Guest Post: The Origin Of Money

Tyler Durden's picture




 

Submitted by John Aziz of Azizonomics

The Origin Of Money

Markets are true democracies. The allocation of resources, capital and labour is achieved through the mechanism of spending, and so based on spending preferences. As money flows through the economy the popular grows and the unpopular shrinks.  Producers receive a signal to produce more or less based on spending preferences. Markets distribute power according to demand and productivity; the more you earn, the more power you accumulate to allocate resources, capital and labour. As the power to allocate resources (i.e. money) is widely desired, markets encourage the development of skills, talents and ideas.

Planned economies have a track record of failure, in my view because they do not have this democratic dimension. The state may claim to be “scientific”, but as Hayek conclusively illustrated, the lack of any real feedback mechanism has always led planned economies into hideous misallocations of resources, the most egregious example being the collectivisation of agriculture in both Maoist China and Soviet Russia that led to mass starvation and millions of deaths. The market’s resource allocation system is a complex, multi-dimensional process that blends together the skills, knowledge, and ideas of society, and for which there is no substitute. Socialism might claim to represent the wider interests of society, but in adopting a system based on economic planning, the wider interests and desires of society and the democratic market process are ignored.

This complex process begins with the designation of money, which is why the choice of the monetary medium is critical.

Like all democracies, markets can be corrupted.

Whoever creates the money holds a position of great power — the choice of how to allocate resources is in their hands. They choose who gets the money, and for what, and when. And they do this again and again and again. 

Who should create the monetary medium? Today, money is designated in the ivory towers of central banks and allocated through the banking system. Historically, in the days of commodity-money, money was initially allocated by digging it up out of the ground. Anyone with a shovel or a gold pan could create money. In the days of barter, a monetary medium was created even more simply, through producing things others were happy to swap or credit.

While central banks might claim that they have the nation’s best democratic interests at heart, evidence shows that since the world exited the gold exchange standard in 1971 (thus giving banks a monopoly over the allocation of money and credit), bank assets as a percentage of GDP have exploded (this data is from the United Kingdom, but there is a similar pattern around the world).

Clearly, some pigs are more equal than others:

Giving banks a monopoly over the allocation of capital has dramatically enriched banking interests. It is also correlated with a dramatic fall in total factor productivity, and a dramatic increase in income inequality.

Very simply, I believe that the present system is inherently undemocratic. Giving banks a monopoly over the initial allocation of credit and money enriches the banks at the expense of society. Banks and bankers — who produce nothing — allocate resources to their interests. The rest of society — including all the productive sectors — get crumbs from the table. The market mechanism is perverted, and bent in favour of the financial system. The financial system can subsidise incompetence and ineptitude through bailouts and helicopter drops. 

Such a system is unsustainable. The subsidisation of incompetence breeds more incompetence, and weakens the system, whether it is government handing off corporate welfare to inept corporations, or whether it is the central bank bailing out inept financial institutions. The financial system never learned the lessons of 2008; MF Global and the London Whale illustrate that. Printing money to save broken systems just makes these systems more fragile and prone to collapse. Ignoring the market mechanism, and the interests of the wider society to subsidise the financial sector and well-connected corporations just makes society angry and disaffected.

Our monopoly will eventually discredit itself through the subsidisation of graft and incompetence. It is just a matter of time.

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Sun, 07/01/2012 - 16:49 | 2579139 Kayman
Kayman's picture

Money, and its various disguises, is not the economy.  Money is founded in trust and there is no banker or politician you can trust.

Sun, 07/01/2012 - 17:55 | 2579264 economics9698
economics9698's picture

This is by far the best thing you have ever written.  Clear, accurate, concise.  Damn john I think you just graduated.

Sun, 07/01/2012 - 17:23 | 2579199 slaughterer
slaughterer's picture

I want to buy $20 trillion of Euro Debt a.s.a.p.  Euro Debt is the best investment of the 21st century.  Does anyone know where I can get some cheap?  Euro has the best future of all eco zones.   

Sun, 07/01/2012 - 17:56 | 2579266 economics9698
economics9698's picture

No but I got a bridge to sell you, lots of paper with it.

