these hallowed traditions were dropped and replaced with brand new ones whenever they did not fit in with the Zeitgeist of Victorian England. While payment and banking technologies (i.e. how we do things) have obviously continued to dramatically improve ever since, the fundamental objectives pursued by the system (i.e. why we do them) seem not yet to have been seriously revisited since Victorian England. So, from the perspective of the objectives pursued by the money system, we are still living to this day with what propelled us so effectively into and through the Industrial Revolution. So what are the particular unquestioned features that still characterize our "normal" money systems? We will highlight four key ones: our money is typically geographically attached to a Nation-State. It is created out of nothing ("fiat" money) by bank-debt, against payment of interest. While all this may sound pretty obvious, the full implications of each one of these characteristics is much less clear. So, bear with me through what may appear trivial at first sight. We will see that when we put in question these "obvious" or "trivial" assumptions, we can sometimes discover a wealth of new insights. Let us now take a brief look at each one of these characteristics. ------------------------------------------------------------------------ National Currencies While we now have trouble imagining any currency other than those issued by a country, it is useful to remember that the concept of a Nation-State itself is only about two or three centuries old. Therefore the vast majority of historic currencies were in fact private issues usually made by the sovereign or some other local authority. Furthermore, during the few recent centuries when national currencies were issued, there was always another transnational currency available for global trade (specifically gold). The only exception to this rule has been the past twenty-odd years, when one particular national currency--the U.S. dollar-- has de facto become the global currency. We will see in chapter 5 that this is not without serious negative consequences for all participants, including increasingly for U.S. itself. Finally, the emergence of truly global non-geographic communities such as Internet, for which currencies are already being designed and implemented, foretells significant changes in the transnational currency realm which will be addressed in chapter 6. ------------------------------------------------------------------------ "Fiat" Money The simple question: "where does money come from?" propels us back into the world of magic again. Money not only performs the act of dematerializing as mentioned earlier, but it also is quite literally created out of nothing. To fully understand this process we need to look beyond appearances. At first sight, the national currency appears to be created on the printing presses of central banks or - in the case of the US - of the Treasury Department. One of the favorite fill-in images used on Television to replace boring images of heads talking about money is the heavy printing presses rolling off these bills. But this is not where money is created, just as the rabbit which appears to come out of the magicians hat is not really coming from there. If we want to know where the rabbit comes from, we need to go through the patient step by step task of tracking the rabbit up through the magician's sleeves and other contraptions. It you want a hundred dollars in cash, what do you do? You go to your bank teller and ask for a hundred dollars. The teller will simply look up your bank account balance. If there is more than a hundred dollars on your account, you will be debited by the amount and given the cash you asked for. If your balance is not large enough, you will get an apologetic smile or some other cryptic message, perhaps even a receipt, but not the money. Your money really amounts to the number in your bank or other financial institution account, not in its fleeting cash form because the physical bills will be given to you on demand as long as there is a positive balance on your account. Similarly on the next step up, the Treasury will deliver to your bank as much cash as demand justifies, but it will debit the bank's account for the corresponding amount. The next step is of course: how does the money appear on your bank account? Most of the time because you deposited your paycheck or other payment. But where does your employer gets his money from, to paraphrase Truman's famous line: where does each buck ultimately start? ------------------------------------------------------------------------ Bank Debt The answer may be surprising to some: every dollar in circulation was started as a bank loan somewhere. For instance, when you go to get a hundred thousand dollar mortgage to buy your house, the bank creates out of nothing the hundred thousand dollars when someone punches in the credit on your account. That is the moment when money really is born. Once you have the credit, you can draw the check to pay the seller of your house, who in turn deposits it in her bank account, and the money will start flowing through the system forever... This simple process to create money is dubbed with the appropriately fancy technical name in Latin of "fiat" money. This refers to the first chapter of the Bible: "Fiat Lux" were the very first Words that God pronounced according to Genesis Chapter One, i.e. "Let light be". The next sentence is, "And light was, and G-d saw it was good". We are dealing with nothing less than the truly magical function of creation out of nothing ("ex nihilo") by the power of the Word. No wonder you may be intimidated by your banker next time you respectfully introduce a loan request! However, just like the magician needs a handkerchief to wave above the hat before the rabbit can appear, there is an additional veil over the whole process of money creation. That is where our attention is directed: the otherwise boring technical aspects of competition among banks for deposits, the needs of reserve requirements, and the role of Federal Reserve in fine-tuning the valves of the system via high powered money multipliers.