The failure of money, chapter two.
The phrase “Money is the root of all evil” is not necessarily true. It’s the intentional scarcity of money that results in war, greed, competition and other malice practices that we see all around the world today.
Introduction
As you know from the previous chapter, the modern money has been created in a very different time when people had different worldviews and priorities than we have today. Throughout the history of our world, with all its wars, political reforms and revolutions, somehow the money system has been left unchanged. This begs the question, “Why don’t we review our money system?!” Somehow the subject remains largely untouched and it feels like a taboo to even talk about it. Modern economy is presented with numbers, equations and algorithms as if it’s science that is engraved in our nature, and nothing could be further from the truth. In this chapter, I will explain what money is, how it is created as bank debt and why it needs to go. Let’s do this!
A dollar for a knife
Although money has known different forms throughout history — from clay, metal to paper — it is merely represented as such. If you’re on a deserted island and you have a knife in one pocket and a dollar in the other, a knife will still be a knife but a dollar will be a useless piece of paper. Money in itself is worthless, it’s the products that are exchanged that have value. This value is then projected into the amount of money that is needed to transfer between accounts. It is also worth noting that only 3% to 5% of money exists in physical form. Most of the money in the banking system are zeros and ones that you see, for example, in your banking app. Now, let’s dissect the actual definition of money.
If you ever managed to stay awake during an economics class, you probably overheard that money is defined by three characteristics: a store of value, a medium of exchange and a unit of account. I don’t necessarily agree on some of them. For example, money functions optimally when it is available and circulates, but a store of value can result in a currency’s removal from circulation. People will store something if they think its value will rise with time, thus making it more like an asset or investment. Additionally, there is one important feature that is often overlooked. For anything to act as money, it requires a community to agree that the particular commodity is acceptable in exchange. Therefore, I like to define money as an agreement within a community to use something as a medium of exchange. There are different ways to settle this agreement. One way is to give that medium of exchange an emotional value, the other is by government enforcement in the payment of taxes. What many people don’t know is that the government also defines money by choosing what it will accept in payment of taxes. Once it has required that the citizens must pay taxes in the form of particular money, for example euros, the citizens must obtain that money to pay taxes. In order to obtain it, people offer services or goods to the government or each other through commerce.
Money owns you
Say you’re one of those people that likes to buy things they can’t afford. Which basically means that you are willing to take a loan from a bank and buy that sweet €100 000 car you always dreamed of. You make your way to the bank and you borrow the required amount to get ready for your purchase. The common misconception here is that the bank will take the money from other peoples saving, which is false. What actually happens behind the bank’s curtains is the following:
When a new loan is made — for instance, a mortgage to buy a house, or in this case financing for a car — this usually results in someone making a new deposit somewhere else in the banking system, for example, by the seller of the car. In turn, the bank receiving that deposit is entitled to create another loan for 90 percent (a fraction) of that new deposit (held in reserve), hence the name fractional reserve system. Then that loan is deposited in another account, that bank is permitted to make yet another loan, and the cascade continues from deposit to loan down through the banking system. Worse still, it’s the application of interest that reveals the dysfunctional and fraudulent nature of our monetary system. When a government or a person takes a loan from a bank, it almost always has to be paid back with accrued interest. In other words, every single dollar/euro that exists must be eventually returned to bank with interest paid as well. But, if all the money is borrowed from the central bank and is expanded by commercial banks through loans, where is all the money to cover all of the interest that is charged? Nowhere, it doesn’t exist. This is why inflation is constant in the economy, because new money is always needed to cover the perpetual deficit built into the system. Mathematically, defaults and bankruptcies are literally built into the monetary system, which means that there will always be people that will get the short end of the stick.
See it as musical chairs where periodically someone falls short and is eliminated from the game. The process will repeat itself until only one player remains, in this case, the central banks. Here is a small art piece of mine to help you visualize this process:
Let’s do a hypothetical to put the previous use case in perceptive. We can conclude that the banks gave out mortgages for the total amount of $11.100.000 against interest of 5%. The mortgages are usually paid in 30 years, so that results in a monthly payment of $59.500 for 30 years. After the 30 years period, the banks receive $10.351.392 in interest alone. Believe it or not, the banks made $10.351.392 in 30 years with only $10.000 in reserves. The people who took the loans paid the total amount of $21.451.392 for the loans and interest combined. Now think about how common this process is. Billions of people take loans every year, but that money flows only in one direction, up.
In conclusion, if there were no debts in our money system, there wouldn’t be any money. Every single euro/dollar in your wallet is owed to somebody by somebody, since the only way that money comes into existence is from loans. Therefore, if everyone in your country was able to pay off all debts including the government, there would be not a single dollar/euro in circulation. Additionally, although new loans are being created, the interest on the principal (money in circulation) is not. Nowhere in the system is this additional money created. This gives rise to scarcity, which, in turn, creates competition to acquire the extra money to cover the loans’ interest.
Some claim that there isn’t enough money to go around. This is a very limited view because the Federal Reserve produces approximately 24.8 million dollar notes a day. The problem is distribution, which is the topic I will be covering in my next chapter. Stay tuned!