Mon, 07/02/2012 - 03:59 | 2579982 gold-is-not-dead
gold-is-not-dead's picture

hehehe, there are plenty of 'em cheap, just look for "SD" rating... :)

Sun, 07/01/2012 - 16:46 | 2579132 bullionbaron
bullionbaron's picture

"Markets are true democracies." Eventually the public will return to the people's money, Gold and Silver.

http://www.bullionbaron.com

Sun, 07/01/2012 - 17:41 | 2579232 unununium
unununium's picture

The state of new, alternative currencies is exciting.  Bitcoin is at the forefront.  Forbes writer Jon Matonis deserves tremendous credit for treating the topic seriously.

http://www.forbes.com/sites/jonmatonis/2012/05/07/bitcoin-funded-debit-c...

http://www.bitcoin.org

Sun, 07/01/2012 - 19:26 | 2579441 NIRee
NIRee's picture

So we trade one fiction for another? What was the definition of an idiot?

Sun, 07/01/2012 - 19:29 | 2579446 Aziz
Aziz's picture

+1. Bitcoin explained in a single question.

Sun, 07/01/2012 - 19:57 | 2579477 unununium
unununium's picture

Learn more, and you will reconsider.  As hard money goes, bitcoin is harder than gold-backed currency because a backing party can always renege (e.g. United States, 1971).

Actual gold coins are great, but practical demands will always require electronic transfers.  There is no reason international, or even inter-city transfers should require fiat currency.

Bitcoin transfers are final, non-repudiatable direct transfers between parties with absolutely no financial intermediary.  The future monetary policy of the currency is published, algorithmic, controlled by no-one, and set in stone forever.

That's all the energy I have for delivering education today.

 

Sun, 07/01/2012 - 21:31 | 2579591 Blankman
Blankman's picture

Dear Mr. Bitcoin,

 

Please refer to the Liberty Dollar to see what happens when you try to compete with the US Dollar.  Get too big and you better get your lawyers ready.

Sun, 07/01/2012 - 21:55 | 2579623 economics9698
economics9698's picture

The problem started in 1862 with the greenback.  The way to eliminate governments from the picture is to allow banks to issue their own currency backed by metal.

Mon, 07/02/2012 - 00:24 | 2579830 unununium
unununium's picture

What we have here is a Linux vs. Microsoft situation, capish?  How's it going for those Microsoft lawyers?

Mon, 07/02/2012 - 04:16 | 2579991 gold-is-not-dead
gold-is-not-dead's picture

Hehehe, yeah, those lawyers who got rid of the nasty torrents and thepiratebay, will now have a chance to fail it again... To all the non believers, bitcoin network can not be stopped... Internet kill switch, fine, we'll setup a new interweb network... All you need is a couple of hundred bucks worth of antena equiptment and you can have an intercity wifi internet running on ipv4 or ipv6...

Sun, 07/01/2012 - 16:51 | 2579142 sunaJ
sunaJ's picture

They are screwed.  In their final moments they will scream that we must kill each other in "self-defense."  They aren't just going to walk away.  They have been grafting for so long they don't even remember to keep it secret.  That is the level of their corruption.

Sun, 07/01/2012 - 22:09 | 2579644 illyia
illyia's picture

Yes. But it is still "just a matter of time". Unfortunately it is also my time...

Sun, 07/01/2012 - 16:53 | 2579146 wandstrasse
wandstrasse's picture

the future? a boot in your face, that is the future.

Sun, 07/01/2012 - 17:28 | 2579207 Goldilocks
Goldilocks's picture

Yah can’t eat that     :-/

Sun, 07/01/2012 - 17:34 | 2579221 A Lunatic
A Lunatic's picture

Why? Seriously. Why the Hell does that have to be the future? Cowardice? Apathy? Fear? Dependence upon the very system so many profess to abhor? Who is it that commands such authority over you as to garner your submission without so much as a thimbles worth of resistance???

Sun, 07/01/2012 - 18:09 | 2579301 Zero Govt
Zero Govt's picture

Resistence = stop paying your taxes

all other options (via the political process) are futile

you cannot change a sows ear (the rotten monopolist State) into a silk purse

Sun, 07/01/2012 - 19:52 | 2579471 narapoiddyslexia
narapoiddyslexia's picture

There is another option. Stop spending money. Shrink the economy. The government can only survive in its current form if the economy grows. Growth is the justification upon which it issues all debt. Without growth the debt cannot, will not, be repaid. Puncture the balloon. I do not know what the numbers might be, but if everyone who reads this tells everyone they know to stop spending money, and what it will do to the government if they stop spending money, then Obama, at least, is screwed. A lot fewer people are required to sink the economy, than are required to vote Obama out of office.

