Kestrel's Nest

On the Nature of Money

"The chief value of money lies in the fact that one lives in a world in which it is overestimated."
- Henry Louis Mencken.

What is money? It might be easier to explain what it was and then trace its history down to the present day. When the kings of Lydia created the first coins around 600BC they can hardly have known what they were starting. A standard weight of gold stamped with the king's lion badge was an easily transportable way of moving wealth around and all manner of goods could have their values determined in relation to this standard. The intrinsic value of the metal was important here. The coin did not 'represent' a certain value; it 'was' that value. China started to produce coins about the same time, but there the value was set by the state, and did not equal the metal content of the coin. That was a true 'token' coinage. East and west followed their own ideas of coinage until relatively recently. In the west, that is in most of the civilised world except China, Japan, and south-east Asia, the intrinsic value of the metal remained important except in times of emergency. However, in the eighteenth century, wildly fluctuating metal prices due to war conditions forced the adoption of a coinage that contained a significantly lower amount of metal than that indicated by the denomination of the coin. China and Japan were brought in line in the late nineteenth century. Over the years this content became of less and less intrinsic value until we have the situation where modern British coins in circulation, with the exception of the 1 and 2 coins, are made of coated steel, the value of which is minimal. Most modern coinages are similarly placed. So successive governments have gradually lowered the intrinsic value of the coinage. It is now a 'token' or 'fiat' coinage. To explain the significance of this let us now turn to paper money.

Cunobelin stater ObvCunobelin stater Rev

When money was "real". A gold stater of Cunobelinos minted at Colchester. His death was an immediate precursor to the invasion of Britain by the Roman emperor Claudius in 43AD.
© Angela Grant 2012

Paper has always been 'fiat' currency. From the time it was introduced in this country, it has represented a debt the issuer owes to the holder. You will note the phrase on Bank of England notes (printed in smaller and smaller type with each successive issue): "I promise to pay the bearer on demand the sum of .......". When the first notes were issued you could expect to go to the issuer and get the equivalent in gold or silver coin. If you go to the Bank of England now you would get your note exchanged, if that august body would allow you far enough into its hallowed precincts to do so, ... for another note of equivalent face value. In order to back the value of the notes issued, the Bank of England originally held gold in its vaults, if not to cover the full value, at least to cover a substantial part of it - over the years this proportion has dwindled, and the last Labour government sold most of what remained of that - so now the currency is backed by precisely nothing. Nothing remains but smoke and mirrors; that is all. The currency is now simply another form of government debt and, being so, is only worth what others agree that it is worth. Each time you buy a bag of carrots you are actually trading in government debt. So what makes it hold its value? The magic word: 'confidence'. The bankers who loan the government money have confidence that they will get it back, plus a little profit in the form of 'interest'. Curiously that really means that they lend the government a piece of its own debt (or some other government's debt) in order to get in return a larger piece of the government's debt. Money has simply become numbers on a computer, smoke and mirrors. If confidence were to vanish, so would the currency.

What has kept this whole mad merry-go-round operational is growth. Without growth in the economy the government cannot get the amount in taxes it requires to pay the banker's interest. The Bank of England controls the amount of money in circulation. However, growth has a habit of failing to materialise, as at present. This is known as a 'recession'. If the government can't get sufficient income from growth, the Bank of England is able to create more money out of thin air. This is called quantitative easing and is, in fact, a form of devaluation of the currency. Most governments require a certain amount of controlled devaluation in the system to keep 'growth' going. Since other central banks are doing exactly the same thing, quantitative easing hasn't, so far, had a lot of influence on the main exchange rates. However, if you compare exchange rates between the pound and a currency that is not affected by quantitative easing, say, for instance, the Swiss Franc, a somewhat different picture emerges. It is useful for the government to allow a little inflation in the system as, because of the delay between business transactions and payment of tax on those transactions, it seems that the payer is handing back a smaller slice of the government's debt than it actually is; smoke and mirrors again. However, it is very dangerous for monetary health to do too much quantitative easing, or to be more honest, creating money - as has happened in Zimbabwe recently and happened in Germany in the period up to1923. Inevitably, in this situation, the value of money rapidly follows an exponential curve downwards into the abyss. How much commodity prices are rising now because of quantitative easing and how much because of demand exceeding supply is difficult to quantify. There is no doubt, however, that this method of effectively increasing government debt, without appearing to do so, is bound to affect prices.

