Money Redefined, Part I

ABSTRACT

This portrayal of an idealized post-capitalistic society hypothesizes the correction of some of the more onerous characteristics of our present capitalistic system while, at the same time, retaining its evident virtues.  The claims made of improvement are the following:

 1) Avoidance of boom-bust economic cycles

2) Stable money supply and purchasing power

3) A more egalitarian society

4) A reduction in hunger and homelessness without government subsidization

5) A slowdown in the introduction of disruptions created by innovation

6) Lowered societal “overhead” on account of simplified tax collection, a much reduced financial sector, and a reduction in the size of government

7) A more self-determined economic system less dependent on government regulations

8.) A reduced crime rate

It is the author’s intention that the views expressed are addressed in a rational, problem-solving, apolitical manner.  It is safe to say that they would not fit comfortably in either the left or right political camps.

Admittedly the scheme discussed would require systemic changes.  It would not, however, violate our basic political and economic principles nor, most importantly, require an alteration of human nature.

The essay is divided into four parts:

I. Money, the economy’s shaky foundation

II. The individuals’ sphere in a post-capitalistic society

III. The business sphere

IV. The governmental sphere

ECONOMIC’S SHAKY FOUNDATION

 And when she was good, she was very, very good.  But when she was bad, she was horrid.

 Henry Wadsworth Longfellow, 1807-1882

THE SYSTEM:

Longfellow was not speaking of our capitalistic economic system, but he might as well have been.  When times are good, it furnishes a veritable cornucopia of benefits.  Thanks to the social and physical infrastructure it creates, we enjoy better health, a higher standard of living, a greater choice of goods and services, better education, more opportunity to express ourselves, and more interesting careers.  It is, in short, indispensable to our way of life.

However, if truth be told, our economic system is never actually very, very, good.  Even in the best of times, it habitually misbehaves.  It fosters speculation, encourages hoarding, disregards the environment, plunders natural resources, and undergoes fluctuations in the supply of money that creates business uncertainty and upsets the smooth functioning of a market economy.

One more of our capitalistic system’s peccadilloes: if it is given credit for producing a substantial and largely prosperous middle class, it must also be held responsible for its reprehensible creation of an underclass.  And whereas the subsequent unfair treatment given this segment of society may not necessarily be an offshoot of capitalism itself, it cannot be disentangled from it.  Karl Marx’s tirades would not have won a worldwide audience if they did not contain some truthful elements.  A few examples.  The well-off earn interest and poor people pay it (provided they are fortunate enough to be granted credit).  The well-off reap the lion’s share of the profits that working people, in large part, create.  The well-off stride confidently along the stepping stones to success-parental attentiveness, adult guidance, educational advantages, business connections, and financial security, to name a few-that are far less accessible to the poor.

Whether out of a sense of outrage against such injustices; or out of feelings of compassion; or a self-centered, pragmatic concern for public safety, the plight of the poor must be taken into consideration and this essay on economic reform attempts to do so (without, by the way, recourse to socialistic methods)

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 And then there are the times when, like Longfellow’s petulant child, our economic system behaves horridly indeed, throwing tantrums, undergoing fits, and succumbing to seizures.  The fact is, in the last two-hundred years, no generation has completely escaped a financial crisis of one sort or another.  One might have hoped that the economy’s behavior would have improved with time, but, if anything, it has gotten worse.  It seems that the more sophisticated our economic systems have grown, the more uncertainly they have performed.

Even a very fragmentary recounting of financial disasters illustrates the point.

 1497-1509, Italian city states, collapse of bond prices

1540’s-1640’s, Europe, dramatic increase in cost of living

1630’s, Dutch United Provinces, tulip mania; 1672, England, payment of bills suspended

1720, England, South Sea Bubble; 1720, France, Mississippi Bubble; 1792-97, England, value of Consuls halved

1826-29, Peru, Columbia, Chile, Mexico, Guatemala, and Argentina, loan defaults; 1847-66, England, banking crises; 1863, Southern Confederacy, confederate dollars become valueless

1910, Shanghai, rubber stock market collapse; 1923, Germany, Hungary, Poland, Austria, and Russia, hyperinflation; 1929, United States, Wall Street crash; 1930’s, United States, the Great Depression; 1931, United States, run on the Bank of the United States; 1945-90, Argentina, double-digit inflation; 1970’s and early 80’s, United States, double-digit inflation; 1973-74, United States, stock market collapse; 1979, Worldwide, rate of inflation over 10% in 60 countries; 1980’s, Japan, property bubble; 1980’s, Latin America, debt crisis; 1987, United States, Black Monday stock market crash; 1990-91, United States, recession; 1992-93, European Union, crisis in the Exchange Rate Mechanism; 1993, United States, Savings and Loan crisis; 1994-95, Mexico, default of debt; 1997-98, Asia, currency crisis; 1998, Russia, financial crisis; 2000, United States, dot-com bubble collapses

2007, England, run on the Northern Rock Bank; 2007-09, World wide, credit crisis; 2008-09, US, England, Spain, deflation of housing bubble

Not surprisingly, governments have sought to prevent a repetition of these disasters.  They have, for example, given national banks the responsibility of preserving the purchasing power of their currencies and providing financial liquidity to stem bank runs.  Watchdog organizations have been set up to dampen stock market volatility and prevent fraud.  Wage and price controls have been tried as have pegging currencies to hard specie.  Farm subsidies, corporate welfare, and direct handouts have been implemented to revive lagging economies.  And, at the international level, funds have been set up to rescue countries on the verge of financial collapse.

