A Brief Story of Money

I want to tale another look, in story form, at money and profit as we currently have them, and the long term systemic consequences of both. There is still much demystifying to be done.

Money does not grow like organic matter does, by taking in other organic matter and transforming it into growth. Likewise, money is not engendered organically by value creation throughout the economy, such that someone working hard discovers fresh, new money in his pockets at the end of a long day. Money creation occurs before anything 'valuable' can take place in the economy. Money is not biologically, organically or otherwise linked to work or other forms of effort in the economic sphere. It is an invention created by humanity to assist/enable economic activity, not the consequence of such activity. The truth is that money is created by banks and 'grows' via a mathematical trick called interest. Someone has to create it, and establish the correct amount and the best rules.

First no-brainer question: if there were only savings, with no one or thing in debt anywhere, would that be good? Answer: Not possible. All banks would be in debt to their customers, unable to pay the interest owed. People's ability to save depends on other people being in debt. 'Thrift' on one side requires 'profligacy' on the other.

Second no-brainer question: if there were more money-as-savings than lent-as-credit, would banks be happy? Answer: No. For the money guys, profits are eveything. Banks need to lend more than they borrow, which means, crudely speaking, money systems need more people in debt than in the black.

When banks create money by lending it, they do so as a business, so must earn a profit. They must be earning more from repayments on loans than they are paying out to savers. They will otherwise go bust. Governments create money by issuing treasuries, bonds and guilts, each a form of borrowing ... borrowing, that is, at interest, from private individuals and institutions.

So let's take this a step further and assume, initially, a fixed-size pool of money out there in the world, created by God for us to use. As economic activity takes place, amounts of money move around from person to person, from entity to entity. From the point of view of worker A, money is earned by doing something another person is prepared to pay her for. From her point of view there is an expansion in wealth when she gets paid. A successful business sees money coming in too, sees money-growth. Conversely, people going into debt experience a contraction in the amount of money they have. So, at this level of perception, there appears to be money growth and contraction. But, seen from the point of view of the total money pool, there are only movements of funds from one place to another. Growth and contraction are narrow perceptions of money movement, from us or to us.

In this basic model, what are profits? Net movement of money to some person or business. And what is loss? Net money movement away from some person or business. There is no money growth or contraction, only movements, or eddyings, in the money pool.

Let's play with the pool. It is now made up of loans, and no longer a divine creation. It is therefore owed back to the various lenders, plus interest of course. The pool is $10bn, the amount owed $10.5bn (readers have been here before with me). The only thing that can happen in this difficult situation, is that one or more people competing to pay back what they owe have to fail. The maximum possible amount that can find its way back to the lenders is $10bn, since this is the amount that was created in loans to the population. An amount to cover the interest was not created.

Of course, no respectable controller of money wants the game to end after round one, which would happen were the loans to be paid back (minus defaulters of course). That would be counter-productive. What happens in the world as people compete for their share of the too small money-pool, is that they are 'pressured' to become creative by money scarcity. They invent stuff and produce stuff, which they buy and sell. Those who succeed are demonstrating themselves as 'money earners', while those who fail and default show themselves to be unfit to play the game. So the winners are loaned more money — since they have proven their ability to pay it back — to keep the circulation going. Some are net winners, that is, they suceed in accruing more money than they owe (which means the lenders don't get it back), whereas others fall off the treadmill. The money pool therefore contorts as a consequence of this bumpy balancing out, this sorting of the wheat from the chaff, pooling here and trickling away from there, just as before. Soon though, fresh injections (as loans) are necessary to keep the game going, because, for one thing, the lenders will not see their entire $10bn again, only a part of it, and ambition to expand businesses, as well as desire for houses, cars and other large items, arrive at the lenders' doors as demand for more money. Scarcity set the game in motion, and must be maintained to keep it going. No free lunches here!

Indeed, money lenders themselves also have to be successful against other money lenders (their competitors), as they compete for their share of the now growing amount of money in the economy (though thanks to interest always too little). The pool is expanded to, say, $15bn. Thus the game can continue, thus, via interest, is scarcity maintained despite an expanding money supply. It is even imagined it can go on and on indefinitely. The money pool grows and grows as time goes on. People fail and succeed (including money lenders), and the battle to stay in the game makes humans creative and inventive. So far so good. We have ourselves an Invisible Hand running a beautiful perpetual-motion machine.

