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THE LITTLE MONEY BOOK

The Disinformation Company Ltd.

METAL MONEY

Money can be anything you like. The trouble is that we all live in a world that confuses money with real wealth, that muddles money and what you have in the bank with eternal human values — so it is hardly surprising that we are all getting a bit obsessed with money.

WHAT IS MONEY?: And where has it come from?

"Money is human happiness in the abstract; and so, the man who is no longer capable of enjoying such happiness in the concrete sets his whole heart on money."

— Arthur Schopenhauer

For something we all use so much of, and think about as much as we do, money is extraordinarily elusive. Nobody quite agrees what it is or even, sometimes, what it's for.

At the end of the spectrum, it can be shells from the beach which are used as money in parts of Polynesia. It can be 12-foot-round blocks of stone, used as money in the Caroline Islands — unlikely to be stolen out of your purse but less than useful as small change. Or, if you're in Wall Street, money can be screeds and screeds of digital information, unrelated to any product in the real world.

It isn't that one is real and the other isn't. Both are profoundly real and relate to the different functions that money plays. According to the economists, there are three of these: as a store of value (like the stones), as a standard of value (which everyone can understand) and as a medium of exchange (like the shells — they need have no value in themselves, but help you exchange at an exact price).

Money can be anything — like cigarettes — which helps you account for what you need to buy. It can be something valuable, like coins. It can be something scarce like gold, with intrinsic value. It can be something sophisticated and elastic like shares or copper futures. It can be something that can be accidentally deleted by your bank just because someone sits on the keyboard (this happens surprisingly often). And sometimes it can be a bit of all of these, like the gold that the Spanish conquistadors found in Latin America, extracted from the Incas and shipped back to Europe. Almost anything can be used as money.

The trouble for us is that money is a bit of all of these things. It is coins and it is debt. It is credit card plastic and it is infinite bytes and bytes and bytes in cyberspace — the place where banks actually keep our deposits.

Except that for some of us, money is a good deal more elastic than it is for others. While the poorest people in the world make do with the equivalent of a few cents a day, the "masters of the universe" in Wall Street and the City of London — as Tom Wolfe called them in The Bonfire of the Vanities — have a money system that is almost infinitely elastic. When the rogue financier Robert Maxwell fell off his yacht in the Bay of Biscay in 1991, he had stretched his money so much that he owed twice as much as Zimbabwe. That is the heart of all the great injustices of the money system. For some people money is stretchy, insubstantial and infinite, for others it is horribly concrete. Some people make and remake the rules; some people die by them.

But where does it come from in the first place?

There is a popular misconception that the wealth of the world is underpinned by great bars of gold in the vaults of the Federal Reserve, Fort Knox and the Bank of England. Not any more it isn't.

There is still gold in the vaults, and it is still shifted from cage to cage — each one assigned to a different world government — rather than shipped round the world. But that's an historic anomaly and a simple way of storing some of the nation's reserves. Central banks actually spent most of the 1990s trying to sell off their gold reserves surreptitiously without lowering the world gold price. (They failed.)

Actually, the UK pound hasn't been backed by gold since 1931, at the height of the Great Depression, and the final link between money and gold was broken in 1971 when Richard Nixon finally ended the pretense that the U.S. dollar had gold backing.

Of course there are coins, but these are made of cupro-nickel and are no longer worth anything like the 10¢ or 25¢ stamped on the front. The total value of notes and coins in circulation is only a tiny percentage of the country's money.

Where does all the rest come from? Well, astonishingly, nobody agrees — but most people seem to accept that it is lent into existence by the commercial banks. When you stash money in the bank, they must keep around 8% of that loan on deposit — in case there's a run on the bank — but all the rest is lent out again, many times over. In other words, most of our mortgages and bank loans are created, as if by magic, by a stroke of the pen.

And one day it will have to be paid back, plus interest to the bank, when it can be used as the 8% backing for yet more loans. And so it goes on. It's a magical money-making system that is, surprisingly, seldom commented on, limited these days by only two things: the regulations of the Bank for International Settlements in Basle, and fear of having to pay it back if the loan fails — and a good 10% usually do fail.

That's the strange truth behind modern money. We don't mine it, we don't find it on a beach, it bears no relation to anything real, but still some people have vast amounts of it and some people have none at all. And we hardly ever talk about it.

John Kenneth Galbraith Money: Whence It Came, Where It Went Penguin, 1975 ISBN 0140234799

ORIGINS OF MONEY: It's not what we think

"The worst thing is not giving presents. We give what we have. That is the way we live together."

– Kalahari bushman, quoted in William Bloom's Money, Heart and Mind

There are so many myths about money, and the myths lie behind so much of what we are told about economics, that it would take more than a book to outline them all — but the first, and the most insidious, is about its origin.

