More About Money

To understand the challenges inherent in our current money systems, it’s helpful to know a little about the history and workings of present day finance. A historical look at money helps to show that our economic systems are constantly changing, and can also encourage us to be more intentional about how they change as we move forward.

Secondly, the stores of value (for example, gold) became separated from the notes or tokens that represented the value. Hundreds of years ago, the first bankers were people who securely stored ‘hard’ currency (like gold, which was both heavy and dangerous to carry around) and issued depositors with a note that served as a promise to pay.

Through history, governments have often switched to forms of fiat money in times of need (such as war), simply by printing the money needed. However, if they produced money more rapidly than economic growth, the value of money is reduced through inflation.

http://en.wikipedia.org/wiki/History_of_money

Over time, rather than returning to banks to collect and use the gold (or other precious currency) for purchases, people simply began swapping the bank notes. All that gold was just left sitting there – and it became fairly rare for someone to make a claim on it. The bankers then realized that since claims weren’t often made, they could lend out two notes for every one piece of gold in their coffers. The amount of money in circulation doubled at the stroke of a pen. Gradually, the number of notes relative to the gold in storage increased, until the system became what is known as fractional reserve banking. This system works as long as people have confidence in it. If a lot of people decide to claim the wealth at once, the system crashes – as it did in 1929 when the stock market collapse triggered The Great Depression. Although it differs from country to country, under this system most banks are only required to hold a small percentage (typically less than 10%) of the actual amount they are legally able to loan out.

In 1971, the United States switched to fiat money when President Nixon de-linked the US dollar from the gold standard, indefinitely. With many countries’ currencies fixed to the US dollar at the time, this single decision meant that most of the world’s currencies effectively became fiat-money based.

Thirdly, money systems have become based on debt. In the 20^th century, we came to understand ‘debt’ as ‘consumer credit’ – in the 1920s, some US companies began issuing credit cards, including oil companies and department stores, yet it was only in 1946 that the first bank-issued credit card was introduced. Debt, for so long a restriction on consumption, became an enabler of consumption. Debt itself became a commodity. Over the last few decades, debt of many kinds, including government, consumer, and corporate, has grown to unprecedented levels.

But debt is also how modern money is brought into existence. This critical point deserves a more detailed investigation. Let’s take a look.

Indebted

In addition to banks needing only a fraction of the reserve amount in order to lend and the increasing separation of money from trade of real goods and services, the way financial systems are structured has become the key driver of the need to keep economies ‘growing’ (more people consuming more, faster).

Money is created by being loaned into existence as debt. This debt is comprised of the money borrowed, but also of the fees that the lender charges the borrower. As repayment of the loan with interest requires extra income, whole financial systems are based on the premise that the economy will continue to grow so that all debts can be paid back with interest. As a result, perpetual growth is a requirement for many current economic systems.

Money and exchange in a digital world

Once the value of money was divorced from the ‘cold hard cash’ it represented, the ability to wire or transfer money from one party to another became possible. This has been, and continues to be, very significant for entire populations who live and earn money far from home (due to displacement or relocation for a variety of political and economic reasons).

As money has become increasingly ‘virtual’ in this way throughout history, the leap to online banking was not a great stretch of the imagination. Since the late 20th century, innovation in money and exchange systems has exploded with the rise of the Internet and electronic banking. In 1994, a US bank became the first to offer Internet banking. 1997 saw the launch of both BPAY, an electronic bill payment system, and Octopus, the world’s first contactless smart card (for use on Hong Kong’s public transport system). At the turn of the millennium, Paypal was launched, which gave people the ability to pay anyone anywhere in the world electronically, so long as the payer and the payee each had a bank account, a Paypal account, and an email address. A range of possibilities continue to emerge through new online transaction methods and currencies such as Google Wallet App, Facebook Credits and Bitcoin.

While such innovation has delivered convenience and other positive benefits, the fact remains that money no longer has a connection to a store of real, physical wealth. When money was unleashed from the restrictions of the physical world in the 1970s, compounded by the emergence of digital economies, speculative transactions such as derivatives trading grew dramatically. The trade of actual goods and services has become a smaller and smaller part of the global financial casino as the practice of ‘making money from money’, and consequently the amount of currency available, has grown exponentially.

Speculative economic systems have been used to create and legitimize huge inequalities, with a massive shift of resources from the so called ‘developing’ world to the ‘developed’ world; and a wealth transfer from lower to higher earners within many nations. Despairingly, the increasing gap between rich and poor is also drawn along racial and gender lines. Not only has our money been divorced from the wealth it represents, but what we purchase with it has been strategically disconnected from the labor required to produce it, as well as the environmental costs. We now have money systems that require ever-expanding debt, which makes them fundamentally unstable – and economic instability hits the most vulnerable hardest.

In addition to fuelling inequality on an unprecedented scale, our debt-based money systems are now putting all of humanity at risk – pitting us against physics and biology by creating a runaway train of debt, a Ponzi scheme that we need to keep feeding with more and more growth, because entire systems have been structured to demand it. But what happens when our economic systems that must, by their very design, keep expanding, run into the physical and biological limits of the earth? What can we do? What are our alternatives?