Money. It is essential to civilization. Without money we would all return to being hunter/gatherers, or at least to a system of barter and trade. But there you are – as soon as you start to barter and trade you are creating money again – of a sort. “How much is that pair of shoes?” “Three chickens.” “I’ll give you two now and another next month.” The earliest known writing was commodity accounting.
Money is a convention, similar to the convention of driving on the right side of the road and staying on your side of the line. We drive toward one another on two lane highways at a closing speed of 130 mph and pass safely within 3 or 4 feet of each other, simply based on mutual understanding. Isn’t money similar? It works because we all need for it to work.
Money allows us to account for production and consumption. While it might seem that the two have to roughly balance, they don’t actually as long as everybody is working and consuming. The problem comes when not everybody is working. That’s because even though there’s is still plenty of stuff and plenty of equipment, the essential convention is then broken. If people can get by without working, then what’s to stop everybody from taking a permanent vacation? It’s obvious – no work, no money, no eat, no iPad even.
So, everybody needs to work and the work needs to produce something in demand. That’s the convention. A century ago more than 90% of us farmed. Sixty years ago some of us still dug ditches. Now it’s machines and a 70% service economy, and we are running out of things to do – it’s called “productivity”, making more with fewer people, and when the Great Recession came along, business found out it could do more with fewer people.
The problem is not production. Think about it. With modern machines and technology it takes less than one percent of America’s population to feed all of us, and even then there’s lots left over to export. Mankind long ago passed the point where most of us had to farm to supply basic needs like food, clothing, shelter and safety, a.k.a., defense. It began in the Industrial Revolution in the latter part of the 18th century. Up until that time the principal function of money was to keep track of basics, but mining, manufacturing, and transportation enabled investment and things got more complicated. All of a sudden there was money for stuff besides basics, stuff like planes, trains, automobiles, armies, navies, diamonds, and movies.
Money was linked to commodities, essentially gold, until well into the modern era. The world was on the gold standard until a mere 40 years ago when the U.S. government left it in favor of, well, just our word. That, according to Wikipedia, is called “fiat money” as opposed to what it was with gold, “commodity money”. Most countries of the world had linked their own currencies to ours until we switched, but our action caused them to produce their own fiat money. Now every country is running on promises, including the EU. Some, like Greece and Ireland are shaky, but the system is still working, even though it’s just based on promises. Or at least it was until the Great Recession, the worst such occurrence since the Great Depression.
The reasons for the GR have been much discussed – in my opinion it goes right back to Congress and the large financial firms catering to the populist demand for cheap mortgages, selling them to people who shouldn’t have qualified, and then compounding the mistake by rating bundled bad mortgages as good investments. It all seems so simple now, looking back. Devastating. Most Americans’ net worth was tied up in their house equity and when the values fell, people couldn’t recoup by selling, so they began to walk away from their financial “promises”, a.k.a., mortgage payments. And so the downward spiral continued. Isn’t it interesting that investment ratings are just opinions based on promises about money, kind of like money itself?
For money to work, humans need assurance that it will buy what they want, and for that to happen we need to find something to do for the one out of five who are unemployed, on part time work, or who have dropped out discouraged. Otherwise, money loses its meaning and the system will fail, a.k.a. depression. So, let’s get to work. As I mentioned in my last post, I think working on our infrastructure is a good way to do it. First work, then budget. Otherwise we’ll be back to trading in chickens.