Phil for Humanity Phil for Humanity
A Guide for the Survival of Humankind and Helping the World, Society, and Yourself.



The History and Current State of Money


Employment and currency are indeed difficult problems. I have been studying the history and current state of money. Itís quite frightening once you get an idea of what is really going on. Only by following the history of money can one appreciate the complexity and implications of the various systems of money.

In a nut shell, the simplest form of currency is good will. This is possible only between people with shared long term interests such as those living within a community.


Beyond that is barter, which allows you to trade with a wider range of people. Barter has its well known limitations since you need to find someone who wants what you have and who has what you want. There are more complex forms of barter with multiple parties involved, but it gets complicated and cumbersome very quickly.

The next obvious level of trade is to use a commodity such as gold which everyone values. Gold becomes a place marker and expands the impossibilities of barter by an order of magnitude. But gold, or any other commodity, has several significant drawbacks: gold is heavy and hard to conceal on one's person. It is awkward and invites crime. There is a limited quantity of gold. If there is not enough gold available for the needs of commerce, it becomes a bottle neck. For example, when population and commerce expanded during the Middle Ages, there was not enough gold to cover all the economic activity. This problem has often been exploited by people seeking to make huge profit by 'cornering the market,' that is they hoard enough gold to create a problem. The lack of gold drives up its value, at which point the scoundrels sell the gold at an inflated price making a killing at the expense of the community.


For all these reasons, the Italians invented vouchers to solve the practical problems of carrying gold and credit as a way of extending the volume of gold. The way credit extends the volume of gold is that the holder of some quantity of gold (the banker holding a reserve of gold) would lend gold to their customer, in the form of paper vouchers secured by the gold held in reserve. But since the receiver of the voucher was likely to use the voucher as we use dollar bills today and not ask for the physical gold, the banker is free to lend money to the next customer in the form of vouchers against that SAME gold! This sounds like a criminal act, but it is in fact called fractional banking: the system we still use in most of the world today. The 'reserve' in the Federal Reserve Bank of the United States of America is the modern corollary of original gold reserve. Banks are allowed to lend out 10 times their reserve. When they put 1 dollar in reserve, they can lend out 10 dollars. Those $10 are spent and go into another bank who can lend out $9. The process continues until the $1 in the original reserve account becomes up to $99 in debt.

After the American Civil War, there was not enough gold to back the dollar one to one. So, the U.S. Government started backing the dollar with fractions of gold. This lasted until President Nixon was forced to take the dollar completely off of gold. Since then, we have been operating on fiat money and a fractional banking system. That is, since gold is not backing the dollar (or any other major currency now), it is only the word of government (the promise to pay) which backs the dollar.

Interestingly enough, there are two things that force people to accept a currency: Taxes must be paid in the currency, and it is considered legal tender. Legal tender means that if you buy a car from me and offer me dollars, I cannot insist that you pay me in gold or silver or even potatoes. I have to accept dollars if I want recourse to the courts of land.

Our system has two major strings for manipulating the economy: creating more money (remember, each new dollar created results in $99 in circulation) and controlling the reserve requirement (if you change the reserve requirement from 10% to 5%, then you essentially double the potential supply of dollars). There are other less effective strings such as the prime rate, but these are much less effective.

The debate in this country of who should control those strings of our money supply started before the ink was dry on the Declaration of Independence. Some, like Alexander Hamilton (the first United States Secretary of the Treasury), felt that money was too complex a matter to be put in the hands of amateurs and should be controlled by professionals. Furthermore, they argued, if politicians were to control the money supply, they would print money when they needed it rather than undertake the unpopular task of raising revenues through taxes and tariffs. The excessive printing of money could and often does lead to inflation. Inflation is a hidden tax in that the buying power of your savings shrinks just as if you had been taxed while the government (and all other debt) has been decreased proportionally. Uncontrolled inflation also causes uncertainty in business which is a damper for all of the economy.


