Sacred Economics: Money, Gift, and Society in the Age of Transition (23 page)

It was quite natural that eventually the symbol would become detached from the metal, which is what happened with the advent of credit money in the Middle Ages and even before. In China, the first paper money (which was actually a kind of bank draft) was in use by the ninth century and circulated as far as Persia.
¹
In the Arab world, a form of check was in wide use around that time as well. Italian traders used bills of exchange as early as the twelfth century, a practice that spread rapidly and was followed in the sixteenth and seventeenth century by fractional-reserve banking.
²
This was a major innovation, since it freed the money supply from the metal supply and allowed it to grow organically in response to economic activity. The detachment of money from metal was gradual. During the fractional-reserve banking era, which lasted several centuries, bank notes were still, at least in theory, backed by metal.

Today the era of fractional-reserve banking is over, and money has become pure credit. This is not widely recognized. Many authorities, including most economics textbooks and the Federal Reserve itself,
³
still maintain the pretense that reserves are a limiting factor in money creation, but in practice they almost never are.
⁴
Banks’ real constraints on money creation are their total capital and their ability to find willing, creditworthy borrowers—that is, those with either uncommitted earning potential or assets to use as collateral. In other words, social agreements govern the creation of money, primary among them the dictum, encoded in interest, that money should go to those who will make even more of it in the future. Today’s money, as I shall explain, is backed by growth; when, as is happening now, growth slows, the entire financial edifice begins to crumble.

Money, which developed in parallel with technology, suffers similar flaws. Each bears a relentless compulsion to grow: technology because of the ideology of the technological fix, using yet more technology to remedy the problems caused by existing technology; money because of the dynamics of interest I have described, issuing more debt to pay the interest on existing debt. The parallel is quite exact. Another similarity is that each has usurped domains properly belonging to other modes of relationship. But in neither case do I advocate rolling back history. Both technology and money have developed to their present forms, I believe, for a purpose; credit money is the natural terminus of the evolution of money toward pure fiduciarity, pure agreement. Having arrived there, we are free to make that agreement purposeful. We are like an adolescent who, having developed her physical and mental capacities through childhood play, is now ready to turn those capacities toward their true purpose.

Some observers, seeing the disastrous consequences of today’s credit-based currencies, advocate a return to the good old days of currencies backed by something tangible, such as gold. They reason that commodity-backed currency would be noninflationary or would eliminate the compulsion for endless growth. I think some
of these “hard currency” or “real money” advocates are tapping in to an atavistic desire to return to simpler days, when things were what they were. Dividing the world into two categories, the objectively real and the conventional, they believe that credit-money is an illusion, a lie, that must inevitably collapse with every bust cycle. Actually, this dichotomy is itself an illusion, a construct that reflects deeper mythologies—such as the doctrine of objectivity in physics—that are also breaking down in our time.

The difference between an unbacked and backed currency is not as great as one might suppose. On the face of it, they seem very different: a backed currency derives its value from something real, while an unbacked currency has value only because people agree it does. This is a false distinction: in either case, ultimately what gives money value is the story that surrounds it, a set of social, cultural, and legal conventions.

At this point the “real money” or backed-currency advocate might object, “No, that’s just the point: a backed currency gets its value from the underlying commodity, not from agreements.”

Wrong!

First let us consider the standard example of what advocates call “real money”: pure gold and silver coinage. These are valuable, they say, because the commodity they are made from is valuable. That is the source of their value, and the markings on them are there as a guarantee, to bestow confidence in their weight and purity. But despite nostalgia for the real money of yore, historically much gold and silver coinage did not fit this description, but had a value that exceeded its commodity value (see
Chapter 3
). It differs from paper money by degree, not in essence. Paper and electronic money are not a departure from metallic currency, but an extension of it.

To further complicate matters, what is this “commodity value”? Like money, property is a social construct. What is it to own something? Physical possession is only ownership if that possession is socially legitimate; with legitimacy, physical possession isn’t even necessary. After all, in today’s commodity markets, most investors never touch the things they buy. Their transactions are a set of rituals, symbolic manipulations invested with power through shared beliefs. The fictive nature of ownership is not a recent phenomenon. The famous money of the Yap islanders, huge stone rings that are too heavy to move, can nonetheless change owners quite easily when everyone agrees that so-and-so is the new owner. Gold never needs to leave the vault to be a currency backing.
In fact, it never needs to leave the ground
. Even if we did adopt a gold standard, most transactions would still use paper or digital symbols. Only the story conferring value upon those symbols would differ.

Moreover, the value of commodities depends on social agreements as well. This is especially true of gold, which, unlike other forms of genuine commodity money such as cattle or camels, has very little utilitarian value. You can make pretty ornaments from it, but it has very little industrial utility compared to other precious metals such as silver or platinum. That means that the value of gold depends on convention. That makes it an odd choice indeed for those who want money whose value is independent of convention, money that has “real” value.

What is true for gold is true for other commodities as well. In a society with a high degree of division of labor like our own, the utility of most commodities depends, like money’s, on a web of social agreements. How useful to you is an iron ingot? A barrel of crude oil? A ton of industrial-grade sodium hydroxide? A bushel of soybeans? To varying degrees, they are valuable only in the context
of vast numbers of people performing the specific, interrelated roles that put such things to use. In other words, commodities, like money, also have a fiduciary value in addition to their intrinsic value—indeed, upon close examination the distinction breaks down almost entirely.

