Tuesday, October 22, 2013

Mo' money

Continuing on recent themes:

The physics of money (Cassandra's Legacy)
Petty money was not simply a question of low denomination. It was a completely different form of money. The "moneta grossa" had a value corresponding to its weight. The coin was normally just a convenient way to measure this value by counting coins rather than weighing bullion. It was what modern economists call "commodity money". Petty money, instead, was a form of "fiat money", a kind of currency that had a face value unrelated to, and normally much larger, than its value in terms of the component metals.

This fundamental difference stabilized the system: two completely different kinds of currency co-existed for most of ancient times. Indeed, the two currencies had different purposes and different diffusion. Moneta grossa, pure gold or silver coins, were for the rich and were used for important or international transactions. The poor had no use for gold coins and it is likely that most of them wouldn't even see a gold coin during their lifetime. The intrinsic value of these coins made them valuable even at long distances from the places where they were minted. So, we find Roman coins that made their way up to China to buy silk. It didn't matter to the Chinese that these coins had the face of a Roman Emperor on them. They could always be fused and re-minted or the gold used for other purposes.

The opposite was true for petty money. It had value only close to the place where it was minted and this value was created, normally, by the fact that the local king or warlord or chief brigand would accept these coins as payment of taxes. As the local king/warlord/chief brigand controlled the local army, that was the crucial point that guaranteed value for these objects that, otherwise, would have had no value at all. Even today, if our government were to accept squirrel skins as means of payment of taxes, then banks would be soon turned into tanneries and the old men sitting on park benches would carry with them poisoned crumbs.
9 Mind-Blowing Facts About Money (The Big Picture)
1.) China invented every single major form of currency: metal coins, paper money, and fiat currency not backed by precious metals; Seized gold six centuries before Franklin Roosevelt, in order to prop up its fiat currency and prevent runaway inflation.

2.) Debt Forgiveness Is The Basis for Modern Civilization. Indeed, the first recorded word for “freedom” in any human language is the word for freedom from debt.

3.) Everyone was taught that money was invented to replace the messy business of barter. It’s hard work walking my cow all the way to your village to trade for firewood … and then carrying all of that firewood back home. And what if no one wants my cow?

But economist Charles Goodhart – a former member of the Bank of England’s Monetary Policy Committee – anthropologist David Graeber, and other experts on the history of money say that this is a myth. Instead, they say that money was invented to finance war, and to keep score while armies went about pillaging and looting.

4.) The average life expectancy for a fiat currency is less than 40 years.

5.) Big Banks Are Not Really In the Banking Business

Everyone thinks of banks as holding our deposits safe, and extending loans based upon the amount of deposits they hold in their vaults. This is no longer true.

The big banks currently do very little traditional banking. Most of their business is from financial speculation (which, sadly, metastasizes into manipulation and criminal behavior). For example, less than 10% of Bank of America’s assets come from traditional banking deposits.

6.) Inequality Today In America Is Worse than In Ancient Slave-Owning Societies

Inequality is much worse than you think …Indeed, inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America.

7.) Quantitative Easing Hurts the Economy

81.5% of all money created through quantitative easing is sitting there gathering dust … instead of helping the economy.

8.) Yes, The U.S. Has Defaulted

It is widely stated that the U.S. government has never defaulted.  In reality, the U.S. has partially or fully defaulted on numerous occasions.

9.) How Money Is Really Created

Banks create money out of thin air, without regard to whether or not they have deposits on hand. This sounds like an outrageous statement … but the Federal Reserve has said as much.
A brief history of banking: the link between money and society (The Guardian)
Do you know what happens to your money when you put it in the bank? If you are like the majority of the population, including, it would seem, the majority of politicians, then you believe that your money is kept safe in the bank. In fact, quite a number of the people who still use branches are older people coming in to visit their money and check it is all still there.

However, the word bank (with all its connotations of solidity and stability) is in fact rooted in the latin meaning "bench" and refers to the seating in any Roman forum where money lenders used to hang out. Money lenders who could be bankrupted (literally their bench was broken so they couldn't sit there) if their loans went bad. Bankers ancient and modern relied on the confidence of the public to trust in their ability to pick good credit risks from the bad and deposit money with them in return for interest. The ensuing credit crunches which are the result in the collapse of that trust and confidence are as ancient as credit itself.

So where did your money go? Well, in theory, the bank has turned your money from a liability on one side of its balance sheet (an IOU to you as the depositor) into a credit on the other side, such as a loan or bond to a business. This loan or bond, despite it representing money owed to the bank, is counted as an asset and is given a real value on the balance sheet based on an assessment of the risk that it won't be paid back; the higher the risk, the lower the 'book' value of the asset. The loan also provides new money to the bank in the form of interest, a small portion of which is paid to the depositors as reward for their trust in the bank. The rest is profit after the wages of the bankers are taken into account.

This is important because what the bank does with your money really does affect the world around you. It is money that produces the activities and companies (such as those engaged in fracking) whose actions we might fundamentally disagree with. However, you don't need to feel powerless in the face of the big banks and their current dominance over how money works for us in the economy.
'Money reduces trust' in small groups, study shows (BBC)
"Subjects basically latched on to monetary exchange, and stopped helping unless they received immediate compensation in a form of an intrinsically worthless object [a token].

"Using money does help large societies to achieve larger levels of co-operation than smaller societies, but it does so at a cost of displacing normal of voluntary help that is the bread and butter of smaller societies, in which everyone knows each other," said Prof Camera.

But he said that this negative result was not found in larger anonymous groups of 32, instead co-operation increased with the use of tokens.

"This is exciting because we introduced something that adds nothing to the economy, but it helped participants converge on a behaviour that is more trustworthy."

He added that the study reflected monetary exchange in daily life: "Global interaction expands the set of trade opportunities, but it dilutes the level of information about others' past behaviour. In this sense, one can view tokens in our experiment as a parable for global monetary exchange."


  1. I like your posts on the myths and realities of money. The freedom from debt and debt forgiveness goes back even farther, as the Jubilee system was a part of Jewish custom for a time.

    I've made up sort of a rough sketch of what I think would be a viable next step. I don't think it is utopia. Far from it. And getting it to work involves a political reordering as well. Even with what I have read from you and others on the subject, I also realize my own perception of economics is still limited. If you'd like to see it, then I can send it to you. It's not Right or Left. Just different, and you may be intrigued.

    1. So where is this sketch? A link please?


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