Monday, October 22, 2012

What Is Money?

(part 2) (part 3)

This seemingly simple question has been at the center of most of what I've posted in the last three years. Like the fractal properties of the waterline on a river bank, the closer you look at money the more infinitely complex it becomes. Like language or math, money is a projected system we've built around our inclination to abstract symbolic meaning from things. Like language and math it is a tool we created to solve practical problems in the world that once extant began its recursive feedback with that world restructuring our actions in it around the new definitions created by our own invention, money. Instinctively we value life, the things required to sustain life and the things within it that afford pleasure. Money is an alternate value system we invented to solve distributional problems with those prior values. But, like math or language, its universality as a system lends money a tendency to usurp those subjective, less measurable and older values and to substitute its own terms for those that preceded it.

The invention of money had the same kind of affect on our production and exchange of things as the invention of writing had on our production of myths. That is to say it decisively ended an earlier phase and set us on new and for the first time fixed foundations over which we continue to build. David Greaber's magisterial "Debt: The First 5000 Years" comes as close as the general reader probably wants to get to an historical understanding of the creations and evolutions of monies around the world. For our purposes here I'll focus on what money is here and now in early 21 century America, I'll focus on the fiat dollar. Since the final demise of the Bretton-Woods exchange rate system in 1971 the US dollar has been a floating fiat currency. This is to say it is a money backed only by the value created within that system of trade and commerce denominated with the dollar. This is very different from how fiat currency is popularly described as being backed by nothing. The productivity of the dollar denominated global trading system is at present the greatest economic achievement mankind has produced. It is something more than nothing, but what exactly is it?

The distributional problem money was invented to solve was a twin birthed with the division of labor. With the birth of centralized agricultural civilization divisions of labor became institutionalized. Once institutionalized their arrangement of tasks, and specialized trades to perform them, became both central to the physical sustainability of the new social organization and essential to the social forms of the society itself. Economic function began to define individuals monetary worth in society. If we view civilization for a moment as a technology, money is one of its essential gears: money allows a simple value measure of the produced goods of civilization making it possible to monitor, understand and plan their distribution. However, with this intended function came unintended effects. Once money was in use to facilitate distribution, manipulations of money by those who controlled the system became central political events concealed behind the abstract nature of money from those subject to the manipulations. And with these manipulations the definition of human value imposed by the money measure began to prejudice the functional values of those at the apex of the system toward the terms of the system and against their own humanity.

As a technology civilization takes an entirely instrumental attitude toward the people of which it is composed. The conception of specialization of roles that defines the division of labor allows productivity to be enhanced through improved social organization. It is important not to forget that this is first and foremost a social arrangement between people that organizes their access to things and each other for mutual benefit. People existed and flourished prior to specialization in production, but specialization, as it penetrated society, both improved productivity and expanded the realm of things produced. Civilization as a technology is that set of institutions through which our social organization perpetuates improvements to productive organization to capture and transport into the future real material gains achieved. It has been incumbent on leaders from the beginning, however, to mitigate the instrumentalist view money imposes on these social organizations or risk rebellion when the functions devolved to the base of society become more than it can bear.

It is this instrumentalist value set, valuing things through the prism of money, that has led to the backing of currencies with commodities. By defining money value in a commodity unit, those who control the system hope to preserve the value of the money itself even in the face of breakdowns in the social organizations that underpin real productivity in the economy of real goods and services. When your concern is wealth accumulation and the competitions of kings or empires this has the appeal of divorcing winnings and losings in the political competition from the real productive capacity of the underlying civilizations. It is the individuals who make up these underlying societies who bear in blood and sweat the brunt of such competitions and who's otherwise productive integration with the division of labor is the underlying driver of real wealth creation. It is the destruction of these productive relationships by violent political competition that bankers have tried to protect themselves from with commodity money: it pushes financial risk onto the real factors of productivity, ordinary working people, and sets finance apart as a uniquely protected sphere.

