I promised you some thoughts on money, so here goes…
I guess the first question is: where did money come from?
Money developed as a medium of exchange. Barter wasn’t always convenient – goods may have been seasonal and available at different times – there was no “coincidence of wants”. Around 9000BC, to get around the problem, people started trading in “commodity money”, initially cattle, camels, grain and cowry shells.
Coins started around 700BC, with gold and silver the most common metals used, often minted by the current ruler in an early form of monarchic brand management, reminding the users who was boss every time they bought a flagon of best Malmsey or a bushel of olives. After Charles I seized £200,000 worth of private gold stored in the Royal Mint in 1640, merchants found it safer to stash their bullion in the vaults of goldsmiths and jewellers, who thus became the first bankers. They issued notes confirming the amount of the deposit and soon these notes began to be used instead of the coins. Providing they trusted the banks, merchants and shops were happy to take the notes.
Realising that they could issue these notes against the security of the coinage they were looking after and which, increasingly, wasn’t being used, the bankers started lending notes and charging interest. The coins stayed in the vault, as collateral. Now they knew they were onto a winner, the banks started issuing more credit notes than they had coins for, and control of the nation’s currency passed from the government and its coins, to the bankers and their seemingly unlimited notes. The banks had acquired the power to create money. Which is where we are now, with 97% of the money in the economy created by banks, and a mere 3% by the government.
Which is why most money doesn’t exist. It’s merely froth created by the banks. Made out of thin air. Here’s how they do it: when a bank makes a loan it creates a line of credit, temporarily on loan from the bank. Once the loan is paid back, the line of credit – and the “money” – disappears and meanwhile the bank has made a profit from the interest charged on the loan. So they want to lend as much as possible when people are able to pay them back; when they are not able to, the banks don’t lend. Sound familiar? Ten years ago, the banks got over-confident, didn’t properly check on peoples’ ability to repay their debts, particularly “sub-prime” mortgage interest payments, and precipitated the great crash of 2007. So Northern Rock came a cropper in September that year, as its customers lost confidence in its ability to give them their money, there was a “run on the bank” and the British taxpayer picked up the tab.
The froth flies in one direction only, with customers repaying their loans with real money, money that represents energy expended, real endeavour. The banks have thus achieved what centuries of alchemic endeavour has so far failed to do: to create something out of nothing.
And of course banks quite understandably want security against big loans, usually property. What’s interesting though, is that the value of this property depends almost entirely on confidence, the confidence we have in its value not just holding but increasing, the same confidence that underpins pretty much everything we do in the economic sphere – the value of shares, unlimited growth, permanent supplies of natural resources etc. And what underpins confidence? Optimism? Right. That shaky, Micawberish faith that either “something will turn up” or posterity will pick up the tab – sometime. Scary how insubstantial this is as a basis for sustainable human evolution. Amazing how quickly confidence can switch from high to low, how much fear lurks behind either mood.
How close we all sail to that Lorelei Rock of loss or liquidity – like it or not, as most of us don’t have a hand on the tiller. That siren call is for those creating and then selling a dream most of us can only imagine, a dream that pushes the present far into the future, contaminating it for all time with a fearful confidence, and neatly dispensing with responsibility.
And even more extraordinarily, this funny money, this froth, is traded as a commodity, just like sugar, copper, oil and other real staples. Fantasy finance! We now have HFT, high frequency trading, or algorithmic trading, using superbly sophisticated techno tools and algorithms to speed up trades, making buying and selling decisions automatically and far more rapidly than a mere mortal. Frothing up the froth.
And here’s the killer realisation: in calling for all debts to be written off, Will Self, that brilliant commentator on our all-consuming, consumerist, image-fixated, technology driven world, points out that the $199 trillion of world debt is entirely founded on the sands of expectation; that “…mortgages, bank loans, government bond issues, they all work on the basis that in the years to come, our heirs will continue not simply to work and innovate, but also to extract the world’s natural resources as much, if not more, as we’ve done historically.” He calls this “[an] advance drawn on the future” and talks of our refusal to accept the true economic – and by extension political – fault line running through our society: “…the divergence in interests [lying] between the old and the young”.
So the can gets kicked further down that yellow brick road and, like Pilate, we can wash our hands as the world bleeds.
Next time I might venture into the chaotic, confusing world of largely unregulated commerce. Or I might not, opting instead for something altogether more pleasing and real.