Sun, 07/01/2012 - 22:23 | 2579659 n8dawg84
n8dawg84's picture

narapoiddyslexia,

I believe it's very difficult for the average person to simply stop spending money. Not everyone has the ability to produce the things needed for everyday living. I agree that there is a lot that can be done to reduce overall spending, however to completely stop seems almost as impractical as not paying taxes. Sadly, I cannot come up with anything original as a better way to starve the beast. For now, I've closed my digital fiat accounts so banks cannot practice fractional reserve lending with my money. Also, I hold hard currency to protect against wealth destruction. These are the best options I've come across.

Sun, 07/01/2012 - 21:54 | 2579622 n8dawg84
n8dawg84's picture

Zero Govt,

I understand that you starve the beast by not paying taxes. It sounds good in theory, but how does one simply stop paying taxes without ending up in jail or having money withheld from one's paycheck?

Sun, 07/01/2012 - 22:14 | 2579649 illyia
illyia's picture

Yes, agree. Just not paying taxes is a great idea but the ones who go first are the first ones shot. I do like narapoiddyslexia's idea, though I recognize that in the end that is what will happen anyway: eventually. I guess the idea is "do not feed the beast".

But, there again, so many fool to convince, so little time...

Mon, 07/02/2012 - 09:03 | 2580303 jimbos world
jimbos world's picture

Yes, agree. Just not paying taxes is a great idea but the ones who go first are the first ones shot.

You may be surprised...  a whole bunch of like minded individuals have claimed their property (wages) back from the US Treasury.  In many cases with not so much as a question before being refunded all monies taken out of paychecks.  Hint: the deductions from your pay are not taxes (they are simply held in a non-interest bearing escrow account) until you file your tax return.  Educate yourself-

http://losthorizons.com/

Sun, 07/01/2012 - 22:25 | 2579662 A Lunatic
A Lunatic's picture

Freedom isn't free..........What are YOU willing to sacrifice? I do not mean that in a snide or condescending manner.........it's just the truth. Please give it some thought, everyone.

Sun, 07/01/2012 - 16:53 | 2579147 Yen Cross
Yen Cross's picture

 Markets can't / won't thrive without corruption. The masses will NEVER be fed.  True market Capitalism  generates the will, and desire to TRY!

Sun, 07/01/2012 - 16:56 | 2579153 Debugas
Debugas's picture

markets are not democracies. Markets tend to form monopolies and truly free markets have to be enforced otherwise the markets tend to degenerate into unpleasant mafia style parasitic structures.

Best prove is an analogy with cultivated field which yields useful crops vs uncultivated one which gets covered with parasitic plants

Sun, 07/01/2012 - 17:31 | 2579214 Aziz
Aziz's picture

"unpleasant mafia style parasitic structures."

Are you talking about the Federal Reserve system?

Sun, 07/01/2012 - 19:03 | 2579404 Lord Koos
Lord Koos's picture

More like JP Morgan & Walmart.

Mon, 07/02/2012 - 06:48 | 2580056 Lebensphilosoph
Lebensphilosoph's picture

Markets tend to form monopolies and truly free markets have to be enforced

Enforced according to the stipulations of contract, yes. Planned and regulated by the state, no, for that couldn't possibly be a 'truly free market'.

 

otherwise the markets tend to degenerate into unpleasant mafia style parasitic structures.

Mafia? Parasitic? Such as the state? Pay us 10-35% of your income for our 'protection' and 'services' and if you don't we send around our official thugs in blue to bundle you off to prison or kill you if you try to defend yourself. So when businesses become governments we have a problem, eh? You don't say ...

Best prove is an analogy with cultivated field which yields useful crops vs uncultivated one which gets covered with parasitic plants

The analogy is a poor one.

