Naked Money: when alchemy doesn't work anymore

If we look at longer periods of time, we see money often changes. Not only does the picture on the money change, so does the way we think about it. That is why here at OuiShare, we think a lot about money. In this article, Joel Dietz draws the outlines of the history of our money system. After all, the world was not born with money. Like many other objects (i.e. the wheel), it was an important technological innovation that humans created at a certain point in time to serve a certain purpose.

The Carrot and the Watermelon

We can rediscover the origins of money with a simple thought experiment. You have a few carrots. You like watermelons. I have a watermelon. I like carrots. So it makes a lot of sense to trade, but it may not make sense to trade one carrot for one watermelon, especially since you have a bunch of carrots and I have only one watermelon. So we have a reason to use measurements, and since the carrot is more plentiful, we will probably say that a certain number of carrots is “worth” a watermelon. When we do this, we suddenly create a concept of value. Value (here in the context of a free exchange) is inherently democratic, since we are free to determine what we value, and acquire it. So perhaps I get ten carrots and you get a watermelon and we are both a bit happier, and we make the world happier as an extension of our happiness.

Money goes wrong?

How can this go wrong? Well, first of all more complex societies need something that is a bit more complex than carrots. Usually this involves that an object has widely-recognized value, is stable and that can easily be exchanged. The greater the scope of the society, the greater the need to have objects that play this intermediary role. We typically call these objects "money," since they serve this need that we all have -- to get things that we do not have and cannot easily produce, like watermelons. Here, we have sheep, cows, and other objects that people generally find useful and can move. We also have pretty things that are in limited supply (like seashells). In the first case, the limited factor and intrinsic value are offset by the difficulty in moving the object (including the possibility that it will die in transit). In the second, the lack of intrinsic value is offset by the fact that they are easily tradable. Perhaps unsurprisingly, shiny objects dug up from the ground have been the basis for most of the widely circulating currencies. Not only is there the obvious imagery of mastery of the earth, which is symbolized not only by the extraction of its ores from deep caverns and the forging of them into objects of worth (i.e. weapons and coins) -- the resulting object is both light and rare and can be "stamped" with the symbols of a particular political entity.

The World of Symbols

Here, we necessarily enter the world of symbols intrinsically tied to political consciousness. When people enter a political union, they are raised to pay homage to a particular set of symbols (i.e. a flag, a set of stock images, national heroes). The value of the currency is then tied to these symbols, and a threat to the currency is seen to be a threat not only to the symbols, but also to the people who have been raised with them. This problem has been aggravated by the transition to paper and, later, digital currency. The wisdom of central issuing agencies of paper notes for centuries was that it had to be backed by specie (i.e. gold) of a certain amount, or the value of the paper object would be destroyed. Moreover, it is an often cited maxim that a government in a time of perceived crisis can never find the necessary willpower to avoid printing money. This problem, widely noted for centuries, was offset by a different sort of innovation -- the introduction of government debt on the open market, a way by which the government could gain money in a crisis without massively inflating its currency. This process, helped by the innovation of British banks, made the world wide bond markets become the basis for governments in need of immediate capital infusion. The most obvious need of immediate capital infusion was for wars, and, since the banking system profited most from this sort of short-term financing, it is understandable that it was perceived as exploitative from the beginning. The banks profited much from small-scale wars and opposed anything that would be destabilizing (i.e. a unified Europe under Napoleon), even if would be positive.