(13) While these technical features all have a perfectly valid purpose (so does a handkerchief), they all regulate simply how much fiat money each bank can create (i.e. the number of rabbits that can be pulled out of which hat). What is particularly brilliant about this scheme is that it resolved the apparent contradiction between two types of objectives pursued in Victorian England: creating and reinforcing the Nation-State on the one side, while relying on private initiatives and competition among them on the other. Specifically, it provides a smooth way to privatize the creation of the national currency (at least theoretically a public function), as a privilege to the banking system as a whole, while still maintaining a competitive pressure among banks to obtain the deposits of their clients. ------------------------------------------------------------------------ Interest The full implications of applying interest on the loans are probably the least understood of the four characteristics. Again, we somehow believe that interest on money is intrinsic to the process, forgetting that for most of history that was definitely not the case. In fact, all three revealed religions (Judaism, Christianity and Islam) emphatically outlawed "usury", defined as any interest on money. Only Islamic leaders still remind anyone of this rule today. But it is interesting that up into the nineteenth century, for example, the Catholic Church remained prominently in battle against the sin of usury. It is only in the early years of this century that it "forgot" about this sin, and suddenly redefined it as "charging excessive interest"(14) One implication of the way money is created today in its relation to interest is that it sets up people in systematic competition to each other, actively discouraging cooperation as a consequence. An Australian story illustrates best some this less obvious implications of the way interest is woven into our money fabric. ------------------------------------------------------------------------ ------------------------------------------------------------------------ The Eleventh Round Once upon a time, in a small village in the Outback, people simply used barter in all their transactions. So, on every market day, you would see people walking around with chickens, eggs, hams and breads and engaging in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, harvests for example, or when someone's barn needed big repairs after a storm, people also had brought over from the old country the traditions of helping each other out. A stranger came by, and observed the whole process with a sardonic smile. "Poor people, she said, so primitive.... There really is a much better way to do all this. See that tree there, well, I will go wait there for you to bring me one large cowhide, and gather every family together. I'll explain the better way." And so it happened: She took the cowhide, and cut leather rounds in it, and put an elaborate and elegant little stamp on each round. Then he gave to each family ten rounds, and explained that each represented the value of one chicken. This way, people could trade and bargain with the rounds instead of the unwieldy chickens. "Oh, by the way," she said, after every family had received their ten rounds, "in a year's time I will come back and sit under that same tree. I want you each to bring me back eleven rounds. That eleventh round is a token of appreciation for the technological improvement I just made possible in your lives." What do you think had to happen during the next year? Remember, that eleventh round was never created. Therefore, bottom line, one of each ten families will have to go bankrupt to pay the financier, without regard to how well it manages its affairs, and lose all its rounds, in order to provide the eleventh round to all the others. So when a storm was threatening the crop of one of the families, people suddenly had less time to help bring it in before disaster struck.... It was indeed more convenient to exchange the rounds instead of the chickens on market days, but the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants. This is exactly how todays money system works. When the bank creates money by providing you with your one hundred thousand mortgage loan, it creates only the principal by crediting your account. However, it expects you to bring back two hundred thousand dollars over the next twenty years or so, and if you don't you will lose your house or your business or whatever collateral you were asked to put up. Notice, your bank does not create the interest, it sends you out in the cruel world to battle against everybody else to bring back the second hundred thousand. Because all the other banks do exactly the same thing, the system requires bankruptcy for a set portion of its participants in order to provide you with your second hundred thousand. This margin of failure, or "acceptable poverty line" is one of the reasons why so much attention is being paid to the interest rate decisions of the Central Banks: increased interest costs automatically determine a larger proportion of necessary bankruptcies in the future. Again, was it that different an atmosphere when the high priests were having to decide whether the gods would be satisfied with the sacrifice of only a goat ... or required the sacrifice of the first born child in every family instead? Lower down on the totem pole, when your bank checks on your "creditworthiness" it really is checking whether you are capable of competing and winning against the other players, i.e. manage to wrestle out of them the eleventh round that was never created. No wonder "it is a tough world out there", and that Darwin's observation of "survival of the fittest" was so readily accepted as self-evident Truth by the Victorian English--and by any other people who live within a money system of their own design, such as us today. In fact, there is not much "out there" that supports such a cynical interpretation, claims Professor of bio-sociology Imanishi, from Kyoto University. He has shown that the Darwinian vision of nature as a struggle for life simply has been completely blind to the many more frequent cases of co-evolution, of symbiosis, of joint development and harmonious coexistence which prevail in all domains of evolution. Even our own body today would not be able to survive long without the symbiotic collaboration of billions of micro-organism in our digestive tract for example. (15) The concept of interest is important in other ways which we will discover later on. But at this point, let us see how the money system we live in has shaped our societies. ------------------------------------------------------------------------ Intended Effects The prevailing money system looks as if its designers asked: How can we use our money system to reinforce our Nation-State, and concentrate resources to enable systematic and competitive heavy industrial development? Even if the question was never asked in this way, it should be emphasized that the system has proven remarkably successful in meeting these objectives, independently on whether these objectives were conscious choices or embodiments of the Victorian Zeitgeist, or most likely a combination of both. Every country in the world, independently of its degree of development or political orientation, has in fact bought into this Victorian construct. It just has proven to be the proverbial better mousetrap, so that even Communist countries have reproduced all four features (the only difference being that the banks just became state-owned instead of private, which in practice did not prove to be beneficial). If you want to create a national consciousness, for better or for worse, the creation of a national currency is still one of the more powerful tools available, as demonstrated as recently as during the breakup