Excerpt from TAO OF ECONOMY by Leonardo Wild
/Copyright 2003/remailing is allowed
as long as the source is given and the purpose is not commercial and/or for
The past and the present of economy
Economy began with hordes of hunter-gatherers taking from the environment
what they needed to survive. The goods they didn’t use right away, they
stored for the days of scarcity. Thus “store of value” was instituted.
Also, gift-economy took place as mothers and other members of the group gave
the young ones food they had not themselves gathered, or supplied them with
clothing they had not themselves made, or took care of other parents’
children as they went away to hunt or gather. This practice —of giving
without expecting anything specific in
return—, goes on today in lesser or greater measure, as well as reciprocity
terms of loose barter.
We have seen that the three ways in which needs are met —gift-economy,
barter, money— evolved throughout the ages. Little by little, new aspects
of economy where added, with specialization of both the production and the
offering of services growing, which also meant greater dependency on what
“others” could do.
Something called “market economy” began to be born. Since most
of present-day economy exchanges happen with the intermediation of “money”
in its various forms of presentation, perhaps it is now time to give money
a closer look.
The evolution of money
The path taken by money varies from place to place. Money started to exist
when certain goods that were widely accepted as “valuable” began
to be traded, not only for their own sake, but because they could be used
to acquire other things. So: money is to consumers
and producers what transport is to distributors.
This means that widely accepted goods, which were deemed
important, became a “commodity of trade” and, therefore, what
is now known as money’s raison d'être, that is, a “means
of exchange” that transcended the limitations of barter. Commodities
became money because, besides their inherent usefulness, they were also widely
accepted and sought-for because they could do various other things besides
fulfill needs. They could:
a) Store “value” over time.
b) Be of a quantity enough to exchange with other things.
c) Be scarce enough so not everybody could come up with more.
These commodities acquired a “cultural value,”
that is, they were widely accepted regardless of their real value.
Commodity money went through a process of evolution:
at first it was cattle, rice and other grains, tobacco, alcohol, animal hides,
among other things. After a while, people began to accept particular commodities
as means of exchange due to their cultural value, things such as: cowry shells,
axes, religious totems and assorted tokens, also precious metals such as gold,
silver and copper and other luxury” items.
Sometimes these metals were “officially minted” into coins to
proclaim their purity and weight. Cresus of Lydia (around 560-546 BC), instituted
the “royal seal” on coins to guarantee their “value.”
Then after commodity money became mainly gold and silver —in the form
of dust, nuggets, coins, or bars of a given weight and purity—, goldsmiths
invented what is normally known as a “promissory note.” That is,
a document that was, in practical terms, a “warehouse receipt”
for a given object.
These promissory notes —a promise to return a given amount of something
in exchange of the note— began to circulate instead of the things they
represented. This then became what is know as “symbolic money.”
Symbolic money stood “in place of” stored commodities —the
real thing—, especially of gold and silver. Yet, because of this representation,
symbolic money behaved much like commodity money in the sense that people
looked upon it as a true commodity, forgetting that they couldn’t wear
it, eat it, drink it or use it for anything other than to trade for real valuables.
In the case of symbolic money, the process by which it was created happened
more or less as follows:
1) An owner of gold went to a bank to deposit
2) The bank measured the gold (or checked the gold or silver coins’
soundness in terms of purity and weight);
3) The bank issued a promissory note —or presented pre-printed paper
bills— in relation to the amount of “value” deposited.
The person holding the note or the “paper money”
could then use it instead of the gold or the valuables. This money circulated
and, whenever someone wanted to have the gold (or the valuables) instead of
just the symbol for the stored value, went back to the issuing bank and the
bank returned the “stored value.” This meant that the bank “promised”
the bearer of the bank note “to deliver something in the value of ...
” whatever amount was written on the face of the promissory notes, paper
bills, bonds or whichever “value-holding document.” This means
that bank that issued the money
actually owed that much in value. However, “real value” became
confused with “cultural value” to the point where, instead of
seeking to acquire goods and services, people began to run after money as
if money itself was something that could truly
ensure their survival of its own accord. A later variation of symbolic money
was “credit money.”
Credit money is a so-called “monetization of assets.” That is,
real things are made liquid” —monetized— by an institution
that issues money, usually a bank. Both symbolic money and credit money “stand
for something” and the issuing institution has been trusted to be “holding”
that value or a “legal right” to it and thus the value of the
issued money should be in accordance with the real value. In the case of credit
money, the process was very similar as with symbolic money, with a slight
difference in the origin of the “value” that was being represented
by the issued money:
1) The owner of some sort of physical property went
to a bank and wrote out a contract (mortgage) where it was clear that he
would give the bank ownership of the property in case he didn’t pay
back the amount of money borrowed (that is, the credit);
2) The bank, with the mortgage contract in hand, delivered the money into
the hands of the property owner or, as it’s done nowadays, “credited”
the amount into the wner’s bank account;
3) The property owner then spent the money into circulation, usually engaging
in business that would, at the end of the term of the loan, return him enough
money to pay the loan’s principal plus the interest charged (which
is the “cost” of having torrowed the money).