On the other side of the debate, are those who feel that the economy should be controlled by elected officials, since it is the money of the people. Furthermore, having the control of the money supply in the hands of people whose prime motive is profit is like asking the fox to guard the hen house. With bankers in charge of the supply of money, there is more than the potential of a transfer of wealth from the middle class to the wealthy.

The ball went back and forth until 1913 when a hybrid system was developed with a privately held central bank which operates at arm's length to the government, but the chairman of board is chosen by the president of the USA (from a short list offered by the bankers), and there was always the possibility that the bank's charter could not be renewed if it were not to act in the public interest.

After an awful start resulting in the Great Depression, the system seemed to work, especially after President Nixon took us off the gold standard. We had 40 years of explosive growth. Today, we call it a bubble, and we are paying the price for the 'irrational exuberance' as Alan Greenspan (ex-Chairman of the Federal Reserve) put it.

In looking back at the recent bubble, it looks like two things went very wrong: first, financial instruments got so complicated that very few people could understand them or unravel them; and second, money was made so easy (low interest rates and easy to qualify for loans) that it drove up the demand for housing and started a speculative spiral. Prices, especially in California, went way above their real value. By real value, I mean what people would be willing and able to pay based on its use. The difference in the prices of houses between the real value and the bubble price is the speculative component.

Another factor, that has structurally influenced our political and economic situation for the worst, is treating corporations as persons. Corporations are not persons, their sole motivation is profit and they have no loyalty to the community in which they reside, except as it serves their profit motive. This has lead to the corruption of our elected officials and all of the agencies that are supposed to regulate industries. This is done through political contributions which drive up the cost of elections and drowns out the vote of the people, lobbyists who give corporations a disproportionate voice, and the swinging door between industry and regulatory industries which lead to unnecessarily complex and ineffective regulations which amount to barriers to entry for the corporations.


Letís consider the possibility of having one person per community (a community being small enough that the voters would know the people that they are voting for) and that these elected individuals would vote on all the issues. Current technology could allow each individual to vote. Ideally, each individual in a democratic society would have a voice. As much as I try to stay on top of issues, I invariably find myself staring at a ballot with nothing more than the apparent ethnicity or gender of the individual from which to make a choice. Only an informed choice is a democratic vote. Most people do not have the time or the inclination to educate themselves about the issues to be voted on. Having a smaller number of people, who are in touch with the people they represent and who would take on the job and the duty to inform themselves of the issues, would allow truly informed choices.

There is also the issue of coming up with a currency system that would meet the needs of a sustainable society without the wild swings and greed of the current system. To do so, we have to remember that money has no value in itself, but is a simply a place marker to the efficient movement of goods and services (some prefer to use the term capitol). To this end, technology which exists today can be used to allow a single bank to issue currency to support actual transactions.

Letís say, each person alive has a bank account and each month a deposit is made into that person's account for enough money for the most basic subsistence. In addition, people can earn more money for doing useful work, including studying, art and providing services to the community. Those who work for companies get paid by those companies and those who contribute to the community as a whole by studying, art, teaching, child care, administrators, police, fire, medical care... get paid by the community which decides how many of each they need and can afford. Those who wish to own companies are free to do so: farmers, manufacturers, miners, entertainers, service industries... They could borrow the money from the bank based on the community's assessment of the usefulness of their enterprise and the probability of success, or they could borrow money from individuals. The bank would charge interest. Interest is different than usury. True interest is sharing in the profits or the losses (up to the amount lent) of the enterprise. Usury is charging a percentage whatever the outcome. Usury is prohibited by most religions. Today we call usury 'interest' but that is playing with words. Only some Muslims hold onto that prohibition. Getting back to the new form of currency, the interest the bank receives from the company would be the only tax collected. There would, of course have to be limits on the salaries of the people working in the business so that no one earns disproportionately or guts the profits of the company in order not to pay the bank its share. This is something that needs a lot of work, because it must balance incentive to produce against possibility of abuse.

