Why Things Are Going to Get Worse - And Why We Should Be Glad. Michael Roscoe
of the majority while increasing the wealth of the financial sector, creating a vicious circle of unsustainable credit creation.
When we take into account the ever-rising productivity of manufacturing and the associated reduction in the industrial workforce, we begin to understand the fundamental problems facing the developed economies of the world. I’ll come back to this after the next chapter. But before we go any further, we need to think a bit more about money and, in particular, what gives money its value.
1 The data for global mineral extraction, which forms the basis of Figure 1, comes from a 2011 United Nations report entitled ‘Decoupling Natural Resource Use and Environmental Impacts from Economic Growth’. The authors of this report in turn based their work on research undertaken by Fridolin Krausmann and colleagues at the Austrian Institute of Social Ecology, who made the following points regarding data reliability: ‘According to broadly accepted principles of material flow accounting, we accounted for the extraction of all types of biomass, fossil energy carriers, ores and industrial minerals as well as for bulk minerals used for construction. Extraction by definition also includes the biomass grazed by domesticated livestock, used crop residues and the tailings that accrue during the processing of extracted ores. Resources extracted but not used (eg overburden in mining, excavated soil, burnt crop residues etc) have not been accounted for. We think our data provides a consistent picture of the overall size and composition of global materials use, and their change over time. Our results match well with other estimates of global material flows covering the period 1980 to 2005.’
2 The United Nations System of National Accounts (SNA) is a global set of accounting rules for nations compiling statistics, and was updated in 1993 to include Financial Intermediation Services Indirectly Measured (FISIM).
3 For more about the link between gold and money, see Chapter 5.
A brief history of money and debt
It might seem as if money is just printed by the government and circulates around the economy indefinitely, via the banks, but for several reasons this is not the case. A balance must be maintained, because the quantity of money in circulation affects its value. As the economy expands, more money will be required to keep up with demand. A shortage of money will constrain overall economic activity relative to primary output, subduing demand and forcing down the price of goods; this is what we call deflation. On the other hand, if the government, or indeed the banking system, creates more money than the real wealth of the economy merits, the lower its value must become, as I explained in the previous chapter. So the value of money can vary almost day to day.
In fact money itself, being just an IOU from the government – a promise written on a piece of paper – has no intrinsic value at all these days. Its value is related to its usefulness as a medium of exchange, and therefore depends on how much of something else it will buy, and this in turn depends on a complicated series of relationships between commodities and currencies, which in turn depends on the relative strengths of national economies, which in turn depend on commodity prices, which in turn…
Perhaps we should look at it another way. A dollar is worth a dollar because the US government says it is. Okay?
Better still, let’s go back to the beginning.
A goat and two shekels
The first forms of money were commodities that were in common use and had a generally agreed value relative to other goods, and which therefore became accepted as payment. The most obvious examples are coins made of gold, silver or copper, but before coins came into general use people used all kinds of things: seeds, tobacco, rice, salt, tea, grain, linen, even goats.
The value usually depended on the weight, which is why so many currency units are still called lira (from the Latin libra) or pound. The original pound sterling, introduced to Britain in the 12th century, was equal to one troy pound of sterling silver. (Silver currently costs around £200 per pound, by the way). The troy weight system is still used for precious metals, as in the troy ounce of gold. The name comes from the French town of Troyes, an important trading center since early Roman times.
Historical evidence suggests that the first unit of currency was the shekel of Mesopotamia, which came into use around 3000 BCE. Shekel probably referred to a weight of barley initially, but by 550 BCE a coin had been introduced by the king of Lydia (in what is now Turkey) to make life easier for traders. These gold discs were stamped with an official seal to certify their purity and weight, giving them a readily accepted value. They also had the advantage of being easy to carry around, and they didn’t rot away, unlike most commodities. The use of coins quickly spread throughout ancient Greece. By around 350 BCE, Aristotle was writing about the concept of non-commodity money, such as we use today: ‘Money exists not by nature, but by law,’ he explained.
Aristotle was one of the first philosophers to write about economics, and in particular the value of money. In trying to explain how we arrive at an agreed value when exchanging goods, and how money makes this process easier, he concluded that money provided a measure of value determined by need, or demand, rather than the value being intrinsic to the goods themselves. Value is subjective – we each put different values on goods because our perception of a thing’s usefulness or desirability varies – but demand, for the purposes of trade through the market, requires a standard unit of measure, and money provides this. The price represents a threshold determined by wants; if you want something enough, you’ll pay the price.
Coins were also used in China and India by Aristotle’s time, possibly earlier, but these were more like bronze tokens than true coins, as they weren’t marked by an official stamp. By 280 BCE, the Roman Republic had begun minting coins in gold, silver, brass and copper. Initially these coins were stamped with the image of the goddess Roma, but by Julius Caesar’s time they featured the emperor himself. These early Roman coins had an intrinsic value in their content of precious metal, though as coins they tended to be worth around twice that value.
Later coinage issued in Europe and elsewhere had a lower content of precious metal relative to its face value, allowing the issuing government to mint more coins from its limited supply of gold, silver or copper. This process of ‘debasement’ of coins reduces the value of the coinage. This in turn causes inflation, which is bad for the citizens, because their money will buy less, but can be good for the government because its debts will be devalued along with the currency.
The first banknotes
Around 2500 BCE, when the shekel was being used as currency in Mesopotamia, there was also a form of credit money authorized by the Babylonian kings, who used clay tablets to record transactions of some kind. It is thought that these clay tablets, hundreds of which have been found in temple ruins, were receipts for barley paid to the temple as a tax, and there is evidence to suggest that they were also traded as a form of ‘IOU’, in which case they would have been the first form of banknote, and as such the first form of actual money, predating coins by two millennia or more. This would mean that the first forms of money were also the first forms of recorded debt; so the link between money creation and debt creation might be as old as money itself.
Paper money was first introduced in China around the eighth century, as a form of receipt used by merchants who didn’t want to carry large quantities of coins around. The merchant would deposit coins with a trusted person – the banker – who would write a note confirming that a certain number of coins had been deposited, or a certain weight of gold. This note could then be exchanged for goods. The person who sold those goods, on presentation of the note to the banker, or any other banker in the region, could then redeem the coins.
In the case of clay tablets, paper currency and coins that lacked intrinsic value (in other words, were not worth their weight in gold), money was representative of a value rather than