The Money Game

Sam Kahl
Sam Kahl
Aug 31, 2018 · 7 min read

Go back seventy years. Imagine you’re leading a nation newly liberated from colonial rule. Supposedly you are now sovereign, free to pursue development of your economy, laws and people. Let’s say you have abundant resources of water, land, minerals, even some rudimentary infrastructure and enterprises left from your former colonial master. Is it enough? No, you find you’re missing sufficient skills, updated machinery and replacement parts.

Because your nation has a deficit of skills and technological advancement, you try to import educators, scientists and technical experts through some political arrangement and export some of your people to be educated through exchange programs. Meanwhile, you organize some schools and farms as best you can and institute land reforms so as to employ your people and secure your food supply.

In all this, you can’t avoid working with two principles. One involves what I call the physics of economy. The other is what I call the politics of economy. Every aspiration for social regeneration is tied to getting this right.

With the physics, it’s feasibility that we must deal with: can it be done? Can we travel the distant reaches of deep space? Can we terraform Mars so it becomes habitable for humans? Can we industrialize the Moon? Can we bioengineer the Earth’s atmosphere? Can we increase crop production with existing soil and smelt metals while recycling emissions to other productive uses? Can we reconstitute the molecular structure of waste, regenerate damaged brain cells and spinal cord and feed a population of nine billion people? If it can be done, can it be done now, fifty years from now, five hundred years from now? That’s what we’re dealing with here.

With the physics half of the social equation, can is the operative word. With the politics half, the operative words become shall, should, will. And what comes into play are: do we want to do this? Why do we want to do this? Who benefits? Who gets to decide? What should be the basis of decision? Is it environmental impact? Is it costs and budget? Is it lifting people out of poverty? Is it making national or private economic profit?

Here we enter a world of negotiating agreements and exchanging resources and services for mutual advantages of people and nations. If we cannot do it by ourselves, then who will do it with us?

The practice of exchange of resources and services for mutual advantage dates back thousands of years. Development of this practice motivated development of mediums of exchange. To produce money from such medium as metal or paper, we must somehow invest that medium with a store a value, sort of like investing a plastic gift card today with purchase value, and peg the values of all else being traded to the money value. Thus, the store of value becomes a measure, or standard, of value of everything else.

How does this “magic” come about? The power of society pulls off this trick. Even when our medium of value has some inherent material value of its own, such as precious metals, it becomes money through a social process. When we shift into paper or electronic calculation and transfer of value, the social “alchemy” is hard to miss.

Livestock and grain were among the earliest forms of money, dating as far back as 9000 B.C. By 1000 B.C., metals came into prominence as mediums of exchange because they were durable and easily transported. By 500 B.C. this practice was widespread in China, Southwest Asia and surrounding area of the Mediterranean Sea. By 118 B.C., China was experimenting with bank notes marked on leather and by 806 A.D. with paper bank notes.

I have a nifty little booklet published by the New York Federal Reserve in 1979 with the title Coins and Currency containing the following passages:

“During the Middle Ages, as travel became more common, travelers went to goldsmiths to exchange their coins for a receipt [that] could [in turn] be exchanged [for a fee] for coins with a designated goldsmith in another city.”

In the beginning of the United States, “the feeling toward paper money was so bitter that a provision permitting Congress ‘to emit bills on the credit of the United States’ had been struck from the first draft of the Constitution, and the final version forbade states from issuing bills of credit.”

Whether issued as interest-bearing bonds, redeemable notes, bills of trade or currency notes, what underwrites and validates the money value? Asset-value of underlying collateral is one factor. Creditworthiness, that is, the ability and willingness of relevant parties to turn over assets as payment, is another. And the enforcement authority and power of government or relevant private entity is one more factor. Once money becomes a dominant social force, it can be utilized both as an instrument of production and a powerful political player.

Once money becomes a dominant social force in its own right, it can be employed both as an instrument of economic production and instrument of political subjugation. Consider a private transaction. Suppose it’s not mutual advantage, but to take advantage of you, that I want. How would I arrange a credit/debt transaction to steal assets from you legally, with or without organized violence being employed? Elevate this to transactions of nations, large credit institutions and international loan agencies. (1)

To see this in real life, consider Venice eight hundred years ago. Venice was the most successful of the northern Italian city-states in creating and maintaining a republic dominated by a merchant capitalist elite amassing vast capital formation of financial assets. Venice created political institutions which guaranteed property rights and enforceability of contracts. It pioneered and excelled in developing foreign exchange, international credit markets, banking, accountancy and government-bond market with compulsory loans on which interest was regularly paid.