The modern financial system is born

Whether perceived positively or negatively, this financial system served to maintain the balance of power in Europe while allowing mercantile interests to expand their influence significantly via the increasing availability of credit. The availability of credit means both an increasing number of creditors and an increasing number of debtors. This system of increased liability restricts the freedom of all operators in certain ways, generally increasing the dependence of people on the system as it is, decreasing the possibility of any violent actions (i.e. revolution). However, if there is one thing that debtors need, this is very often simply more debt. One additional and very strange innovation that has allowed this multiplication of debt is fractional reserve banking. The simple concept is this: if you put money in a bank, they only need to keep 10% of the money available. The rest they can do whatever they want with it (so long as they make money, banks are also responsible to their shareholders). The government guarantees the rest. With a few tricks, money multiplies. With it, there is much more money available. With more money available, more of it gets into the hands of people who want to create things, and they create more things faster. This is the broad logic, and is generally assumed that the present system consequently gives us more innovation faster. One problem here is liquidity. The presence of a large number of people on the open market looking for more debt to finance their operations presents rather nasty outcomes if debt is not available. This means in order to keep up confidence in the system, governments are frequently forced to put up a large number of smoke and mirrors to "prime the pumps," boost confidence, and keep things in working order. The consequence of being unable to do this is that if confidence is lost, people will grab their money from their banks, put it under their mattress, or convert it into something perceived as having more value (i.e. gold).

Gold and iron

This is often termed financial alchemy, as when the true gold is lacking, the ability to convince people you have the ability to create it from nothing is extremely important. Here, simply showing something shiny to the masses is often sufficient -- at many points in history, these alchemists have been able to convince both masses and monarchs to partake in their fool's gold. Although in these cases a collapse is inevitable, very often these charlatans have escaped with a large amount of coins taken from the public purse. The present system is especially prone to this problem. For most of the innovations outlined above, America played second fiddle. While the increased rule of finance involved Europe in a number of small wars and revolutions, Americans were busy spreading across an untamed continent. Their assumption of the royal mantle at the head of finance was not quite deliberate, it was more the product of their massive economy fueled by the incredible industry of their citizens. Americans worked hard and built a lot.

The idea of gold in alchemical circles has always been the subject of a mythology, and "true gold" was used for the person who had obtained a state of perfect identification with action. The crucible of alchemists was identified with the fire of Heraclitus. If the world was constantly in flux, the principle which remained the same was that of a heat that could supercharge the human body and make it capable of heroic feats via identification with this eternal principle. So the gods were seen to interfere in the affairs of men; this was the meaning of the word "hero." Here, we have always had two opposing principles: iron and gold. Iron is the symbol of force; it is the sword that slices the person who refuses to use the coin with the emperor's face. Gold is the symbol of the underlying value of the object in question, an object that is inherently valuable. Although both may always be present (few governments offer their citizens the possibility of opting out), there are many times when the gold fades and all that is left is the rule of iron.

The carrot and the watermelon are lost

Today if our financial system is a step removed from both literal and metaphorical gold, we are even further from carrots and watermelons. At times it seems we have forgotten the basic purpose of what money was meant to provide, the possibility of creating value and facilitating human satisfaction. This is a good time to return to the ageless parable of the emperor without clothes. The ability to keep the emperor marching forward without any clothing on is the job of his assistants, who employ large numbers of spin doctors and imperial guards in order to keep the public content and not to ask questions about the lack of crown, royal mantle, or even underwear. Haunting this story is the principle of iron, the fear of the response that awaits the one who dares speak the truth. Here, it is the child who has the best ability to spot a fraud by refusing to recognize the "things that should not be said," and to simply and directly state the obvious truth. The simple truth at this moment is that there is a great sloshing about of capital derived from the ability of people to repackage debt and sell it as assets, but a great loss as governments lose the ability to ensure the value of their own currencies, parading naked due to corrupt advisors who make both the governments and their citizens a laughingstock. The world needs a new global currency that, in the words of Zhou Xiaochuan, "is disconnected from individual nations and is able to remain stable in the long run." As Keynes declared it, his plan for an international standard of account was in a sense “utopian" as it required "the spirit of bold innovation and of international cooperation” that is often not present in the uninspired debates of international governmental bodies. Now it seems more necessary than ever. "Hush child!" is the word of the parents to the child who has declared that the world is based not on humans recognizing and creating value, that formula and fiat are not enough to empower humanity. And yet, the bold words of the child continue to be heard by all who will hear them, "But Mom, look, the emperor has no clothes!" Credit picture:

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