We are constantly told by economists and politicians that money began as a way of facilitating trade. We are told that it developed because barter was inefficient and that, for this reason, the drive toward individual wealth and competition that seems at the heart of economics is also at the heart of all of us. Or that money is just an expression of our inner drive to compete with each other in business.

This is simply not true; neither greed nor inefficiencies "drove" the growth of money. Of course barter had its inefficiencies. You have to want what the other person's got, and life doesn't always work like that. The barter schemes that allow some societies to get by without enough cash — like Russia during the 1990s — are fiendishly complicated and devilishly inconvenient. But that wasn't why money began.

Most anthropologists agree that money started as a form of ritual gift — something you gave the next door tribe when you met, or gave the father of the woman you were going to marry, or gave to God at the temple. The word "pay" comes from the Latin pacare, which means to pacify, appease, or make peace with. Money began as a way to make peace.

Take, for example, the meeting between Solomon and the Queen of Sheba around 950 B.C.:

"Extravagant ostentation, the attempt to outdo each other in the splendor of the exchanges, and above all, the obligations of reciprocity were just as typical in this celebrated encounter, though at a fittingly princely level, as with the more mundane types of barter in other parts of the world," says Glyn Davies, author of The History of Money.

In fact, the ornamental metallic objects known as "manillas" in West Africa were used as money as recently as 1949. Some ceremonies in the Pacific still use special whale's teeth or edible rats as ritual gifts of money. The origins of money are still there to see, if you are sharp enough, but they have always been regarded with a peculiar horror by modern economists, and officials have even tried to stamp the whole idea out. Canadian authorities outlawed Native American "potlatch" ceremonies — the mixture between social, ceremonial, ritual and barter that were the heart of their societies — between 1884 and 1951.

What does this mean? It means that economics wasn't originally about savage people competing over scarce resources, using money to do each other down. It was about mutual recognition and facilitating human relationships. It's important to remember this now that money's secondary function is to replace human relationships with monetary ones. When things are sold rather than given, when old people live in nursing homes rather than with their children, relationships get driven out by money.

"This is to say that people do not work and create the economy because they want to support the economy," says the writer William Bloom. "They create and relate — and this, in turn, creates the economy." So don't be taken in by economics. We created the economy around us, and if we want to change it, we can do just that.

William Bloom Money, Heart and Mind: Financial Well-Being for People and Planet Viking, 1995 ISBN 0670865974

GOLD: The barbarous relic

"The customs of the Lydians differ little from those of the Grecians, except that they prostitute their females."

— Herodotus, on the inventors of money

Herodotus was talking about the first coins, invented in the Seventh Century B.C. by the Lydians, living in what is now Turkey. Within a century or so the idea had spread to Greece and North Africa. Even in China, they were making metal versions of the tools and shells that had been used as money before to serve as coinage.

The trouble was, as Herodotus points out, that the shift to metal coins wasn't very honorable — more to do with prostitution than the beginnings of a great trading empire: The Lydians were actually the first pimps. But it meant that people could be extremely precise about price and debt in a way that they couldn't before. Unfortunately, coins confused people about the nature of wealth. The money they were using began as a token of wealth, but soon it became all-important; people believed that gold or silver was the wealth itself, and soon humanity had become caught up in its now-familiar muddle about money. Whatever people know in their hearts, they often act as if:

• Metal is wealth, rather than a manifestation of the intrinsic wealth we carry around inside us as human beings.

• The total amount of wealth is somehow limited to how much gold there is in the world — so that there isn't nearly enough money to go around.

• Only gold — or things that can get you gold — are important.

• The things that are valuable in terms of money, like houses, burger franchises and diamond rings, are really valuable compared to things that money can't give value to, such as orphans, nurses and love.

Those errors have led to the most appalling human mistakes. The conquistadors who followed Christopher Columbus to the New World in 1492 set about cutting the gold jewelry off the locals and hauling it back across the Atlantic in such quantities that it caused disastrous inflation for well over a century.

We make the same mistakes today when economists persuade us that money is all that's important and only things that can be reduced to money — trees after they've been cut down, great works of nature as tourist resorts — are worth measuring or protecting. "Industrial humanity is behaving like King Midas," writes Paul Ekins in Wealth Beyond Measure. "He turned his daughter into gold before he realized the limitations of his own conception of wealth."

Gold may be a "barbarous relic," according to the great economist John Maynard Keynes, but in times of uncertainty we still hanker for it. Most currencies haven't been based on gold since 1931 — but, quite reasonably, we want our money to be based on something real — rather than the purely digital information about debt that money is based on these days.

