Adonis Diaries

Color of your money; (Dec. 25, 2009)

Consider a settled community. Suppose that in the beginning each extended family has its own water source, its lot to grow food, its chicken, a goat or cow for milk. For a time, this extended family is sufficient; it might not occasionally eat its fill but it does not suffer of famine or existential danger. Due to calamities in weather, disease, or family problems then productivity for survival is at risk. The slack periods of labor, during winter season for example, has encouraged the extended family to becoming proficient in specific economic practices.

One group of families opts for artisanal productions (such as clothing, pottery, woodworking, metal tools, stonework…) and it trained a few of the members to that kind of non perishable products. Another group of families goes into raising cattle; a third group goes for agriculture of grain based or fruit products. Question: which group of families has potentially the upper hand economically within the community?  Maybe the cattle raisers can existentially survive better and exchange or barter better their products with other kinds of merchandizes. Most probably, goat, cows, or sheep might become the basic common “currency” for exchanges during community market days, events, marriages, and daily routines. The cattle families grow richer in worth especially that they are producing existential needs.

Calamities strike the community and raising cattle is no longer profitable. Suppose that artisans supplant other extended families in economical exchanges and cloth, tools for productions, or other artworks become the basic currency for bartering. It stands to reason that an artisanal product cannot be counterfeited easily because it requires years of training. Communities aid families in time of distress for a short time but customs require that help be returned, for example in labor work.

Life is not that predictable; after trying dominance of one group of families over other extended families then alliances emerge among families. A chief is selected from the allied families; the chief main worry is to establishing stability and good working relationships in the community. A trading and unifying “currency”, agreeable to the alliance, is accepted by the community. Most probably major warehouses for various products are instituted by the chief and his powerful alliance of families. The chiefs learn to consider a currency that is more effective and easier to handle than actual bartering. Soon, metal coins are manufactured: they are not easily counterfeited because they require skills and much training. By the by, rare metals are considered and monopoly for the rare metals is concentrated in the hand of the chief’s entourage. Gradually, political systems learn that a currency has to enjoy properties such as being small to handle, having intrinsic value, rare, and difficult to counterfeit. Families not designated to manufacture the currencies will have to invest large capitals for acquiring the raw material and the skills. Police force is established to guard the warehouses and to apprehend counterfeiters and then hang them. The effigy of the chief is stamped on the coins.

A new class of families emerges (the bankers) that specifically manufacture the coins and distribute them to “oil” the economy.      Conflicts of economic supremacy among groups of “professionals” are frequent and these conflicts turn political by mechanism of alliance of interests. When the political system changes, then the rules of the game change by exercising “preferential” treatments to the alliance. The victor will inherit the warehouses and a new currency is coined to the advantage of the alliance. Other community chiefs might counterfeit the “enemy’s” currency with lower quantity of gold or silver for profit and for discrediting the enemy chief. In general, pride along with the dissemination of perception that the enemy is expanding economically on territory forces the counterfeiting chief to “recall” the counterfeited currency.

The colonies in the US before independence experienced economic expansions while England was having hard times. Benjamin Franklin, Ambassador to France after the US independence, let out the secret: Economic expansion was related to the colonies enjoying the right to “printing” currency when the economy needed this “oiling” mechanism. England then convinced the U, after its independence, to have the monopoly of issuing money; the Rothschild family endeavored to ruin the US economic expansion by refraining from distributing needed currencies. The dollar received a higher value than being simply an oiling mechanism: the dollar was overvalued and the economy shrank. After the civil war of secession two powers got in conflict: the bullion gold group and the “Green buck” who rightly considered the bullion currency as undemocratic and favoring the northern States who horded most of the gold.

This concept of money as simply lubricating mechanism continued to be adopted by economists since Adam Smith: economists set the money aside as an economic factor of interest and analyzed the economy as a barter exchange of good that was no longer valid.  Money is an entire social fact; it is a language and an institution (a set of rules, regulations guaranteed by political power that should be accepted as legitimate); money reflects the tag of war among classes in times of financial crisis: money has not the same value and meaning for the poor and the rich. The rich classes have the connections and political cloud to efficiently utilize and fructify their worth in money. Money is indeed unequally distributed and has become a cultural capital that divides communities.

What happens when a currency with intrinsic value is substituted with paper money or banknotes? What kind of confidence the community members enjoy to resume exchanging good products with just papers or fiduciary banknotes?  What happens when citizens are forbidden to exchange this fiduciary paper with gold put in reserves to guarantee their worth?

Question: “how this currency is guaranteed to be accepted by the entire community for smooth exchange of merchandizes?” There are three levels of confidence required for times of financial crisis. First with have the “methodical confidence”; a check worth $100 from one national bank should be exchanged with $100 at another national bank; the institution of “independent” National Banks guarantee this kind of confidence when one bank goes bankrupt. The second kind of confidence is “hierarchical confidence”. In times of financial crisis there are hierarchical structures to quick “arbitration mechanisms” among financial institutions based on rules, laws, and regulations. The third kind of confidence is the “ethical confidence”. The political power in charge of supervising money distribution makes decisions that are never neutral economically and socially. If legitimacy of the authority is lacking due to ethnic or religious conflicts with a State, then ethical confidence is perturbed. It is the conformity to a system of values that is the last barrier against monetary crisis. This is what happened in Argentina, especially when Argentina tied its currency to the overvalued US dollar and thus Argentina lost its independence of issuing money relative to the internal trading expansion.

It is inevitable that globalization will institute two kinds of currencies; one currency meant for the little people and “derivatives” for the big players. The traditional monetary system for the little people will adopt an international banknote based on a basket of rare metals, critical industrial raw material metals, and other existential products. This currency would actually function as a redistribution mechanism of accumulated currency reserves from States to other needy States in currency. The little people currency would be transferred as fiscal exchange among federated states.

The “derivative” currency (future, forward, and option) will be established after international institutions guarantee the three kinds of confidence for derivative exchanges and stop being a competition among enemies.