Where fiat money has come into broad use, whether in ancient China or in America since 1971 it has been the result of an imposition of humanist values between the operations of money systems and the instrumentalist values they suggest, restoring humanity to the center of government aims. Fiat money is used where governing institutions are more concerned with maintaining the constellation of productive relationships into which the division of labor has evolved than with maintaining the relative value of the unit of measure (money). The bankers who proposed Lincoln's resort to fiat money in the Civil War considered fiat money to be a forced loan in as much as the state created money value without paying interest to the holders of gold stocks for the use of its value in facilitating commerce. This was a justification of fiat money as a tool of government in extremis, but it relied on the conception of money as a store of value rather than the essential lubricant of wealth creation. This same rationalization has underpinned all war finance in the last century. The final adoption of floating fiat money in 1971 was a more enlightened recognition that productive relationships were vastly more valuable in the long run than the relative purchasing power of a unit of measure, and that to tie that unit of measure to some commodity made the vastly larger system of production subject to the vicissitudes of fortune in one narrow commodity market.

So money as the lubricant of wealth creation is the final value of fiat systems. In such systems the relations of production within the economy are preserved by contracts and courts and the rule of law, all functions placed outside the market on the understanding that human fairness is central to the non-coerced relations of production in a modern economy. This last is itself the lesson of the American Civil War where the un-coerced productive relationships of modern financial capitalism demonstratively outperformed the coerced productive relationships of the Confederacy. And these are the essential issues still at stake today in the hard money versus fiat money debate. Those who want hard money want a unit of measure that is not dependent on un-coerced relationships of production, but this does not quite imply that all proponents of fiat money are interested in un-coerced productive relations. To the contrary, the prime abuse to which fiat money has been subject since the 2008 collapse has been its use as a forced loan from American civilization and the dollar denominated global system to bail out the speculators and the political opportunists who do their bidding in Washington.

For the rest of us, when we work we are paid with a measure of our systems worth. The amount we are paid is subject to the contract we have arranged to engage productively in the vast and multifaceted division of labor that constitutes modern production and to our ability to enforce that contract in a court of law that is neutral to the commerce of the parties involved. The acceptability of the money we receive and use in payment of our own obligations is the result of popular confidence in the effectiveness of the overall system from production to commerce to citizens to the courts. Because the vast majority of people believe these institutions will continue to work, that the United States citizens will continue to purchase and produce, that our government will continue to collect taxes and purchase goods and services, the US dollar continues to be the global reserve currency. And while China's rise may at some future point legitimately threaten that reserve currency position, China is in no position at present to demand the produce of the rest of the world making it ill suited to denominate any significant portion of world trade in its currency. The real and present danger to the US dollar is the willful ignorance of ideologues who want to preserve the value of the measure of wealth in the face of an all out assault on the production of real wealth itself.

As Keynes said almost a century ago, there is no greater loss of wealth in an economic slump than the wealth that is simply never created by idle labor and idle stocks of capital. This is the essence of the global hiatus in growth we are now living through. Idle resources and idle capital stocks sit stockpiled in unproductive hoards while billions of people world wide are under or unemployed. The power of fiat money has been co-opted by financiers to convert the fiscal authorities of the major world governments into rent paying pawns of plutocratic hoarders who are more concerned with the measure of their winnings than any advance of real human productivity or living standards. Deficits now grow wildly around the world to pay off bad debts owed to failed institutions who are being rewarded with rents for their failure to underwrite. It remains for political leadership somewhere to take back the peoples money, for that is what all money fiat or other is, and put it back to work for the common good. This will entail standing up to the common criminals who propagandize against majorities who's needs are going unmet while stealing the full benefit of trust and participation in an economic system now subject to a political class that no longer cares for voters. Our politics now cares only for financiers. It has converted the money creation power of the state into an infinite ATM for these same financiers who recycle only the minimum required to sustain their political puppets while amassing vast and useless hoards.

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