Sun, 07/01/2012 - 16:56 | 2579156 Atomizer
Atomizer's picture

 http://www.trilateral.org/

 

“The Trilateral Commission is international and is intended to be the vehicle for multinational consolidation of the commercial and banking interests by seizing control of the political government of the United States. The Trilateral Commission represents a skillful, coordinated effort to seize control and consolidate the four centers of power: Political, Monetary, Intellectual, and Ecclesiastical.” - BarryGoldwater , U.S. Senator

Sun, 07/01/2012 - 16:56 | 2579157 Snakeeyes
Snakeeyes's picture

Absolutelly. But the US is screwed too. Obamacare was anti free market as we're Obama's 14 loan modification programs. Now we will have to print money to pay for these lavish redistributions of wealth.

Http://confoundedinterest.wordpress.com

Sun, 07/01/2012 - 16:56 | 2579158 Bansters-in-my-...
Bansters-in-my- feces's picture

"Markets are true democracies"

Are you fucking wasted ...???? ...or what..??

Not in this world.!!!

Sun, 07/01/2012 - 17:03 | 2579167 localpacific
localpacific's picture

good post ZH 

Sun, 07/01/2012 - 17:03 | 2579170 blunderdog
blunderdog's picture

Centralized production of money is undemocratic.

Brilliant insight.

For your next assignment, I suggest researching a method of using wind-power to move ships.  It could change the world.

Sun, 07/01/2012 - 17:08 | 2579177 Atomizer
Atomizer's picture

 

 

“The principle we must keep in mind is that two people cannot both be the exclusive owner of the same thing at the same time. Yet fractional reserve banking operates on the theory that bank account holder A and borrower B can both own the same money at the same time. This practice is just as fraudulent as selling two buyers the same vacation home and giving them both exclusive title to the home and hoping that they don’t both show up to use it the same weekend. With fractional reserve banking, titles to money (gold) are spuriously created, meaning there are more titles to property than there is actual property. In fact, no new money is created, but the number of titles to existing money is expanded. And it is in this manner that the value of the dollar is diminished. In the absence of a gold standard, the crime is exceeded today to the point of absurdity, as only titles themselves are traded with no tie to any real property whatsoever. We have been swindled.” -

   
“We shall have world government whether or not you like it… the only question is whether or not it be by conquest or consent.” – James Warburg, Rothschild Banking Agent, 1950
Sun, 07/01/2012 - 17:59 | 2579276 Peter Pan
Peter Pan's picture

Between fractional reserve banking, paper gold and silver, extreme leverage, deivatives and rehypothecation is there any wonder that the possibility of a free market remains just a possibility?

All these mechanisms are contrivances designed to skim and control the system to the point of collapse.

Sun, 07/01/2012 - 17:12 | 2579183 SHRAGS
SHRAGS's picture

I've uploaded "The Age Of Inflation" [scribd] by Jacques Rueff. The French edition was published in 1964 and the English edition in 1967. It is out of print and unavailable in the physical, except in a few libraries. Rueff covers the resumption of the Gold Standard in 1922 after World War I - in his mind the seeds of the future inflation were set by adopting the Gold Exchange Standard instead of the classic Gold Standard, economising on the use of gold in the system. A similar system allowing foreign reserves was adopted later in the Bretton Woods agreements.

He also covers the "Hitlerite" economics, and credits Hilter with being the only person to conquer inflation. The 1948 German currency reforms are studied, and it provides in Rueff's view laboratory conditions for an experiment on planned vs unplanned economy.

Its 189 pages long, and a quick read. 

From the inside cover:

In these lectures, delivered between 1932 and
1961, Jacques Rueff, the distinguished French
economist who conceived the financial reform
adopted by the government of President de
Gaulle in 1958, attacks the concept of the planned
economy, which he holds responsible for the
inflation which is now ravaging so many coun-
tries of the world.
Comparing Germany and England after World
War I, Rueff demonstrates how the Germans, to
avoid depreciating the inflation-ridden mark by
attempting to control foreign trade, took the first
step towards the planned economy of the Third
Reich; whereas England devalued its currency,
accepted financial responsibility, and preserved
its social structure.
In this and other lectures, Rueff proves incon-
testably that a country can rid itself of inflation
only by permitting the purchasing power of its
population to adjust itself to the total value of
purchasable wealth, and by returning to a gold
standard. 