Essential ingredients are: sufficient time to win and lose; lots of people playing; a playing field (planet Earth in our case) with sufficient raw materials and healthy enough living conditions to support game play; a growing population, ready, willing and able to play along, and a perpetually scarce money supply.

What must not happen is a stop in the circulation of money. The debts must never, ever be paid back in total. All money would disappear if this were to happen, and the game would stop. Because of this systemic rule, the size of the money pool therefore has to grow and grow and grow, in perpetuity, because of interest's role as a necessary part of the money creation process. Note this 'growth' is a function of the rules of the game, not a function of economic activity per se. Indeed, increasing economic activity is a function of the rules of the game, a consequence of interest. Interest is the whip, economic activity the beast whipped. It was not always this way, nor is money the only incentive, but money-technologies, that is, incremental changes in the way humanity deals with money, have made it so in our model. That we tend to think of the whole thing arse-backwards doesn't alter the fact of how the money system works today.

The amount of money owed back necessarily increases as the money-pool increases. Population growth supports the game as more people come to the table. Production and consumption increase inexorably, driven on by incessant whipping from the money system. The technological developments inspired by the fight over perpetually scarce amounts of money enable, pretty much as a side-effect, more and more people to live on the planet for longer and longer. And, because humans are not about money alone — other things interest them too (in fact everything does, one way or another) — while the money game is being played, other things happen alongside it. Developments and discoveries happen in farming, medicine, media, computing, automation and so on, and even in how deeply we understand reality.

But everything is interconnected, so things change within the game too, slowly at first, but increasingly quickly as yesterday's developments accelerate today's. As a part of the struggle to own as much of the money-pool as possible, automation plays an increasing role in the production process. On top of employment fluctuations as one consequence of contractions in the money pool (as central banks fiddle to get a good economic balance), and of money-distribution problems generally, over time those jobs humans can do are automated more and more, leading to a migration of human labour from agriculture, into factories, and finally into services. As services themselves slowly become automated, so humans find paid labour harder and harder to come by. We become increasingly unnecessary in the production of goods and services. It slowly becomes apparent that only our spending power is needed to keep the game going. But humans want to be more than mere consumers. Dreams of escape, of 'something else' emerge in the culture and spread, the speed of their spread assisted by ever improving communication technologies.

Additionally, humanity's successes worldwide result in a population perhaps as large as the planet can happily host, or close to it. For the game to go on, the planet has to be able to play along. The problem is that we are blinded by the brilliance of our perpetual-motion machine, forgetting the underlying factors that make the whole thing possible. On top of this we have a calcified social hierarchy, in which a small elite runs the show, while a far larger number of punters mans the treadmills. Change though, ever-present, slowly rouses the punters from their repetitive labours, as new technologies spread information faster than the elite can police and massage it. The system must be defended at all costs. Without it there is chaos, and the elite would not be the elite any more. Information and disinformation infect each other, trust evaporates, life becomes somehow bland and colourless, while at the same time strangely dangerous, despite the brilliance of what we have achieved.

In the inevitably tiny winners' lounge, the control centre for the now incomprehensibly complex system, a window looks out over the powerful machine as it hisses, steams, and pumps away. For the first time the thought occurs that the machine is in control, not the proud elite, that its inbuilt hunger for more and more is threatening its own functioning. The thought is quickly repressed. Alarming groans are fixed only to erupt from some other part. The machine is cancerous hunger that cannot be transformed into anything else.

And here we all are, components of a process centuries in the making, unwitting contributors swept up in currents whose great motions lie outside our abilities to see directly. Only stories and analogies can help bring some focus to what is historic in scope, cultural in breadth, and psychological in depth. We are the story which is changing, but we have to see it from the outside if we want the coming waves of change to take us higher, not crush us down. Money and money-profit are merely themes of a particular chapter, the products of our inventiveness. They are not divine acts we must accept as commandments for ever more.

And I didn't once mention fraud!

We must seek:

Money-as-lubricant, not money-as-wealth
Wealth as an outgrowth of health
A system which can deliberately promote profit in measures such as literacy, societal cohesion, low crime rates, trust and so on
A worldwide rethink on value as it relates to paid labour, alongisde a recognition of what humanity can do to automate boring and unstimulating work
A recognition that all systems are emergent and subject to constant change
True sustainability
Lasting transition from fossil fuels