The one thing all these wide-ranging measures have had in common is that none of them have worked very well.  However much we’ve tinkered with various reforms, financial and social disruptions have continued to be the order of the day.

This is no small matter.  Every abrupt movement in economic conditions translates into a jarring social impact.  At the individual level, it might mean unemployment and penury, loss of savings, demoralization, family disunion, eviction and/or homelessness.  At the group level, it could foretell strikes, mob violence, property destruction, protest marches, disorder, fire, and break-ins.  And, at the national level, revolutions and wars.  The overthrow of the Russian tsarist regime by the Bolsheviks and its aftermath cost millions of human lives.  No small matter, indeed. 

One has to ask why the countless attempts to cure our economic and social ills have met with so little success?  Certainly not on account of a lack of effort on the part of intelligent, well-meaning experts equipped with all the computer power anyone could ask for and backed by enormous government and private funding.  Most major universities in the United States have an economics department staffed with dozens of highly educated professionals.  Library shelves are filled with abstruse books and research papers dedicated to every facet of the economy imaginable.  Yet, as the historical record attests, no key has been found to unlock the door to dependable prosperity and social harmony for one and all.

The reason fissures keep occurring in the economy is the same reason cracks keep appearing in the walls of some houses.  The problem in both cases is that they’re sitting on a shaky foundation.  Plastering over the cracks doesn’t help for long; the next tremors from below dislocate things all over again.   

The question “what’s wrong with our economic system?” thus ineluctably leads to the question, “what’s wrong with money?”

THE ROOT OF ALL EVIL:

 “…nothing solid could have been built on so insecure a foundation”

 René Descartes, 1596-1650

Money’s most dangerous characteristic is that, at its heart, it is based on nothing more substantial than our faith in its value.  It is an artificial construct that attempts to impose a common denominator upon a number of disparate elements that have, in fact, nothing in common.  In actuality, there is no physical relationship between basic materials, manufactured goods, physical labor, and intellectual activity.  But, by assigning each of them a number corresponding to our opinion of their relative worth, we convey upon them some pretended intrinsic value.  Thus a single hundred dollar bill can purchase various quantities of each of these items without any of the people engaged in the transactions being troubled for a moment by the fragility of the underlying premise-that nothing but the human mind with all its foibles is running the show.

It’s a terrifying thought all right: our monetary system is at the mercy of the human mind-the same human mind that is governed less by rationality than by emotions.  At any moment, perhaps for no apparent reason-fear, greed, intemperance, avarice, and/or prejudice-can seize hold of our collective mindset and, in a matter of days, shred our faith in the currency.  The consequences of such events have, in the past, often been calamitous.  Nor is there any reason to believe future events will be any less disruptive.  Money has no safety net.

Another factor contributing to the volatility of money is its exposure to governmental pillage.  One would hope that, given money’s fragile nature, federal authorities would do everything in their power to strengthen it, that they would limit its supply so as to maintain its purchasing power.  Unfortunately, they inevitably fall prey to one exigency or another and crank up the printing presses-the officials involved secure in the knowledge that they’ll be out of office before the impact of their recklessness takes effect.  Thus they cheapen the currency, surreptitiously dip into the pocket books of the citizenry, strip money of its pretenses and show it to the world in its au naturel state.  And, like as not, such an insalubrious sight sends the economy into some sort of trauma, be it recession, depression, market meltdown, hyperinflation, bankruptcy, and/or political upheaval.

A third contributor to our monetary system’s instability is the  deplorable tendency of its minders to heap a huge, top-heavy stack of financial instruments-mortgage backed securities, credit instruments, derivatives, collateralized debt obligations, credit default swaps, and the like-on top of what we have already seen as a weakened financial structure.

As if money didn’t have enough problems as it is, it has been further strained by its overextended mandate.  It is asked to perform too many, often competing, functions simultaneously: a medium of exchange, a storehouse of value, and a unit of account among others.  The result is an ungovernable commercial structure in which money’s many convoluted elements are interwoven.

Indeed, when one adds up all the monetary system’s many disabilities, we should be thankful, I suppose, we don’t experience economic crises more often than we do at present.

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Imagine, for a moment, that the cityscape we see through a window is duplicated in every respect by a computer image created by a computer game.  Were we then to click on the game’s setup button, we would be shown a display of all the political and economic parameters from which the image had been generated layer after layer through time.  Then were we to manipulate any of these historical values even to a small extent, we would find the new image to be massively reoriented.  Many buildings would disappear, others change shape, and new ones spring up in other places.  Streets would be relocated, bridges moved, and transmission towers rearranged.

Obviously, the real cityscape and its computer image are two very different things, but they stem from a common source.  They both are one-hundred percent manmade.  Before the first stone could be laid, and the first pixel could be lighted, a decision had to be made by a human being.  So, just as surely as we could revise the image on the screen, we can dictate the shape of things to come in the real world.

All it takes is finding the “setup” button.