Understanding Money

Many people are seeking to understand how the money system works and looking for answers on websites and in books. My own journey of discovery has been informed more by Mary Mellor than by anybody else. She has a refreshingly down-to-earth approach and an underlying commitment to sustainability that make her explanation particularly appealing.

Very sensibly, Mary's local Transition Towns network asked her to give a series of lectures explaining money, which were filmed and have been made available online. Mary gives four lectures: What is Money?, Money and Banking, The Financial Crisis, and The Future of Money. Mary's view of the latter is an empowering one: money should be a social resource from which we all benefit. We must end the privatisation of money and the banking monopoly.

Mary is critical of the view of money in economic theory, claiming that it is shot through with inconsistencies. It is focused on modelling rather than understanding. 'The influence on coinage on Western notions of money has misled us', she claims. Even in 1698 the amount of money held in 'tally sticks', a physical system of recording money owed between two parties, was actually larger than the amount of money held in coins. Money is a story of relationships, a story of communities, and of economic exchanges based on trust.

James Robertson, doyen of the monetary reform movement and grandfather of green economics, said about these lectures: 'Mary Mellor's understanding makes an essential contribution to anyone wanting to know more about how the money system work and what its future could and should be. I warmly recommend these films to anyone who wants to learn more and think what we should do about it.' So please find time to watch them, learn more, and begin to change the world.
. Tweet

You only give me your funny paper

The really mysterious thing about the operation of central banks around the world is how they can - as if by magic - 'inject' money into failing banks and finance businesses. Where does this money come from? (Here is what Richard Douthwaite has to say about this.)

Although the Bank of England is officially apolitical, it is in fact deeply political. It can create money by selling government bonds, in other words mortgaging the country in order to create money. At present it is creating money in this way to bail out banks and investment houses who have bought worthless assets. They took the risk but we are paying for it. They took their bonuses when they made the deals, but those bonuses are being paid by ourselves and future taxpayers.

I confess the workings of the central banks are highly arcane and deliberately obscure, so I may have this wrong. If so, I would be glad to be informed of where BoE can find a hidden stash of gold that is not available to others.


The nature of money creation is a shared scam by the commercial banks. They create debts which other banks accept as credits, and this allows the banking system as a whole to create money from nothing, which they share between themselves to create their massive profits.

The problem is that the reverse also applies. In troubling times a bank will refuse to accept another bank's paper but will rather ask for something of real value. Since the very nature of the system of money creation means there is nothing of real value there, the circle which was once (at least if you are a bank) virtuous, will very rapidly become vicious.

This explains the anomalous situation that, as the central bank cuts its own interest rate (meaning we are getting less back for our bonds), banks are actually charging us higher interest rates. They have become more risk-averse which means they have less trust about whether we (or other banks) will repay, which they reflect in making money more expensive. This also has the handy side-effect of increasing their profits at a time when their traditional means for doing this has folded up.

In the face of such disastrous mismanagement of the financial system the obvious solution is for political authorities to take back the power to make money. I predict that any suggestion along these lines will be met with some worthy bank stooge (my money would be on the Ken Clarke-Denis Healy double-act) waffling on about inflation. A shame they forgot to mention that when they allowed the banks to create worthless paper money. Tweet

Transition Towns Make Money!

In spite of my advanced years I have recently embarked on a new career as the face that launched a thousand community currencies. Well, ok, just one so far with another coming soon and an open invitation to Brixton for something exciting in the near future. Next week on 24th I'll be in Lewes launching the community currency associated with the Transition Lewes process. In terms of Transition currencies I'm hoping to keep my 100% record, so invitations are welcome.

You may be wondering why Transitioners have the creation of a community currency as one of their top priorities, alongside growing carrots and eco-building. Why should such practical folk consider the effort involved in launching and sustaining a community currency to be worthwhile?

The disasters at Northern Rock exemplify the most important reason: the global financial system is, if you'll excuse me, rocky. Yes I know I'm an economist and so money is my bread-and-butter in a way it isn't for you (and you would not believe how difficult this makes decisions about mortgages and so on) but if you begin to think what life would be like without a functioning monetary system you may come to understand this sense of urgency.