Credit meant “to trust” or “to believe.”
Thus, “giving credit” meant “to trust that someone would
return the loan.” Just in case, however, something the person owned,
was “signed over” as a “collateral” in case the person
failed to return the money it had asked for as a loan.
Symbolic Money, Credit Money and Fractional
Looking at it closely, it becomes clear then that “credit money”
looked just like “symbolic money” even though the value it was
“backed by” was not the same. In fact, for a while credit money
was confused with symbolic money, and even today people (and banks) still
treat money as a commodity —or a thing— with “real”
rather than “cultural value.” We must remember that symbolic money
stood “in place of” a real commodity. This means that paper bills
were printed to the amount of the value of the real commodities the bank had
in its vaults. Thus, if the bank had 2000 pounds of gold, it could print out
bills to the amount equivalent to 2000 pounds of gold. However, banks realized
that people would seldom ask for the gold, that the bills tended to circulate
because they were easier to handle and because customers trusted that they
could, at any time, go to the bank and ask for the gold at the bill’s
“face value.” So, if the gold usually remained in the vaults,
why not print out more money than the value available in the vaults ... and
lend it out at a cost (interest) and thus make a better business? Who would
notice? While customers trusted the bank to hold the gold, few people generally
went to ask for it. This practice was instituted, and it became legally known
as “Fractional Reserve Banking.” This simply
means that the money in circulation is only a “fraction of the reserve”
that a bank holds in its vaults.
Some considered this practice unethical. After all, the bank was printing
money with no real backing and lending it out at face value when in reality
no value —or only a fraction— stood behind it. But it worked (to
the benefit of the bank). Only when a rumor spread that there wasn’t
enough gold (or silver) in a bank’s vaults, customers
tried to retrieve the “stored value” —a bank run—,
and, since the “real thing” could not be delivered, banks went
“bankrupt.” People, afterwards, held “valueless” bills
in their hands which no-one would accept as a means of payment (or exchange).
When credit money was instituted, the bank did “hold the value,”
though not in their vaults. They had “real assets” signed over
to them, but on many occasions, when a “bank run” occurred, the
face value of the printed bills offered to redeem the bills for gold or silver
and not for a house or land.
Simply put, there wasn’t all that gold or silver available. Thus a bank
could go ankrupt even if it had a “reserve of value” that amounted
to the money it had put in circulation (which is rarely if ever the case now).
But this reserve of value had not been differentiated on the face of the bills,
for they were all redeemable in the precious metal they represented (until
even that stopped being the case). Symbolic money more or less stopped being
emitted when the “gold standard” was dropped (in 1971, by the
U.S. President Nixon). From then on, credit money has been the norm; people
borrow money in exchange for a mortgage on their property or an assurance
that so much of their “time” (monthly payments based on one’s
ability to earn money) will be
devoted to paying back a loan. Getting into the details of banking and how
banks make money is a whole chapter in itself (and an interesting one), but
it will suffice to say that money-as-we-know-it is at the core of some of
the world’s greatest problems because of various reasons. For example,
even before it became credit money or symbolic money or Fractional Reserve
Banking existed, the fact that money was scarce ensured its value.
Too much money in circulation meant that it’s “value” dropped:
devaluation (just as it happens with commodities that exist in great quantities).
Too little money in circulation “slowed down” the economy because
there was not enough “liquidity” —means of exchange—.
Thus, throughout the ages, those who’ve had control over money have
also to lesser or greater degree have had control over the economy. In fact,
the scarcity of money has been the reason why money has become the over-monopoly
of all monopolies, and the main reason why economy has become a structure
for the exertion of power. Also, through the introduction of interest, money
has become the greatest tool for channeling “wealth” from the
bottom up, and this simply from the fact
that money can “make money” even if nothing is produced. This
is how money is working now. From the point of view of balanced economy, money
is therefore malfunctioning.
The main problem derives perhaps from the fact that
money is a technology whose functions are contradictory to each other. Few
economists study money itself, since most of them take it for granted. But
money is a human contrivance and it is in human hands to change the technologies
that aren’t working as they should.
The malfunctioning of money.-
We can start with a daring statement:
Money, as a tool to facilitate distribution —a
means of exchange that allows for multiple coincidence—, is in fact
not doing what it has been created to do, at least not in terms of an economy
This is mainly because the social agreement on which
money is based is one of imposition (not democratic). Also, because its three
main functions —means of exchange, measure of value, store of value—
are in contradiction or are not doing what they are meant to do.