Sun, 07/01/2012 - 17:33 | 2579184 Sean7k
Sean7k's picture

This chart, which is the most coherent aspect of the whole article, shows nothing more than the creation of debt via fiat currency creation and the resulting holding of the debt by, mainly, banks. Regardless of the assets classes purchased and held on balance sheets, all of this debt is the result of fractional reserve banking and governmental debt creation.

Consequently, any movement away from paper currency and credit would destroy said wealth in a heartbeat. 

Eliminate legal tender laws and you free production from the manacles placed on it by banks. When banks can no longer say what is money, they cannot control interest rates and they are back to being a warehouse or clearinghouse- the only two jobs a bank should have.

Note: John, do you have spell check? "subsidization"

Sun, 07/01/2012 - 17:35 | 2579227 Aziz
Aziz's picture

I'm British. We (as well as Canadians, Australians, etc) spell it with an s.

By the way, paper isn't wealth. Biggest delusion in the world. And I'm nothing like naive enough to suggest moving back to the gold standard. Policymakers will never do it, because they are beholden to the financial system who love being able to print money and give it to their friends. We will default back to commodity-money and barter when the system self-destructs. That could be in a year or twenty years, but I know a rotten system when I see one.

Sun, 07/01/2012 - 18:06 | 2579293 Peter Pan
Peter Pan's picture

Agreed. All assets in fact must either have intrinsic value or be scarce. Fiat has neither quality and simply relies on government edict.

As a result the production of every paper dollar acts either as a dilutor of existing dollars or as a confiscator by allowing governments to buy anything they want by what is the equivalent of forgery.

Mon, 07/02/2012 - 07:02 | 2580080 Lebensphilosoph
Lebensphilosoph's picture

Intrinsic value? Grow up.

Sun, 07/01/2012 - 18:51 | 2579391 Sean7k
Sean7k's picture

My apologies. It still detracts from your message. 

I never said paper is wealth, the assets purchased with it is, There is no reason to believe we will default to commodity-money and barter system. Historically, social credit systems are more likely. 

However, if we do not suffer a complete breakdown, the more likely result is a global currency (SDR's) or similar. As for a gold standard, I keep in mind who has the gold. I would be more suspicious of this type of system. 

Freedom for the market to choose is the preferred result and the easiest to achieve. It makes the selection of "money" truly democratic. It does nothing to exclude FED money, but allows people to ignore it. This allows for less social dislocation, as the effect is not aggressive, but passive resistance.

As for debt, there has always been debt and people that default on the debt. The difference lies in how it is eventually handled. As the Austrian business cycle explains the ramifications of the present system, it is ignored by policy makers. This leaves the Elites to move us toward a system of their choosing: probably the elimination of currency with smart cards that guarantee a transaction tax and the ability to seize assets at any time. 

There will probably be black markets, but they will be marginalized. Look around you John, do you really think people care enough or are intelligent enough to evade the trap?This leaves a very small percentage of people with the knowledge, but unable to effect a change. The Elites need do nothing. As new generations are mindfucked through education and media, we will die out and unlike the Elites, we don't create dynasties. We have to learn with each new generation.

So long,and thanks for all the fish...

Sun, 07/01/2012 - 19:35 | 2579450 Aziz
Aziz's picture

The elite have screwed up massively in the last thirty or forty years. From my perspective, they're shitting where they eat. Lots of elites have fucked up throughout history. Look at Egypt, Mesopotamia, Rome, the Romanovs, the Austro-Hungarian Empire, the Qing dynasty, the Ming dynasty, the Soviet elite. All washed away, mostly. 

Sun, 07/01/2012 - 20:21 | 2579515 Manthong
Manthong's picture

If I recall correctly, the French folks got a little peeved about what the monarchy did to the money system, too.

Sun, 07/01/2012 - 21:41 | 2579607 Sean7k
Sean7k's picture

Fascism has spread across the globe. Please explain how the Elites have failed? You might want to get out of the box.

Sun, 07/01/2012 - 20:36 | 2579537 NuYawkFrankie
NuYawkFrankie's picture

Re I never said paper is wealth

But some day soon, paper will be wealth - so long as it's toilet-paper.

 

Sun, 07/01/2012 - 22:04 | 2579634 Unique Snowflake
Unique Snowflake's picture

He who controls the TP, controls the universe.

Do NOT follow this link or you will be banned from the site!