“Money ranks as one of the primary materials with which mankind builds the architecture of civilisation.” – Lewis Lapham
There is money yet community decay. Lack of educational opportunity puts the mind of children to waste and causes ecological breakdown. Africa is rich in natural resources, yet it’s difficult to provide jobs for the people. It’s apparent that the conventional monetary systems and currencies give rise to competition and yet remain scarce. It’s important to understand that the success of a nation or the world is not a state, but a process.
In an earlier post, we had established that humankind is an ecosystem. And the behaviour of organisms in every ecosystem is motivated by the need to survive. Many have wondered if the distribution of wealth can be improved. But to have this discussion we must first understand the way society has been fashioned through the monetary system. And one general wand used to keep mankind in line is money!
Interestingly many professional financial managers rarely understand that monetary transactions have been designed to instigate specific behavior patterns. The money system prescribes our social behavior, our economics, and political climate, amongst other things. We keep hearing that there is enough money on this planet to go around. Yet we have communities trapped in abject poverty. When we ask why we often hear that there is no money to sustain a living.
This planet has the capacity to produce enough food for all creatures inhabiting it.
For citizens, there is ample work, but obtaining the money to pay for food and all we weed is a strange struggle. It’s always about the money. Why can’t central banks just mint money and distribute it? Well, like we earlier pointed the prevailing money system was designed to incite specific behaviours. If we are to embrace sustainable abundance, we must first look at the money systems applied. The people are not the government, but the government needs the people to be powerful. And to keep the people in line the government has to incite social behaviours. We are social animals who rely on each other to survive. In an ecosystem, the selfish behavior of an organism can threaten the lives of other organisms. There is usually the need to put people’s behaviour in check so that people’s selfish actions don’t destroy the ecosystem. But how do the ants do it? Perhaps we humans are just too smart.
What it would take to have a massive improvement in our monetary system would require centuries shift in our perception of our relationship to money. It’s very deep. You will have economists, experts, and other professionals to contend with. To address the radical advancement of humankind one often requires having a thick skin that endures been called a delusional professional or a lunatic. How dare you challenge established knowledge that has been passed from generation to generation?
The spread of technology and blockchain, especially decentralized finance (DeFi), is taming the power government has over monetary interactions and currency creation. It’s not too difficult to imagine the economic advancement we will enjoy when decentralized finance is widely applied to retail.
Let’s look at how money is created
So you think that money is the root of all evil.
Have you ever asked what is the root of all money?
– Ayn Rand
Despite the pivotal role of money in our lives, we barely question what money really is and how it is created.
Aristotle, the Greek philosopher, had established that money doesn’t exist by nature, but by law. That is, it is man-made. Throughout history, money has taken different forms. But what’s more important here is how it is created to become money. The kickoff of paper money in Europe became apparent when it was a prudent practice to store money with goldsmiths, who in turn would issue a receipt for the coins and charge a small fee for the service. When the coin depositors needed to withdraw their coins, they could cash in the receipt so that the goldsmith would pay out the coins. It naturally became convenient to make payments by simply exchanging the receipts (promises to pay). Whenever someone accepted such a receipt as payment, they were entering into an agreement with the goldsmith. We can see how this inspired modern-day banking and paper money. Then over time, a few smart goldsmiths observed that their clients never retrieved all their coins at the same time. Leaving the bulk of the coins in deposit (storage). This presented a business opportunity to the goldsmiths. They could issue more money than they had in deposit. They could issue receipts in surplus of the gold in deposit and increase their revenue by lending out gold(money) without increasing their gold reserve.
This gave birth to debt-based money where people are bound to incur debt and compete with others over money that doesn’t exist. I will explain better in the next section. We are aware that the early forms of paper money were backed by gold. Just as in the case of the goldsmiths – our early European bankers. However, the need to finance development and war made gold-backed money cumbersome as gold wasn’t easy to get, and transporting gold (over land, air ande sea) was a cumbersome and expensive process. There are other reasons too.
The United States, the world power with dominant international trade, removed its gold standard when President Nixon in the 1970s, officially stopped any convertibility between the U.S. dollar and gold, thereby breaking up the link between the money system and a physical commodity.
This move made it easy to tackle the challenges surrounding gold-backed money. This money system gave birth to fiat currency. Fiat means “out of nothing”. We can as well say “out of thin air”. With fiat currency, a government can print money without the need to have that amount in reserve. They also don’t need to back it up with any natural resource.