of the Soviet Union, or the integration of Europe. The reason is that a common currency creates an invisible but very effective bond between all sectors of society: it draws a boundary between "us" and "them". In short, the common currency privileges a geographical space where we interact economically, making tangible in every day life the national boundary which would otherwise remain mostly a colored line on our school atlas maps. If you want to industrialize, you will need to concentrate enough resources (steel factories are not built in a backyard: the Chinese tried and failed as late as the 1970's) for industry. And to concentrate resources--to paraphrase Churchill's quip about democracy--competition among private players is the worst system, with the exception of all others. Would you prefer to buy your next car, meal, or computer from non-competing producers? So, if it works so well, why should we even bother to think about it, not to speak of trying to improve on it? Many argue that the automatic concentration of wealth due to interest payments has gone overboard: the top wealthiest five percent receive a continuous rent from the poorer eighty percent who have to borrow to survive. Interest is clearly the ultimate regressive taxation system, which intuitively all three revealed religions had identified as such. It can be seen as the most unrelenting tax ever borne by the poorer people to benefit the richest: it operates twenty-four hours per day, three-hundred-and sixty five days a year. Further proof is provided by the fact that after interest became officially legal, almost all countries have felt the need to create income redistribution schemes to counteract at least part of this concentration process, such as progressive taxation, or more or less generous welfare systems These income redistribution systems are increasingly being criticized for being ineffective, while the interest payment system continues to work very smoothly indeed. But is this the fault of the overly efficient money system, or of the inefficient redistribution schemes? Or both? A more recent reason worth considering is that everybody is now claiming we are now in a Post-Industrial society, that the Information Age is propelling us into a new direction. Similarly, the process of creating Nation-States seems to have reached its maturity, and many claim that the national framework is proving inadequate to deal with many key issues facing humanity. So would it not make sense to at least ask ourselves the question whether the most powerful motivation tool we have at our disposal should not be mobilized to meet our new challenges? Should we keep blindly using a tool designed to create the Industrial Revolution into the Post-Industrial world? Isn't this like keeping Watts' steam engine because it worked so nicely when we started on this industrialization wave? But there are other, even more compelling and urgent reasons, which may force us to re-invent our money. ------------------------------------------------------------------------ Unintended Effects There are three types of consequences which the Victorians, and even the vast majority of today's money experts are not aware of. In fact, it is only in the past couple of decades that these consequences have reached a scale and state critical enough to demand our attention. Our current money system is one of the key driving forces behind three of the most critical issues on the planet: •unemployment in the Information Age; •the breakdown of community; •and a whole range of ecological issues. The relationship between monetary policy and employment has been one of the mainstays of the economic debate ever since John Maynard Keynes groundbreaking work in the 1920's and 30's. However, one embedded hidden assumption has distorted this entire debate: the assumption that the only relevant currency to take into account is of course the "normal" national currencies, one per country. Unburdened by that assumption, we suddenly discover a whole other way of looking at that complex issue. The first reaction to the idea that the current design of money has any relationship to either community breakdown or the ecological crisis is usually one of simple denial. When the claim is made that there is a direct causal link, the denial can turn into hostility. The next three Chapters will provide the evidence supporting each one of these claims, as well as explore some options to tackle the underlying problems. We just ask you to evaluate that evidence before making up your own mind. Before we consider any alternative money systems, let me make clear that I do not expect the existing national currencies to disappear, or even be replaced with another kind of currency. Instead, what is already happening is that other parallel currency systems are developing to complement the existing system, to fill in functions that the national currencies do not, cannot, were never designed to fulfill. The existing money system will remain central for example in the economic activities where competitive behavior is desirable. But whenever we want to promote cooperative processes, we may want to question blindly using a competition generating currency.[Ever noticed the ferocious competition existing between non-profits when access to money is concerned?] Although it may appear at first sight convenient to have a single currency to do everything, we should weigh this convenience against all the socio-economic costs this monopoly generates. After all, it would also have been more convenient to have a single currency worldwide instead of different national ones, but it was correctly decided that the nation building effects of each national currency outweighed the inconvenience this multiplicity generated. My aim here is to provide you with enough information to make a conscious choice. You can make that choice. In plain sight for everybody who is willing to look around, but still invisible to mainstream economics, there are already several currency systems in operation in many parts of the world. They are very different in design from the official national currencies, and have already amply demonstrated they also create very different collective behavior patterns. Many more are ready to pop out of the cyber-woodworks in the very near future. And all these different and overlapping money systems do not have to result in anarchy or chaos. Maybe our own Zeitgeist, our post-Modern, post-Industrial, Information Age, Knowledge society has also some nice surprises in store among some of the dreaded ever-accelerating changes.( 16) The time to rethink the design of that iron ring we put though our noses has come. Where do we want it to lead us during the twenty-first century? ------------------------------------------------------------------------ ©Copyright 1996 Bernard Lietaer http://www.transaction.net/money/book/rethink2b.html [EMAIL PROTECTED] ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. 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