| How Money Works | 2003-02-16 16:49 14 comments |
 by Flemming FunchBelow is an article I wrote a number of years ago about how the money system works and what is wrong with it. Maybe I'd put more nuances in it today, but I still believe it is basically correct. Most people don't really have any clue about money and think it is being 'made' by doing good work. It isn't. It is being made by borrowing it from somebody who doesn't have it, but who invents it out of thin air. Which I think is alarming. I'm no economist, but I haven't heard anybody educated in economics challenge this. The feedback I've mostly gotten from experts is that it all doesn't really matter. Anyway, read on... "Some of the problems with our prevalent economic system as I understand it is this: Money is created by banks. In part by central banks who can make up amounts and lend them out, mainly to central governments, but also to regular banks. The worst problem is not that the central banks are mostly outside the control of any elected representatives of the population, even though that is certain cause for some suspicion and alarm. In some areas, such as the U.S., the central bank is a completely privately owned institution, owned by its member banks. The central bank of central banks, the Bank for International Settlements in Basel Switzerland, is also not controlled or owned by any government, but is a corporation with stocks. It is located on land that is not considered part of Switzerland or any other country, it is not answerable to any public body, and it does its business in secret. However, the worst problem is that interest is being charged for the money that is lent out. It might well be a good idea to use fiat money, that is, money that doesn't have any inherent value, but is only valuable because we trust that it is. All currencies on the planet are, as far as I know, fiat money. However, the problem is the interest. For example, the Federal Reserve Bank lends a billion dollars to the U.S. government. That money is created out of thin air. The Federal Reserve Bank doesn't particularly lend it out because it has accummulated produced value. It simply has been given the authority to invent the money. It gives the money to the government. The government spends it on what it thinks it needs to spend money on. The money is now due back from the tax payers. That is not in the first place a problem, since the money is out there in circulation. But, the bank wants the money back with interest. And the ridiculous thing is that there is nowhere the money can come from except for by being lent out by banks. The central bank is not the only one that can create money. Any bank can. Regular banks create money by being allowed to lend out a certain number of times more money than they have deposits for. For example, if there is 1 million in the bank, it can lend out 10 million, thereby creating 9 new millions. Regular banks also charge interest. Meaning that, no matter how much they create, they always need MORE back. Technically speaking, that is impossible. It only appears possible because there are enough banks around and the total economic transactions are complicated enough that it always seems like there is somewhere else the money can come from. But, if we add it all up, there isn't anywhere else it can come from. People trust money to be valuable, so they use it as a medium of exchange. That drives the production of a lot of things, and it buys people a lot of things that they want. And, as long as the wheels keep spinning around, that seems OK. However, the system can't lead to anything else but a higher and higher amount of money that is being owed to banks. That is, national debts increase, and personal debts increase, and a higher and higher percentage of the actual assets in the world are being owned by the banks as "security" for the debts. All current money systems are based on debt. If all debts in the world were paid back there would be no money in existence. I repeat, NO money. However, that in itself is impossible in that there isn't enough money around to pay all the debts that are there, because of the accrued interest. It can only be a never-ending escalation, by the banks issuing more new loans so that people can pay the installments for the old loans. That appears to work as long as there is never-ending expansion. As long as more and more stuff is being produced and people need more and more money, the system might keep working. But, we are on a limited planet, with mostly limited resources. Certain activities can not be expanded indefinitely. There is for example a limited number of physical assets that the banks can get as security or as payment for the loans, and sooner or later they would all be owned by banks, and the escalation would stop. And now, if we look around us, most people seem to have a perpetual scarcity of money. There somehow doesn't really seem to be enough to go around. However, our ongoing need to provide a livelyhood for ourselves and our families drive us to pursue more money anyway, and one way or another we get by. And we are too busy to notice that there is something fishy about this lack of money. There will always be somebody around who has a lot of it, so that we are reminded that this would be possible for us too. But we might not see that it wouldn't be possible for everybody in the current system. The current system is built on scarcity. The system is driven by the idea that there isn't enough, and we have to compete for what is there. It happens not to be true. If we add all the cummulative resources together and manage them well we could very well all live comfortably. It is just that the economic system tells us that we mostly don't own these resources, but they are just beyond our reach, and if we manage our credit well, we can keep being rewarded with nice stuff. Never mind that the bank owns our houses and our cars and the companies we work for, we can at least pretend that we own them for a while. The weird thing is that most people don't know these things at all. Most people think that the national debt is a big problem, but they haven't really thought of who this money is owed to. Or how come almost all countries in the world can have such astronomic debts that we all have to work twice as hard just to pay off the interest to it. And all of this money is owed to somebody who didn't own any real value in the first place. There are plenty of economic experts around who will provide very complicated explanations for what is wrong with the economy. There is too much unemployment or we buy too much stuff from Japan or something. Whereas the actual mechanics of the economic system are never mentioned. I suppose that if a solution had to be found centrally it would be something along the lines of nationalizing all the central banks and canceling all the national debts, which never existed in the first place anyway. And then letting the governments issue money without interest. I'm sure there would be some major repercussions in that that I don't understand, but I'd say that sounds like an attractive solution just speaking from common sense. If that doesn't happen I'd say the solution is in creating different schemes of economic interaction that aren't based on borrowed money that has to perpetually be paid back with more borrowed money. A system is a set of relations that influence behavior. An economic system that were inherently viable could influence people to behave in generally more sane and enjoyable ways. A system based on a fixed quantity of assets, such as gold, is problematic in that the amount of produced value is mostly increasing in the world. So, if there were only a fixed quantity of money, there still wouldn't be enough to buy everything. I think what is needed is a system that allows money to be created in tune with value being produced. That is, at the same time as something that is perceived valuable is being created, an equivalent amount of money to pay for it needs to be brought into existence. And that money needs to be available for those who need and appreciate the created value. And there should be no future installments due based on that exchange. Ultimately I don't think money will be needed at all. However, to get to a future where resouces are used and shared in a sensible way, we might need some intermediary systems that point in that direction. How exactly to do that, I don't know. I do know that it is possible. I also know that isn't very likely to be done through the mechanics of the old system. You probably don't go to the bank and get a loan to finance a new money system. You just make your own system and start using it more and more." Flemming Funch, 27 July 1995 |