Let us think more deeply about what it means for money to be backed. Superficially it is straightforward. To take the example of the U.S. dollar before 1972, it meant, “You can take a dollar to the Federal Reserve and redeem it for one-thirtieth (or whatever it was) of an ounce of gold.” But this simple picture is fraught with complications. For most users of dollars, even if it were permitted, it was not practically feasible to go to the nearest Federal Reserve vault. As far as I know, the gold was hardly ever physically transported even for balance of payment settlements among banks. The banks’ gold was kept in the Federal Reserve banks; their ownership of it was a matter of entries in record-books, and not of physical possession. The system would have worked even if no gold were physically present. No one except foreign banks ever actually exchanged dollars for gold. Why would anyone when it was dollars, and not gold, that were used as money? We think that dollars (in the gold standard era) were valuable because they could be exchanged for gold, but is the opposite perhaps not truer, that gold was valuable because it could be converted into dollars?

We tend to assume that in a backed paper or electronic money system, the backing is the real money and the paper only its representation. In fact, it is the paper that is the real money. Its association with gold was a projection of meaning, almost a magical formula, that gave us permission to believe in the story of value. The story creates value. In fact, it was never possible for everyone to redeem their paper money for gold. If too many people tried, the
central bank could (and often did) simply declare that it would no longer redeem it.
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The supposed hard fact of the paper’s convertibility to X amount of gold is a construct, a convenient fiction, that depends on a web of social agreements and shared perceptions.

Similarly, before the United States abrogated the Bretton-Woods agreement in the early 1970s, world currencies were pegged to the U.S. dollar, which was in turn pegged to gold. If a country accumulated reserves of U.S. dollars, it could redeem them by having the Federal Reserve ship it a few tons of gold. This was not such a big problem right after World War II, but by the late 1960s nearly all the U.S. gold reserve had been shipped overseas, threatening the Fed with bankruptcy. So, the United States simply announced it would no longer redeem dollars for gold within the international banking system, just as it had ceased to do so domestically some four decades earlier, revealing the gold standard as a convenient fiction.

The proclamation that money is backed is little different from any other ritual incantation in that it derives its power from collective human belief. However true this was of gold, it is truer still of more recent, more sophisticated backed-currency proposals, such as Bernard Lietaer’s terra currency, and recent proposals for revised IMF Special Drawing Rights, to be backed by a commodity basket reflecting overall economic activity. There is merit in this approach; indeed it is a step in the direction I envision in this book. But this backing is obviously a fiction: no one is ever going to exchange their terras for actual, physical delivery—on their doorstep—of
the prescribed combination of oil, grain, carbon credits, pork bellies, iron ingots, and whatever else is on the list. No single person ever needs any of these things in his personal possession. Their value is collective, existing only within a vast web of economic relationships. But this is OK! Actual, practical redeemability is not necessary to qualify something as a backed currency. Yes, the redeemability is a fiction, a story, but stories have power. All money is a story. We have no alternative to creating money within a matrix of stories. Nothing I have written disqualifies backed currencies. But if we are to choose a backed currency, let us be clear about the reasons. It is not to make the money “real” in a way that unbacked currencies are not. It is to imbue money with the story of value that we want to create.

The story of backing can be used to limit and guide the creation of money. Today, we limit that right to banks and guide it by the profit motive—money goes to those who will make more of it. Properly and historically speaking, though, the issue of money is a special, sacred function, not to be relinquished lightly. Money bears the magical power of the sign and embodies the agreement of an entire society. Part of a society’s soul lives within it, and the power to create it should be guarded as jealously as a shaman guards his medicine pouch. In the wrong hands, its power can be used to enslave. Can we deny that that has happened today? Can we deny that people and whole nations have become thralls of the moneylenders?

Not only do we naturally associate money with the sacred, but whatever we use for money tends to
become
sacred: “Where your treasure is, there will be your heart also” (Matthew 6:21). Thus it was that people came to worship gold. Of course, they did not profess to worship it, but actions speak louder than words. It was gold
they coveted, gold they sacrificed for, gold they revered, gold that they invested with a supernatural power and a special holy status. The same happens to cattle in cattle-trading cultures and to wheat or olive oil in cultures where these were used as commodity-money. They took on a sacred status, set apart from other commodities.

The last hundred years have increasingly been an era of unbacked currency, and also an era where nothing is sacred. As I said in the introduction, if anything is sacred today it is money itself. For it is money that has the properties we associate with the disembodied divinity of dualism: ubiquity, abstraction, nonmateriality, yet the ability to intercede in material affairs to create or to destroy. To remove divinity completely from materiality is, again, to hold nothing sacred—nothing real, nothing tangible. Yet the absence of the sacred is an illusion: as many have pointed out, science has become the new religion, complete with its story of cosmogenesis, its mysterious explanations of the workings of the world couched in arcane language, its priests and their interpreters, its hierarchy, its initiation rituals (the PhD defense, for example), its system of values, and much more. Similarly, the apparent absence of backing is an illusion too. Credit-money is (via a different kind of social agreement than explicitly backed currencies, but an agreement nonetheless) backed by the entirety of an economy’s goods and services and, more deeply, by growth.
⁶
Created as interest-bearing debt, its sustained value depends on the endless expansion of the realm of goods and services. Whatever backs money
becomes sacred: accordingly, growth has occupied a sacred status for many centuries. In various guises of the story of Ascent—progress, harnessing natural forces, conquering final frontiers, mastering nature—we have carried out a holy crusade to be fruitful and multiply. But growth is sacred to us no longer.

This book will describe a concrete way to back money with the things that are becoming sacred to us today. And what are those? We can see what they are through people’s altruistic efforts to create and preserve them. The money of the future will be backed by the things we want to nurture, create, and preserve: by undeveloped land, clean water and air, great works of art and architecture, biodiversity and the genetic commons, unused development rights, unused carbon credits, uncollected patent royalties, relationships not converted into services, and natural resources not converted into goods. Even, indeed, by gold still in the ground.