This concept is based on the idea that there are people who produce needed goods, those who provide support services, and those who do neither (the retired, the children, the sick, and the unemployed). Only those people that produce needed goods create wealth for the community. All the rest either spread the benefit of this wealth or are part of the community without currently making a contribution but are none the less valued members of the community. Those people that are or will be contributing to the community should be supported by the community. That means that education and capitol funding should be made by the community. The entrepreneur who chooses to use their creativity to the benefit of the community and of themselves would have the benefit of this support which lowers their risk. In exchange for that lower risk, they would be able to earn several times more than others, but not orders of magnitude more. They would, however benefit from the status and recognition based on their contribution.


Based on this view of the economy, it makes no sense to tax the non-producers and those who distribute the benefits. All this does is cause a lot of circulation of money and a lot of unnecessary work. It also makes no sense to do unnecessary work. If we can all get away with working 20 hour work weeks, why should we work 60 hours? In my experience, few people work much more than 20 hours a week in any kind of productive mode. Even in my workaholic days when I was at my shop 14 hours a day 7 days a week, much of that time was not well spent. I now spend a fraction of that time working and get more done. Some jobs, such as production work or construction are best done in blocks. The 20 hours a week could be done in two 10 hour shifts in a week or one month on and one month off.

This needs a lot of refining. It does not yet take into consideration large infrastructure costs such as roads. There is the matter of trade between communities and how values are set or excess earnings spent. Rome was not built in one day nor do we have to come up with all the answers in one sitting.

Getting back to the question: why do people perform unnecessary work? The answer is that the system pushes them to do so. Businesses are faced with a relentless outflow of cash for rent, payroll, taxes, the cost of money if they use credit, and stock holder pressure for profit if they are a publicly held corporation. The business can only service a limited number of customers in a given period. A rule of thumb is that the overhead associated with an employee is equal to their salary. That means, that a $25 per hour person has to generate $50 for every hour they are working in order for the company to break even on their employment. In some cases the overhead is much more and in most cases employees are not able to be productive the full time they are at work. So for the company to make any kind of profit, each employee must generate a lot of business if they want to keep their job. Given the real fear associated with losing one's job, and the ease with which a bill can be padded and corners cut, is it surprising that there is a lot of unnecessary work done? The system demands it. People only respond to the forces that shape their lives. The trick is to give people enough incentive so it is worth their time to contribute without putting so much pressure that they are compelled to cheat.

As a result, I am not sure that capitalism works. Pure capitalism is a disaster which leaches society. It has the same problem as communism in that it tends to consume itself. The only system that can work is a balance between capitalism and socialism with safeguards at both ends to keep people from falling into misery or making ridiculous profits. For instance, France is probably leaning too far in the direction of socialism while the United States of America is leaning too far in the direction of capitalism. Both have also benefited unfairly from taking resources from third world countries, grown fat on them, and both are starting to pay the price for their excesses. Europe had itsí colonies and the United States had itsí gun boat diplomacy, essentially the same thing. The fat times, fueled by ill gotten gains, has fueled expectations on the part of their citizens and repercussions from their victims and their excesses, such as terrorism, unemployment, a falling currency, and illegal immigration; and in Europe, legal immigration from former colonies.

In Jared Diamond's book 'Collapse', he discusses what happens when societies expand to take full advantage of the resources available during times of plenty. At that point, even small reductions in resources can precipitate a crisis and even an end to that civilization. In 1974 when there was an oil embargo and there were long lines at the gas stations for a long time, the reduction in supply was only 7%, yet it felt like a 50% reduction, probably due to hoarding.

In conclusion, the current state of the world economy is in strong need for change. Hopefully, this change will occur before it becomes a necessity, so that people have an easier chance to acclimate to the changing new world economy.

by Didier G.
on 11/29/2009

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