Networking this model through branch offices into a more global enterprise, Venice’s Peruzzi branch in Florence of the 1330’s, which was effectively going bankrupt in its destructive agricultural credit-and-trade scheme with Europe, had managed to provide credit and loans to England’s Edward III under such brutal terms, providing a means of seizing and looting England’s revenues, that England was forced to default on it loan obligation. (2)

For comparison, we have today the phenomenon of what’s called “vulture” fund, which specializes in trolling for distressed assets, that is, near-worthless debt instruments, to buy them up at pennies on the dollar and sit on them till time was ripe to work some political magic and recoup as close to full contract value as possible, as did Elliott Management Corporation did in 2012 with Argentina, arriving at a settlement in 2016 with a new Argentine government. (3) (4)

Today’s modern adaptation of this Venetian model is truly worldwide and centered in London — not London the city which is capital of England, but City of London Corporation whose sovereignty England’s monarch is obliged to respect. Sometimes called the Vatican of the commercial world, rich in history of managing trusts in legal-financial shell games and private-interest (i.e., East India Company) takeover of government meant to serve some form of public interest, the system thrives on a network of offshore tax havens and penetration of governments. (5)

The real battle with today China is not between the United States and China nation-states, but between economic blocs. China’s current leadership appears to want a way out of an empty financial system and zero-sum hegemony of winning at the expense of another only to be outdone at the next turn. Looking to advance capital formation into useful production as an alternative and unwind from the entanglement of mere-money finance, China’s economic bloc of development corridors with partner nations around the world is a threat to current system of speculative looting and austerity. But without better information at our disposal, our insight is limited.

So now we come to a special function of capital formation called accumulation. Accumulation appears to need perpetual increase. It cannot sit still in equilibrium. How can it achieve this? As long as there’s domestic capacity for it, investment in development of production will do the trick. Suppose we outstrip this capacity? Then we can try exploiting/colonizing resource-rich domains outside the mainstream of capitalist production and market.

Suppose we outstrip this capacity as well. What then? Suppose we arrive at an amassment of “paper” titles to income without any systematic correspondence possible to any increase in real social productive wealth, will the money game stop in its track and recalibrate to unlock labor power and what’s called fixed capital (i.e., value of tools of production) from attrition? You would think so. Where else can it go? But according to the Financial Crisis Inquiry Report issued by the U.S. Congress in 2011, the answer is no. (6) But there’s nothing left. How can it go on?

Here, it seems, the logic of virtual reality has come into play. Having overreached physical and productive capital as collateral, we learn that some mathematical geniuses have managed to concoct schemes of collateralizing existing credit instruments and monetizing newly-compounded risks as new value for trade to keep the game going.

What “magic “is this that can overcome physical laws and put the entire world’s GDP in hock to minimally ten times its value in fake paper assets? It’s the “magic” of social psychology which overcomes the hostility of natural law with the gambler’s fantasy of easy riches. (7)

Now go back to the beginning of this presentation. Consider the challenges we indicated of leading your nation. How do you work out those real-life physical challenges in the current world with its financial system and politics? Do you stick with the formula? If you can’t stick with it, how do you break from it? In moments like this, as under the Great Depression and ensuing New Deal, we are forced to either divorce from the prevailing system so as to undertake something that’s unfamiliar but that actually works, or stick to the tried-and-true formula and die.

(1) https://www.youtube.com/watch?v=fsrtB5lp60s

(2)https://scholarworks.umass.edu/cgi/viewcontent.cgiarticle=1021&context=heliotropia

(3) http://www.wsj.com/articles/after-15-years-a-bond-trade-now-pays-off-145696631

(4) https://www.independent.co.uk/news/world/americas/the-vulture-capitalist-who-devoured-peru-and-now-threatens-argentina-8347577.html

(5) https://vimeo.com/178210280

(6) https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

(7) https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp

County Democrat Reader

Of, by, and for Multnomah County Democrats

Sam Kahl

Written by

Sam Kahl

I like to hear and tell stories, in person and in history. capture and dig into the long arcs of economy and foreign policy, trust nothing that enters my mind.

County Democrat Reader

Of, by, and for Multnomah County Democrats

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