There was never a more powerful myth than money. To build a complex society, ordered through rights and responsibilities, many strategies have been tried, and each has ultimately explored its limitations. In slave based societies, there was wealth created by those with responsibilities, but no rights, but such societies could only develop by the state creating money that could be taxed and for the state to command the responsibilities of the people. This created public works, large armies and temples: the artefacts of the ancient civilisations. As a system for engaging the talents and creativity of people it was limited. As a system for encouraging risky investments by individuals it was limited. Patronage commanded.
The innovation of double entry book keeping created an alternative source of money: private credit. There were now two money systems in operation. Money created by the state, recoverable as taxation, and money created by banks, recoverable as interest and the repayment of debt. In both instances the value of money lies in the demands associated by its creator.
This creates a balance of power between the state and private finance. If the state constrains the creation of private credit, it can become the commander of the economy. If it lifts constraints on credit then the banks and commerce assume greater power.
When the state controls credit and expands the extent of public works, it can find itself responsible for economic activities unsuited to an organisation whose purpose is its own power. Democratic control of the state can help to bring a public benefit focus to the state's purpose, but equally it can corrupt its purpose as it panders to the electorate's short term desires. This can easily become a process of creating more money than there is an intent to tax, with the result that there is inflation.
By contrast, when credit controls are lifted, the bank's assume the position of being the primary source of money. They too have a weakness, for the banks are taking a risk with every penny of credit and unlike the state can not enforce their debt collection by threat of incarceration. In consequence they each seek to gain the security of assets of stable value, such as land, property and government debt. Inevitably this leads to these assets being over-valued. Further assets are then invented by manipulation of the law, such as on intellectual property, or by manipulation of trade, such as in financial instruments. This enables the expansion of credit and in consequence, the money supply, but with a corresponding demand for money for the repayment of debt. Inevitably though, the credit created for the purposes of asset inflation is unable to repay the its debt, other than by increasing rent. Since rent is the cost of utilisation of an asset, this means that the yields on inflated asset prices, become in effect a tax by the banks on the productive economy. In combination, the impact of these consequences of uncontrolled credit are highly distorting on the behaviour of both the economy and society.
As a greater proportion of money becomes associated with inflated asset prices, the potential for further increases in the money supply as credit becomes limited. The resulting decrease in the rate of increase of credit is of itself a cause for deflation. The state can not use interest rates to control credit, because credit is controlled by the lack of assets that can offer a sufficient return to be regarded as security.
This puts the state into a bind. If the state increases interest rates to increase the return on savings and to encourage the utilization of assets, the resulting asset deflation would put the banks into default. This would give the state no alternative, but to create money to acquire the deflated assets and make them available for productive use. In the process it would destroy the countries financial infrastructure and would have to take responsibility for its reconstruction.
If the state were to create money to replace the decreased liquidity arising from the decrease in the rate of increase of credit, it would then need to create a corresponding increase in taxation if it were to avoid inflation. However in an economy operating as part of a global free trade system with capital mobility this is not an option. There would be downward trading on the currency, resulting in a rise in the cost of imports, including energy. This in turn would result in a contraction of the economy, including a decreased ability to repay existing debts to the banks and a collapse in asset values.
The states only other direction for action is to put its own existing capacity to create money and demand tax for the provision of public works and services forward as an asset for further private credit creation. This is what privatisation is in effect. The government creates a monopoly as a contract to deliver a service to be paid for by money raised as taxation. This can then be used as security for further credit creation. In this way a wide range of services are transferred to the private sector, with the general benefit of pulling the economy away from deflation.
This however is just feeding the monster. Just as pushing house prices up to the lowest viable yield ratio is a one off action, so is the transfer of public services to the private sector. After that economic growth requires rent income from other sources. This could be from exports, or from theft.
Theft in this sense goes far beyond the legal meaning of the word. It means taking from some population, their accustomed rights either at home or abroad,. In the UK this has meant an attack on the accustomed rights of the poor and the disabled to benefits and public services. It has meant denying to immigrants the rights normally accorded to everyone. It has meant sending soldiers to fight the American imperial wars to force weaker countries to surrender their resources. It has meant surrendering our sovereignty to trade agreements that steal our right to decide the values by which we shall live. The humiliation of these thefts is increased by the bonuses the bankers pay themselves and the wage rises our politicians vote themselves.
This though is a doomed game. Theft of this sort breeds discord and rebellion. It causes people to turn on each other, breaking the compact that delivers a peaceful society. It destroys the culture of the weak, leaving them without hope or a sense of belong. It throws the educated into confusions of cognitive dissonance that can leave them vulnerable to tyrants. Above all though it is unsustainable.
The value of money can not be vested in either taxation or debt repayments in a global society that needs to work towards a global social equity and environmental sustainability. Money given value by taxation will create the tyranny of the state and if the state produces excess money there will be inflation. Money created by private finance as debt, creates the tyranny of the corporations and if there is too much credit causes deflation. Nor is there a balance to be had between the two, when taxation is a function of nation states and credit is global.
The late economist Richard Douthwaite proposed that there should be a global currency linked to the demand for fossil fuels, with the pollution rights allocated across the world per head of population to each nation. The demand for the currency would distribute wealth to the least energy consuming, with the depressive effects of limited supply falling on the demand for fossil energy. This would both destroy the competitive advantages of maintaining a trading currency (for which easily traded debt instruments are required) and enable individual nation states to develop currencies for internal purposes.
Much more thought is needed on the question of currency reform, but we can see at the moment a terrible contradiction in our current arrangements. Our generally accepted ideas about the aims and values of a modern society call for greater power for individuals and communities. This is at odds with a state of ever growing power and at odds with the ever growing power of corporations and finance institutions. Even more it is at odds with a combined system that is unable to address the larger social and environmental issues that all of us on earth are facing.
In a complex society we use money to describe our rights and responsibilities. Either we must be creative in the ways we develop money to reflect what these rights and responsibilities need to mean, or we need to create an alternative to money. Sadly time is probably not on our side, so for all the failings of money it makes more sense to focus on the evolution of money than on inventing something else. What, however, we can not afford to do is to fail to understand how our political, social, cultural and economic dynamics are being shaped for both good and bad by the money system we are using. Every day this issue is being neglected is a day when the poor and the weak suffer and a day less to get our management of our affairs on a sane footing.
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