Let’s take a closer look at these functions:
1) Means of exchange means that money must circulate;
2) Measure of value means money’s “unit of measure” should
remain stable, like a meter or a kilogram;
3) Store of value means that money must be taken out of circulation in order
to store it.
The forms of presentation of money have evolved from
various types of commodities —cows, tobacco, rice, gold, silver, coins
of various metals—,to the representation of some of these things through
paper money, bonds, and so forth. The latest forms of presentation of money
are in digital form, which is also known as “electronic money.”
But these are all “forms” of presentation, not the way money itself
functions. Once again: when money was a commodity, it existed to the extent
in which the amount of the commodity was available. So, ten cows were ten
cows and if there were no more, there was no more money. Similarly, the number
and value of gold coins was directly related to the amount of gold from which
the coins were made. So, gold being more
scarce than silver, ended up having a “greater value” than silver.
This is so because, as a rule:
Value is directly proportional to the availability
of something, as long as there is a need for it.
When symbolic money came along, money was issued in
relation to the amount of the physical goods it represented. This means that
a note representing “a thousand ounds of grain,” meant that with
that note one could retrieve “a thousand pounds of grain.”
But bankers, when they realized that people did not retrieve the gold, but
rather referred to keep it “stored away,” invented Fractional
The important thing to understand here is that “the symbols don’t
meet reality.” That is, banks could issue more money than they stored
“value.” No-one noticed until everyone (or at least a majority
of customers) wanted to collect the bills referred-to “value”
from the bank.
The interesting thing about this is that money “transcended the limitations
of physical reality” when it became symbolic money and later credit
money. In both cases:
Money can become “more” without “reality”
growing at an equal rate.
To put it differently, money doesn’t really have
to be scarce, and money doesn’t really have to be bound by the limitations
which binds commodities. Nevertheless:
Money should be a reflection of reality and not the
other way around.
Meaning, also, that those who control money shouldn’t
be able to control the access to real things, which is exactly what’s
happening with money. But here is the catch. If money is meant to have the
function of storing value, then it must be kept scarce even if its possible
to produce as much as it’s needed to fulfill real needs. Saying it ifferently:
Money isn’t scarce unless it is meant to have
value. Or, turning that around:
If money is meant o have value, it must be kept scarce.
This simply means that in order for money to have a
function called “store of value,” the edition of money must be
limited. Which is just another way of saying that money is artificially scarce.
So, the questions that must be asked, are:
1) “Why is money kept scarce?”
2) “Who keeps money scarce?”
3) “Where is money scarce?”
Let’s start by answering the last question:
3) Money is scarce where it is most needed. For, if you have enough money,
you don’t need more than what is necessary to fulfill your needs.
Question two could be answered like this:
2) Money is kept scarce by those who issue it. For, if there would be enough
money, it wouldn’t be profitable to issue it and the business would
1) Money is kept scarce “so those who issue it can lend it out at a
cost,” because they are in the business of making a profit with money.
Therefore, we can easily say that:
If everyone would have enough money, there would be
no sense in lending out money.
Those who have enough money can make more money by
lending it out at a cost, while those who don’t have enough money must
borrow it (usually at a cost).
This cost of money —which is not the same as “value of money”—,
begins to exist with the charging of “interest rates,” and it
doesn’t only cover the “cost of creating money,” but goes
beyond that to a practice that is now viewed as normal and self-evident: the
charging of interest.
Charging interest was considered un-ethical and even prohibited in Judaism,
Christianity and Islam. Though back in the early days it wasn’t called
“interest,” but “usury.”
Usury, from the Latin word usura (which means “to use”), was a
“price” set on the loaning out of money. It was eventually replaced
by a more widely accepted term: “charging interest.”
However, back in the days when interest was in fact usury, to charge interisse
meant to “cover the costs” and no more. A “cost” was
only the “loss incurred” when someone loaned out something and
not, as today, an expected gain for taking a so-called “risk.”
Usury, nowadays, is referred to “higher than legal” interest rates,
which misses the point of the matter entirely for, in reality, the practice
of charging interest has more than just ethical or religious consequences.
Interest rates forces money to grow exponentially, which in the short term
may not have too many visible effects, but in the long term it has catastrophic
consequences at all levels, especially since it creates a contradiction in
the primary purpose of money: to “even out economic pressure without
the need to recur to real goods commodities) to engage in an “act of
If I can have access to money without having to back it up by any expenditure
of energy that remotely relates to the “buying power” of money,
I am siphoning off “energy” without putting any of it back.
Also, by keeping control of the money, I defeat the primary function of money:
to serve as a means of exchange of goods and services through “multiple
So, perhaps we must return to the functions of money in order to get a closer
look at what they should be doing.
***END OF EXCERPT FROM "TAO OF ECONOMY" by