What is money?
A hint: it’s not wealth

The nature of money

The first human economy did not include money. Small bands of people cooperated to survive and redistributed food and other necessities based on kinship ties and reciprocity. This social economy still exists today, whenever we do things for our family, friends and neighbors, either out of love and caring without thought for necessarily getting something back, or with the added expectation that your friend or neighbor will assist you in the future.

In a healthy economy, money is not the dominant value, nor is it the sole or even dominant medium of exchange. Indeed, one of the most important indicators
of economic health is the presence of an active economy
of affection and reciprocity.

– David C. Korten

Barter is the practice of exchanging roughly equal worths of different goods and services that two parties want from each other. Because of the difficulty of finding suitable trading partners under more complex circumstances, money was invented to facilitate trade.

Money is fundamentally a medium of exchange. People cooperate, agreeing to use money to facilitate the fair exchange of goods and services having real wealth. Some currencies are also “backed” by stores of gold or other tangible assets.

The creation of money

Money can be created and put into circulation in different ways. In our economy, private banks that are members of the Federal Deposit and Insurance Corporation create the majority of money in circulation out of nothing in the form of loans. These banks then have the right of being paid back with already existing money, plus interest. Thus for most new money to enter into circulation, someone has to go into debt. The borrowers then compete against each other for the smaller volume of money that currently exists to obtain each other’s loan principles to pay back the interest.

This makes money a scarce commodity in our economy. A certain percentage of borrowers have to default on their loan payments. Higher interest rates mean more automatic defaults. Even if all the competing borrowers made worthy contributions to the real wealth and well being of society, the absolute scarcity of existing money to pay back loan interest would force a certain percentage to go bankrupt.

This system of money creation through debt requires the economy to grow exponentially, or it will enter a recession. Exponential growth allows greater numbers of new loans to provide the needed cash to pay back the interest on the previous round of loans. However, since the new loans also require interest payments, a greater number of outstanding interest payments exists than before. So the problem just gets bigger and bigger. The economy is required to expand indefinitely, at a faster pace than the owed debt is created. However, even with a relatively fast-growing economy, the absolute amount of debt tends to grow exponentially. The creation and distribution of money is thus a giant pyramid scheme.

At some point the base of the pyramid becomes too large to find enough new participants. Debt levels build up until such an economy becomes unstable. Periodically, there must be some mechanism to relieve debts and start over, or it is accomplished involuntarily, through recessions, economic collapse or war.

The Old Testament of the bible condemns the practice of charging interest, or usury, because of its harm to the economic and social structure of a society. During biblical times in Near Eastern kingdoms, every 50th year was a “jubilee” year, during which all debts were let go. The superceding Roman Empire did not have a debt-relieving mechanism. Debts that accumulated under the Roman economic system were finally dissolved when the empire collapsed in the fifth century, A.D., destroying the Roman currency and Roman civilization along with it.

The nature of exponential growth is important to understand. While linear growth adds a constant sum with each unit of time, exponential growth adds a continuously increasing sum during each successive unit of time. A constant or increasing (as in compound interest) percentage is added. The increase is proportional to the already existing amount.

A key feature of exponential growth is that it has a doubling time. The total sum of the principle amount doubles over a constant unit of time. For example, if we start with the number 2 and a doubling time of one year, after one year it becomes 4, after two years it is now 8, in three years it has become 16. ... After 10 years the number has reached 2,048. After 35 years the number is above a staggering 34 trillion. With exponential growth that has an increasing percentage of growth, as in compound interest, the doubling time happens in ever-shorter periods of time.

Money vs. life

Continuous exponential growth is only seen in nature under two circumstances: population explosions, such as severe microbial infections, and cancer. Both eventually end in death if nothing is done to intervene in the process.

The interest payments made to investors must be backed by real economic productivity.  We are expecting the Earth and human workers to produce enough real wealth to keep up with debt expansion. However, the rates of interest that investment funds use have nothing to do with the rate of real growth of natural resources or with the actual increasing productivity of workers. Tree growth per year or the yearly regeneration of fish populations is much slower than rates of interest demand that they grow. Therefore, in order for the economy to produce enough goods and services to pay back the interest, real wealth like intact forests, fisheries and ground water supplies must be liquidated. “Renewable” resources like these are currently being “mined” faster than they can naturally regenerate.

Life does not exist to serve money. Real wealth is not money but tangible community assets like healthy ecosystems, abundant natural resources, social connectivity, unique community character that comes from the intelligence and creativity of residents, and much more.  Money should be used to serve life by facilitating the exchange and creation of real wealth.

This can be achieved only with currency systems that put money into circulation without charging interest. In addition, interest rates on loans should be lower than rates of renewable resource regeneration. Returns on investments must therefore be equally realistic.

The high returns expected by today’s investors, especially from speculative, short-term investments, are destroying real wealth and turning it into money. Such investments do not contribute to the production of wealth. Successful investors are simply enlarging their claim to society’s real wealth while simultaneously helping to destroy nature’s and society’s stores of wealth.

Our political-economic system doesn’t seem to think its destruction of human and non-human life matter, because it doesn’t value what we are losing. While the base of every civilization is its primary means of meeting people’s basic needs for food, shelter and other economic necessities, our economic system has taken a step away from a focus on meeting real needs. Our economy revolves instead around the accumulation of money for those who have extra to invest.

High financial returns are the lure to investment, the key feedback loop mechanism in our economic system. Mainstream economists maintain that this promise of making lots of money through investments is necessary to attract investor’s attention and capital. We are told that such high returns signal higher economic productivity and thus wealth. We are reassured that this wealth trickles down to us all. However, this accumulation and transformation of planetary wealth into financial capital in the hands of relatively few people is of necessity built on the exploitation and exclusion of others, both human and non-human.

This is the definition of cancer. In the body, cancer violates the patterns of natural law to which all other cells adhere. Tumors grow and grow, taking over blood vessels and food supplies for themselves, at the expense of the rest of the body. Of course, cancer cells forget that they are a part of the system they are liquidating for their short-term profit. When the body dies, they die along with it.

If you are in the privileged position of owning investments in the stock market or other places, you can help by only investing in socially responsible companies and funds. Expect a good return on your investments, not a “killing.” If you do not have many investments, yet live a basically comfortable lifestyle, consider living fully within your means rather than using consumer credit to further expand your level of consumption.    

Another way to help shift the economy towards sustainability is to participate in the Flagstaff Neighborly Notes community currency system. Flagstaff Neighborly Notes, like most community currencies, does not charge interest either when bills are first issued or when loans are made. Interest-free micro-loans and grants are available to local businesses, nonprofit organizations and individuals who are signed up to accept the Notes. The purpose of Flagstaff Neighborly Notes is to facilitate the healthy exchange of community wealth to better serve everyone’s needs.