100,000 Mark note

German 100,000 Mark note, first issued on 1 February 1923. Inflation of the Mark was moving so rapidly that only three weeks later the first 1,000,000 Mark note was issued.
© Angela Grant 2012

The other way that banks 'make' money (or, in other words, increase the amount of government debt they hold) is from loans to us. In the old days this loan came from assets the bank held, but nowadays they create a 'line of credit', or, in other words, they create the money, and this money, once created, becomes a bank asset and the bank pays out dividends and taxes from it. The Bank of England is aware of this, and not only turns a blind eye, but supports the methodology, so long as they are sufficiently 'capitalised', that is, hold sufficient debt from elsewhere, to cover it should markets take a down turn. All loans, whether they are made to governments or to private persons, bear a certain amount of risk. Before a bank will loan to anyone it has to have 'confidence' it will be repaid, and it sets repayment interest according to the amount of 'confidence' it has. In 2008 many banks badly misjudged the debt they were handling and paid the price, and those of us with money in banks very nearly paid it with them. Now we have the crazy situation of governments owning the banks that lend them money, that is they own the holders of their own debt, the cost of which purchase they now owe to other banks. In doing so they have increased the 'capitalisation' of the defaulting banks, that is, they have increased the amount of government debt those banks hold, well-knowing that the banks upon which they have imposed this additional debt could not repay the original debt before they added to it. Are you with me so far? How they extricate themselves from this mind-bending situation is going to be interesting.

Sovereign debt is what governments owe to banks. Banks in one country are often owed money by several governments. The Euro situation is worrying because it could end up as a row of dominoes. A Greek default on its debts would put a strain on all countries whose banks are owed money by Greece. If Greece and Spain were both to default on their loans, then one by one Italy, other Euro states including France and Germany, Britain, the US, would follow and the whole row of dominoes would fall. And then all debts, including the government debt represented by our bank accounts and the money in our pockets would be reduced considerably in real value and, in a worst-case scenario, could cease to have any value at all.

What would happen in this worst-case scenario is open to conjecture. At best, we could be reduced to a barter economy; no government or local authority would have money to pay bills or staff and so no ability to control the situation that arose. At worst, we could go back to the dark ages with gangs roaming the streets taking what they wanted and killing whomsoever got in their way. Vigilante groups would no doubt be set up to oppose them. Many in the towns would die from disease with no services running. There would be a general exodus to the country, which the country would oppose, by armed force if need be. Chaos, total and irrevocable, could ensue. Millions could die.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
- Henry Ford.

Now you will be expecting me to come up with an Animist alternative, yes? Else why would this article be on the Animist pages? That is easier said than done. Let me be clear: the current economic situation is dire. It is very fragile. Any historian who has studied past civilisations knows that when they vanish, they vanish very rapidly. In each case something arose that had not been planned for: climate change, an unexpected invasion, a volcanic eruption, a sudden pandemic, and they cease to be. We are in precisely that sort of situation now. We have positioned ourselves on the edge of a precipice. We have placed our trust in an economic system that is based on nothing, a construction of smoke and mirrors, a phantom that cannot survive in the real world, and, to make matters worse, we have increased the world population to a degree that the world simply cannot support. Everything is now under strain. It only needs an unexpected catastrophe to arise to tip us over the precipice; then things could turn very bad very rapidly.

An alternative? An Animist lives in relationship with the living world around her. The eco-village is one attempt to do just that, a low-tech, low-impact, low-carbon, environmentally friendly alternative. People have tried this solution, but a lot of the existing examples rely on the outside world being there to provide a source for scavenging materials and food. If the outside world becomes unfriendly, possibly dangerous, that source fails. More developed examples, such as the one in Pembrokeshire, have taken it a stage further, and have a legal status that other examples don't have. They are also planning to grow all their own food. That is going to reduce the variety of diet somewhat, but we did it in this country for thousands of years and I'm sure we can do it again! It could work, as a long-term strategy, but what concerns me is that, in the next fifty or sixty years, which is possibly all the time we have left to find a solution, enough people will not be able to find enough land to build enough of these schemes to cater for more than a tiny proportion of the current population.

But I have drifted away from my main thesis, which is the tenuous structure of our monetary system. There are indications that there may well be yet another bank crisis within the next few years, and, like the last one, will come with little or no warning. I wonder how much the guarantees of governments are worth if it were again to happen. My best advice, if you have spare cash, is to put it into something that will be useful if the worst were to happen; if you have enough of it, into land, if not, why not try small scale crop-growing in your garden, and if you have no garden, you can do it in very small spaces, balconies, window-boxes, allotments - use your imagination! The truth is, money is a depreciating asset, and with interest rates as they are, and whispers of another bank collapse, it makes no sense to hold on to it. Money is a phantom; you see it in printouts from your bank and think it is really there and really safe, but it is truly only a form of government debt and, being so, it only has value if others give it value, otherwise it is worth no more than bits of paper and discs of iron. It is no more than smoke and mirrors. But don't throw it away on things you don't need and which will have no use if things do turn nasty, better to spend wisely and well. As they say, use it or lose it!!

© Angela Grant 2012

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