I am not interested here in the history and theory of money. It is well known that money is basically a medium of exchange and that throughout history many different objects have been used as money: beaver pelts, tobacco, gold, silver, seashells, feathers, salt, and a virtually endless list of other items. Nor am I particularly interested in the difference between so-called commodity money and fiat money.
What I am interested in is the curious idea that money can somehow breed and make more money. That is, we recognize the truth in the saying, “You have to have money to make money.” If you have money to invest, especially if you have quite a bit of it, you can invest it in any one of a number of things, some risky, and some not at all risky, and your money will grow more money. This strikes me as an extremely strange idea. I understand that if you work and earn a salary you are being rewarded for your labor. You may be being exploited but at least you are doing something worthwhile to earn your money. This is not at all true when your money, sitting in stocks or bonds, or even in a savings account, earns money on its own. When you introduce the concept of compound interest it earns even more.
Think of it, to an unsophisticated person the idea that money can grow and reproduce itself must seem like a magical act. If you put your money in the right place (savings, investments, etc.), and if all goes well, you will end up with more money. It’s magical, or so it might seem to some people who do not understand the nitty-gritty of money and finance. Of course to us sophisticates who understand it (?), it is not magical at all. We know that our money is actually invested in companies that make profits through the (more often than not) shameless and/or or careless exploitation of the environment and others (although we don’t usually think about it in such basic ways). Using our money they manage to make more money both for themselves and for us. Banks, of course, might be the easiest example of how this works. We put our money in the bank, it pays us a very nominal interest for the use of our money, they, in turn, invest it at a higher interest rate and pocket the difference as profit. This is a truly kind of magical process. Cultures that use dog’s teeth, or cowrie shells, or wampum as money would never assume they could invest it in a way that would make it multiply on its own. If you wanted another dog’s tooth necklace you had to go out and find more dogs, or if you wanted more cowrie shells you had to find them, they did not sit in your house and breed.
Of course dog’s teeth and cowrie shells have little or no intrinsic worth. They possess value only because some people desire them. Even in such backwaters as the Island of New Guinea there were complicated trading routes that would bring cowrie shells into the Highlands in return for salt, pigs, bird-of-paradise plumes and so forth. These commodities were not general currencies that could be used for anything and everything. The value of a cowrie shell was agreed to be equivalent to a single plume or part of a pig, or whatever. What we know as money is much more flexible as it can be used to acquire most anything, a car, house, toothpaste, potatoes, and whatever. Our money did at one time have value as a commodity as it was directly linked to gold that had intrinsic value. Now our money, in the form of paper bills, has no intrinsic value at all, but is valued because of the belief our government will guarantee its worth in the international marketplace (this could itself become little more than a magical belief under certain circumstances). Intrinsic value is itself an interesting concept as it can itself change over time. Gold, for example, does have an intrinsic value, but its intrinsic value at the moment is probably nowhere near what the price for it in dollars is at the moment.
The concept of money as a medium of exchange, especially an all-purpose one, is undoubtedly a useful and convenient one. If the price of money was stable and unchanging there would be few, if any, problems involved in a monetary economy (I think). When the concept of interest, especially compound interest enters the picture, things are not so simple. Basically, what such a system inevitably results in is that those individuals with money to lend will eventually win and the borrowers will lose. Interest is great for the lenders but bad for the borrowers. This process is greatly accelerated when compound interest is involved. The higher the rate of interest the more money accrues at the upper end of the process. It has always seemed to me that interest, especially higher interest rates as on credit cards, is fundamentally the functional equivalent of slavery, the main difference being that the lender, unlike the slave-owner, cannot actually beat or rape you at will.
This is not to say there are no potential benefits from a monetary system that includes credit and interest. It does allow individuals who could probably never accumulate enough money to pay cash for a car or a house to enjoy the ownerships of such goods while still paying for them. If the interest rates were nominal or fair, and well regulated so as to avoid actual usury (unconscionably high rates), perhaps that would be a good thing. Alas, that is not the situation we face at the moment. High interest rates and compound interest manage to keep most of us enslaved in debt to mortgage lenders, banks, insurance companies, and so on (personally, I think compound interest is usury). How many people do you know that own their house, or even their car, outright?
An interesting question arises when thinking about our money. If it has no intrinsic value, and has value only because the government of the U.S. is pledged to honor it, and if that pledge is broken (something that could in fact happen very soon), our money would have no value at all (it would become, in effect, a false commodity). Thus China and our other creditors probably wouldn’t even want their money back at all, for why should they want something of no intrinsic or even fiat value? Do I know anything about money and finance? Of course not, but don’t bet our debts will be forgiven.
The world economy at the moment strikes me as little more than a gigantic game of monopoly. Those individuals and corporations flush with money buy up not only houses and hotels, railways and electric companies, but also arable lands in third world countries, huge businesses, including newspapers, radio and television stations, and now even the rights to water, and thus are well on their way to breaking the less fortunate completely.
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
This is terrible advice for life in the U.S., it should simply say “Be not a borrower!”