Modern Feudalism: The Imperial Cult of Mammon ~ part one

"Let me control a planet's air supply, and I care not who makes its laws."

~ The Great Cthulhu

Money has a profound effect on people's behavior.  As Robert Anton Wilson states early on in Prometheus Rising, money's ability to provide us with food makes it a surrogate whereupon all the Freudian neuroses pertaining to the breast can be projected.  When we don't have enough money, we go into the same states of psychological and physiological stress as does a hungry infant deprived of its mother's milk.  He calls money 'bio-survival tickets', appropriately.

Since Wilson's book there have been studies on chimps where the animals were taught to use a token economy, where in order to obtain food they had to provide tokens that were given to them by the experimenters for doing particular acts.  The chimpanzees easily assimilated into this system, and soon they were doing whatever silly thing the trainers wanted rather than the productive behaviors that would normally provide food.  When the tokens became intentionally scarce the chimps became harshly competitive.

Since money has profound psychological effects, and since manipulation of its supply can be used as a means of very effective control, it's probably worth knowing where it comes from.

Money originated as a placeholder to facilitate barter.  In societies where everyone valued a particular non-expendable and aesthetically pleasing commodity like gold, it came to be consensus that, instead of not trading you my apples because I didn't want the goat you were offering, you could give me gold, and then I could use that gold to buy the cheese I wanted.  As the monetary system developed, coinage came into use to make it easy to tell how much of a precious metal was being offered without getting out the scales, which few people had.  It became the province of powerful states to regulate coinage.

This lead to problems, as it did with the Roman empire in the Crisis of the Third Century.  Coinage was debased by the precious metals being mixed with less valuable ones, and the economy reverted to barter for awhile as a consequence.

Later in history, due to the likelihood of being robbed while lugging around a heavy sack of gold, the practice of using paper notes to indicate an amount of money stored elsewhere came into use.  You could deposit your gold in one city and receive a letter of credit, then travel to another city and exchange your letter of credit for gold there.  Once many people started doing this, it became more convenient to exchange letters than to exchange metals.  Much more recently, the value of these notes was divorced from any precious metal, and the fact that people had trust in money became the sole backing for our currency.

So if money doesn't come anymore from someone depositing a previous metal in exchange for dollar notes, where does it come from?  In America, we use the Federal Reserve System.  Well, how does that work?

The Federal Reserve was created as a bank for banks.  The rationale for this was that, since many people exchanged money through bank accounts, it was inconvenient for banks to have to exchange with each other every night and settle accounts.  With the Federal Reserve system, the Fed could keep track of their accounts with each other, saving a lot of paperwork.  But how does the Federal Reserve system allow money to be created?

There are two ways.  The first way only works for the government.  The U.S. Treasury department writes up a treasury bond for the amount of money it needs to be able to spend, and sends the bond over to the Federal Reserve.  The Fed then sends a corresponding number of Federal Reserve notes to the Treasury department, effectively buying the bond, and the money becomes real as far as the law is concerned.  It's worth noting that each time the government sells a treasury bond to anyone, they're expected to pay it back at interest.  So when money is created this way, it increases the national debt.

The second way is veiled in more complexity, and banks get to use it.  It's called fractional reserve banking.  It allows the money supply to expand flexibly.  The basic idea is that a bank only needs to have a fraction of the money it creates in loans on reserve, or, conversely, that a bank can create in loans many times more money than it actually has.  

You probably thought that when you got a bank loan, the bank actually gave you some of their money.  Most people think this, because whenever banks talk about the fractional reserve system they tend to hide the way it works in obscure terminology, and because it's just common sense.  After all, you couldn't loan someone something you didn't have, could you?  Similarly, when you pay off a bank loan, the money disappears to whence it came.

The fractional reserve system allows the money system to expand exponentially.  After all, when you get a loan, what you're most likely to do is to deposit it in a bank.  When you do that, it becomes part of the money they have on reserve, so they get to lend out several times that quantity in new created money.

These are the only two ways money can be created in the Federal Reserve System, and Federal Reserve Notes are the only currency now in use in the United States.  So every dollar you have is owed by someone to someone else.  It's either owed by the government to the Fed, or it's owed by a borrower to some bank.  But wait a second.

If every dollar in existence is owed by someone to somebody else as the principal of a loan, and every loan has to be paid back at interest, where does the money come from for the interest payments?

Well, where can it come from?  There are only two ways money can be created in this system, after all.

So in order to pay back a loan, you have to prevent someone else from being able to pay back theirs.  The fact that the money owed in a loan is always greater than the money created in a loan makes it so that, always, some people will have to default on their loans.  The only way to slow down (not stop) this process is to constantly create more money.

This leads to another problem, though.  Inflation.  When there's an expanding amount of money and a continuously stable amount of actual resources, each dollar becomes worth less and less.  In effect, inflation becomes a hidden tax that results whenever the government pours more money into our economy to pay for services that don't create resources.  This will be the topic of my next economic post.

[Part 2]