Countries with bountiful gold didn’t necessarily wield much power. Bank – debt-money easily became accepted as a legal tender by the government as it made financing war and exploration easier.
King William of Orange in 1694, applied this practice when he needed over 1 million pounds for a war against the French. He didn’t have enough gold so it was prudent to use this practice. This practice naturally became attractive all over the world. It spread and became an international agreement.
What is the prevailing fiat money backed by and how?
Debt! Let’s look into this.
National currencies are technically defined as “fiat” currencies. Fiat lux (“let light be”) was the first word that God spoke in the Latin version of the book of Genesis. And this is where Fiat takes its origin. It connotes the godlike ability to create something out of nothing through the power of the word. Technically fiat currencies are created by the law. This means that fiat currencies don’t come out from commodities, a mint, or printing press. This explains why Central Banks can’t just print money into the system. There are practices that must be. Fiat currencies come into being by the power of the word. Then why do we pay taxes if the government can create money by saying let there be money? A sovereign government doesn’t really need to collect taxes to pay for its expenses. Tax is a systematic way of giving value to money and enforcing that the citizens acquire it so that they can continue as being citizens. Remember that the government is the biggest spender. The government defines money by choosing what it will accept in the payment of taxes. The citizens must then obtain this currency (for example dollars, Naira) to pay taxes. Today, the citizens trade, work and invest in national currencies so they can meet their responsibilities.
If you owe the bank a hundred thousand dollars, the bank owns you. If you owe the bank a hundred million dollars, you own the bank. -American Proverb
How does the government say “let there be money” ?
The government uses central banks to maintain monetary policies. However, the fundamental practice is as follows:
For each deposit a bank receives, it has the right to create new money, especially in the form of a loan to a customer of up to some specified percent of the value of the deposit (held in reserve). In truth, a bank is supposed to lend out only the money it has on deposit while keeping a certain percentage of it in reserve with the central bank. However, banks don’t wait for surplus reserves before making loans. Central banks can provide credits to banks short in reserve so that there is always money in circulation.
Let’s look at how loan creates money in practice.
When a new loan is made, like a car loan, it usually results in someone making a new deposit somewhere else in the banking system, for instance, the seller of the car. The receiving bank is entitled to create another loan for x percent of that deposit. Then that new loan is deposited in another account (in another bank), that bank is entitled to make yet another loan, and this continues from deposit to loan down through the banking system.
It’s noteworthy to know that while new loans are created, the interest on the principal is not. The interest is never created! This gives rise to scarcity and the competition to acquire extra money to meet up with the loan’s interest. When you pay interest, you are using someone else’s principal. Let’s put this into context to aid understanding.
Let’s imagine we create a new nation called Pandaville for innovators. Following the prevailing monetary system, we start with the injection of 100 million units of national money from the central bank into the reserve account of a national bank. This 100 million makes it possible for the bank to make loans for 1 billion. These 1 billion ends up being deposited somewhere in the banking system by recipients of these funds, which enables the receiving banks to issue a new loan of 900 million to someone else (100 million serves as a reserve in the central bank). The new loan of 900 million enables the next receiving bank to issue another loan. Starting with 100 million units we can create up to 2 billion units in credit money as it cascades down the banking system. Money creation hinges on loans. Did you know the U.S has the highest debt in the world? And it owes most of those debts to itself after China. You can begin to imagine why. We will visit debts in another post. A key point: if all debts are repaid, money would disappear. This is because reimbursing all loans would automatically use up all deposits. Cryptocurrency, as it is now, is not the solution to the consequences of debt-based money. We can begin to see one important reason that the central banks exist to navigate monetary policies. For example, increased interest rates automatically increase the proportion of bankruptcies.
Therefore, when a bank is checking your credit score, they are simply checking your ability to contending with others to obtain your interest from other people’s principal to pay back your loan. Someone always ends up being squeezed because there is never enough money to pay interest on all loans. It’s a competition.
A way forward is to adopt complementary currencies. But regulatory policies make this difficult in some regions. Thanks to cryptocurrency, this will be easier to implement. However, it will require communities to agree.
For anything to be money it requires a community to agree and accept that thing in exchange. Yes, anything!
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