In fact there is no need to imagine it because this situation happened, just a few years ago, in Argentina. The default of the peso led to a monetary vacuum into which commodities such as grain and soya became sucked, to become useable as currency. But the local currency that environmentalists had established a few years before was more flexible and soon became the main medium of exchange. You can find out more about this and its implications for local currencies in this country here: http://www.uea.ac.uk/env/ijccr/contents.html

In numerous other communities from Hungary to New Zealand and from South Africa to the USA local communities have decided to extract their labour and their lives from the global financial system and its inequities. In the case of the Transition Towns the impulse is predominantly about increasing resilience and ensuring that, if climate change brings financial meltdown on the Argentinian pattern, we will have a functioning shadow currency system to turn to. Peter North describes the adventures of these various pioneers in his book Money and Liberation (http://www.upress.umn.edu/Books/N/north_money.html)

There are quite a few questions for community activists seeking to launch their own currency. Should it have decay built into it by imposing demurrage, a sort of reverse interest that means money is gradually worth less over time? The mechanism was invented by German economist Silvio Gesell to increase the velocity of circulation of money, thus increasing economic activity during the 1930s recession in Europe.

But is this idea compatible with the green economist's wish to reduce economic activity? Perhaps the two motivations could be made compatible if the economic activity stimulated in the local economy displaced the more destructive global activity?

Should you deposit money in the bank to back the currency and allow convertibility? This certainly encourages confidence in the currency, but limits creation to the amount of sterling you can spare. Jonathan Dawson, Co-ordinator of the Global Ecovillage Network and a key player at Findhorn, told me that their currency, which is backed in this way, is acceptable at the rate of 100% in their local pub. Now that might get the punters interested.

Tweet

Thinking about money

Money is one of the most marginalised issues of our time. Most people never ask themselves or others questions about where money comes from, what it is, or who controls it. This is a shame, since money quite clearly lies plum at the centre of an economic system that is not called capitalism by coincidence. As David Korten said, ‘Capitalism is the use of money to make money for those who have money’.

This question has become even more pressing in the post-globalisation version of capitalism, where money no longer operates as a tool facilitating trade in products, but is used to make money directly by various confidence tricks in a system which is now commonly referred to as ‘the casino economy’. The creation of money by banks was originally intended to facilitate the exchange of goods. However, from the start a range of financial scams have been perpetrated which remove this need to get your hands dirty making things.

It is no coincidence that globalisation as represented by the vast expansion of trade in goods occurred simultaneously with the liberalisation of financial markets. Countries which had once attempted to maintain political control over finance through setting interest rates, controlling the activities of banks, and through credit and exchange controls were persuaded that further capitalist progress required the market to take on these functions. Money can now be used merely to generate more money for those who have it, leaving not production but finance to play the central role in the global economy: ‘Of the total international transactions of a trillion or so dollars each day, 95 per cent are purely financial.’

Money is useful for the obvious reason that it enables you to pay for a luxurious lifestyle, but more importantly to those who control capital, money gives them a claim over future production so that over time they are enabled to accumulate an unfair share of a community’s resources and power.

There are few subjects in modern life about which so many lies are told and so many misunderstandings encouraged, both politically and personally, than about money. It is, in fact, neither the root of all evil nor what makes the world go around. It is a neat but deceitful political tool that enables those with power under a capitalist system to exercise that power to generate an unfair advantage for themselves. This is why I am launching a strand of this blog to present the issues surrounding money in bite-size chunks.

Readers who have not delved into the inner workings of the financial system should be warned: you are in for an exhilarating but bumpy ride. You should not be surprised to find yourself thinking ‘I just can’t believe it’. I have frequently felt that way myself when embarking on a similar journey. The disbelief is similar to that experienced when watching a confidence trickster, but be assured that, just because the show is good and you have believed it for a long while, that does not mean that it is true. Tweet