The trouble is that there isn't nearly enough gold in the world to satisfy our needs for a medium of exchange — just enough for the very rich. Since Columbus returned from his first voyage, about 1.5 billion ounces of refined gold have come out of the ground, only enough to fill a couple of small duplexes.

You can see them in bars underneath the Federal Reserve of New York and the Bank of England, each one worth the same as a house in New York City. It's exclusive and scarce — not enough to provide money for most of us.

Glyn Davies A History of Money From the Earliest Times to the Present Day University of Wales Press, 2002 ISBN 0708317170

INFLATION: Columbus and original sin

"Wall Street, in theory, is the center of the financial system which provides for the capital needs of the nation. But Wall Street is, in fact, a speculation center organized for the purpose of enabling a self-selected minority of men of boundless greed and ambition to become millionaires and billionaires. Whatever Wall Street does to provide for the capital needs of the nation is incidental to, and misshaped and distorted, by what it in fact is."

— Ralph Borsodi, pioneer green campaigner

The galleons of gold that Columbus brought home caused ruinous inflation. Suddenly there was too much money flooding into the continent, chasing exactly the same number of goods — and that's what causes prices to rise. A century after Columbus, there was eight times more money in circulation in Europe, and the reserves of the Spanish and Ottoman empires had been devastated. Its own success had brought down the Spanish empire.

In the 1970s, during which we had to live with rapidly rising prices, anyone might have been forgiven for thinking that inflation was something caused by greedy unions and high wages, or for swallowing the idea that we have to cure it by squeezing the economy dry of money — a process known as monetarism.

But these are misconceptions. Actually, we need money to live. If you squeeze the supply of money, the first people to suffer are the poorest. And without money, we all die — "like a peregrination in the catacombs," said Keynes, "with a guttering candle." Economics has now reached the stage of bleeding the patient.

That's not the reason prices go up. More money has to be balanced by more goods and services.

If money is created for speculation — and at least 97% of the money changing hands is now for short-term speculation — then it's going to be inflationary. And even worse, if banks create money just with the stroke of a pen by lending it as a debt — with interest attached — then that's inflationary, too.

$54.35 billion dollars were in circulation in the U.S. in 1970; by the year 2000, it had increased to $571.12 billion — yet the banks only mint a tiny proportion of that amount: all the rest is lent into existence by banks and savings and loans.

All this money is chasing almost the same number of goods, but most of it is sloshing through the electronic markets as speculation. So the prices of luxuries are rising fast: We have had serious inflation in house prices for three decades. The prices of other things are not rising, primarily because financial authorities make sure very little of this bonanza trickles down to ordinary people. For them, the squeeze remains in force.

According to the campaigners of the mid-Twentieth Century, inflation was theft. The government undermined the value of our money by printing too much of it. True — but the opposite is also true: By squeezing the money out of the real economy, or goods and people, they are also squeezing out the lives of ordinary people.

Ralph Borsodi Inflation and the Coming Keynesian Catastrophe E. F. Schumacher Society, 1979 ASIN B00072GDXO

USURY: The great debate

"Those who swallow usury cannot rise except as one whom Satan has prostrate by his touch."

— The Qu'ran

Muslims have a concept they call zakat, which means that everyone needs to pay what they can afford to help the community. It's a tradition and it supports the Islamic idea that nobody should be allowed to starve. Rich people should not press their debts too far and, when necessary, should forgive them.

But then this doesn't just apply to Muslims. Strip away some of the old stories about sheep or goats, and all the great world religions have similar economic ideas at their heart: letting people rest every seven days, letting the land lie fallow and forgiving debts every seven years. And they all condemn what they call "usury."

Usury has been at the heart of Christian debate for the past 2,000 years — and Islam still believes that the charging of all interest is wrong. In the Middle Ages, though, Christian theology began to accept interest, as long as it was fair. However, pursuing people for generations because of unpaid debts, which were rising all the time because of compound interest, was still considered seriously wrong.

Islamic banks are now some of the fastest growing sectors of financial services, refusing to charge interest but sharing ownership instead. The idea is to make sure that money is productive and doesn't just breed all by itself — but however you define it, usury remains with us.

On the small scale, there are the moneylenders and loan sharks who prey on the poorest in society. The average interest on U.S. credit cards is 13% APR (annual percentage rate), with no federal maximum limit. In the UK, loans offered on the doorstep of a public housing project — for people too poor to borrow money from banks — can amass an inclusive APR of more than 1,000%. Recent research showed one loan shark charging 1,834%, and even 5,000% has been known.

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Excerpted from THE LITTLE MONEY BOOK by DAVID BOYLE. Copyright © 2003 Alastair Sawday Publishing Co. Ltd.. Excerpted by permission of The Disinformation Company Ltd..
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