What money is and what’s wrong with it?

Questioning assumptions

“Money has become a ring we wear through the nose, which allows us to be led around by those who control it.”

— Mark Kinney

Money is one of the core technologies at the heart of human societies. It is the means by which we trade among ourselves. In many if not most modern societies money has become a central element around which many human relationships are organised.

To ask what money is may seem a trivial question that is barely worth asking. After all, we make constant use of it in our day-to-day lives and, for the most part, pay it no attention whatever — other than to occasionally worry whether we have enough of it. Our unquestioned assumption is that it is a neutral lubricant for the economic system that in no way influences how that system works. We also tend to assume that money works today the way it has always worked.

These and most other common assumptions about money, in fact, are mistaken. Today’s unitary money systems covering nations and regions are very much the exception in historical terms. While empires at various stages of history have had currencies covering large areas, locally-based money systems — sometimes working alongside the imperial currency, often alone and in the absence of an imperial currency — have been much more the norm.

The first US dollar was minted in 1792 and initially the early member states of the USA all issued their own version (more). Before its introduction there were at least 7,000 different currencies in operation in the US (Dawson, 2009). The first people of North-America were trading amongst tribes in a variety of currencies and through barter.

Many of the currencies used throughout recorded history have not taken the form of notes and coins. Systems of exchange have included beads, cowrie shells, cattle, cocoa beans, grain, wool, precious metals and many other materials and resources. Even today, the great majority of ‘money’ — typically over 90 per cent — is made up not of notes and coins, but rather never leaves the digitalised columns of the bank’s computer databases.

Most people believe or used to believe — as a new awareness is spreading rapidly through social media — that all money today is created by governments. This is not the case. While governments declare a currency like the Euro, Pound, Yen or Dollar ‘legal tender’, the percentage they issue as paper and coin currency through their national minting and printing press is only a very small proportion of the money coming into circulation each year. More than 90 per cent of all money is created by banks in the form of debt, practically out of thin air.

Every time a loan is granted and a bank enters it into their books, the volume of money in the global economy grows a little. This money is entirely based on collective trust in that particular money system. Such currencies are referred to as Fiat Money, as they have been declared legal tender without being backed up by any physical commodity. The value of such fiat currencies is derived from the relationship between supply and demand rather than the value of the material the money is made of.

Above is a short video (2:30mins) explaining the basics of the fiat money system and below a short video introducing you to ‘Where does Money come from?’ (7:30min), a very informative publication of the New Economics Foundation.

If you want to dive deeper into this have a look at the documentary (80mins) ‘The Money Fix’ which includes interviews with some of the world’s foremost pioneers in the field of re-designing and reforming our monetary system. It offers a history and analysis of our current money system and the design flaws of this system that underlie many of the converging crises humanity faces today. The last third of the documentary explains how alternative local and regional currencies can work to strengthen regional economies and what they have to offer in the redesign or our monetary system.

Since the bank-accepted debt that issued the money into circulation has to be paid back with interest, when the loan is paid back and the initial money created is cancelled, the cumulative interest generated remains in the system and generates a ‘debt imperative’ (having to make new loans in order to ensure sufficient money supply to service existing loans), which in turn generated a dysfunctional system that needs to keep growing in oder to avoid collapse.

“The economic growth imperative that results in superfluous economic output and its attendant depletion of physical resources, despoliation of the environment, increasing disparities in income and wealth distribution and many other problems that plague modern civilization.”

— Greco, Thomas H Jr., 2015

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The debt and growth imperatives at the core of our monetary and financial systems design necessitate a marketing industry that actively drives consumption for consumption’s sake in order to avoid this the collapse of a system structurally addicted to economic growth.

So money, it begins to become clear, is rather more surprising and complicated than we generally imagine it to be. One of the most significant misapprehensions around money and bank loans is that these have always been associated with the payment of interest. In fact, until relatively recently, all of the great monotheistic religions have made the charging of interest, usury, a mortal sin. While Christianity and Judaism now accept the charging of interest, Islamic banking institutions continue to work without interest to this day (Lietaer, 2001).

Many of the historically used ‘currencies’ that took the form of natural commodities — grain, cocoa beans, wool and so on — actually lost value over time. Some money systems have adopted this feature — called demurrage — whereby a charge is made on each note or coin at the end of every month or year, resulting in its progressive devaluation over time. This encourages spending rather than hoarding and several glorious periods of history — including the early European renaissance of the twelfth and thirteenth centuries when most of Europe’s great gothic cathedrals were built — coincided with, and appear to be to some degree connected with, the existence of money systems based on demurrage (Boyle, 2003). A number of recent community currency initiatives, such as the Stroud pound in England, have reintroduced demurrage as a design feature.

The Community Currency Knowledge Gateway offers up-to-date information on a wide variety of local and regional currencies. Demurrage has proven a useful currency design feature with a number of regional currencies. Using the stamp script method regional currencies like the German ‘Chiemgauer’, ‘Freicoin’ and ‘Abeille’ in France, and the ‘Waldviertler’ in Austria have shown that money circulates faster in the local economy if demurrage is applied.

But before we take a deeper look at a variety of local and regional currency examples and how different systems may serve different purposes and scales, let’s take a closer look at the impacts using money in the way the current system design incentivises and structurally prescribes. These are important points to understand, as design changes here will act on critically important leverage points that can drive systemic change and transformation — making the transition to a regenerative human presence on Earth possible.

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NOTE: this is an (edited) excerpt from the Economic Design Dimension of Gaia Education’s online course in Design for Sustainability. The first version of this dimension was written in 2008 by my friend Jonathan Dawson, now Head of Economics of Transition at Schumacher College. In 2015–2016, I revised the Design for Sustainability course substantially and rewrote this dimension with more up-to-date information and the research that I had done for my book Designing Regenerative Cultures. This particular section still has some of Jonathan’s writing in the first four paragraphs and could be considered co-authored by the two of us.

The next installment of the Economic Design Dimension starts on March 19th, 2018 and runs for 8 weeks online. You can join the Design for Sustainability course at any point during the year.

Bonus Track ;-) … this is one of my favourites on how money works in circulation: Enjoy Juan Hundred Dollar (10mins)