What you should know about money

Just like the rules of capitalism, the rules of money favor accumulation and profit at the expense of sharing and collaboration. What can the collaborative economy movement do about this? Etienne Hayem opens the discussion with a fundamental criticism of the flaws of our current monetary system.

If the collaborative economy is really about prevailing access to property, how can this concept be applied to money? How can we guarantee access to money everywhere as an alternative to possession and accumulation? Ouishare intends to devote its columns to answering these fascinating questions. In this first piece, which was originally posted on his personal blog, Etienne Hayem prepares the ground for some first reflections.

Many would agree that money plays a far too central role in our economy. We often accuse capitalism, productivism and financiarism of being the cause of this. But first of all, let’s take a look at what we have done with our monetary system and the rules we play by.

1. Money is created by private banks

During the 70s, in France and almost all Western countries, money switched from being issued by democratic, national central banks to private, commercial ones. This deal was sealed twice at the European level: in 1992, in article 104 of the Maastricht agreement, which stipulates that national banks cannot issue their national money, and again in 2005, in article 123 of the Lisbon treaty.

In other words this means that when governments, which represent the people, need money, they must borrow it from private banks and pay interest instead of creating it themselves, as they used to.

Conclusion: Money creation, a highly important power that used to be democratic, is now private. As a consequence, most countries in the world today must pay interest to private banks as opposed to printing their own money.

2. Issued on debt with compounds interest

Everytime someone is given a loan, new money is created. The process of money creation is a simple operation with the only limitation that the bank must have a fraction of the amount of money created physically available in the bank. The borrower must finance the main part of the loan plus find a way to pay for the interest, as it was not issued by the bank.

Since there is not enough money in the world to pay for all of our debts at once, we must continuously take out new loans to be able to pay for previous ones.

We may be under the belief that we only pay interest when we borrow money ourself, but since every business borrows money, we are actually paying for interest in every transaction we make (see Margrit Kennedy : Occupy Money).

Compound interest is a concept that is difficult to understand, so I will explain it with a little story:

Would you prefer:

●      10 000 € a week for one year?


●      1 cent that doubles each week for one year?

While the first option appears to be very attractive, since it holds the possibility of a big cash payout, 1 cent that doubles each week for one year will turn into 45 trillion € by the end of the year – a lot of money compared to the 520 000 € you would receive with option 1. The graph by Margrit Kennedy visualizes the exponential function of compound interest and shows that as soon as your interest rate reaches 3% per year, the growth of the function is exponential.

Conclusion: Our monetary system is based on debt with compound interest, thus making infinite growth necessary to be able to cover continuously growing interest. Since we live on a finite planet with limited resources however, it is evident that this system cannot be sustainable.

3. Short terms revenues count more than ethical principles

During the process of money creation, the only precaution banks take is checking your credit score, in other words, assessing whether you will be able to pay back your loan. Apart from that only short term factors are taken into account, rather than ethical aspects, environmental impact or human development. Bankers will always prefer ethically neutral projects with big profit opportunities and a good guarantee of being paid back to projects with a long term positive social impact.

Conclusion: The only important criteria for money creation are short-term revenues. Our capitalistic money system does not include any selection criteria that consider the impact of a project and the consequences for human development or the environment. Especially in terms of environmental impact, money creation is non-democratic.

4. Promoting and enhancing competition

Since the money issued by banks only represents the initial value of a loan without future interest payments, everyone looking to pay back their loan must, at a systemic level, earn this additional money (the interest) in the market.

As a consequence, no matter who your friends and family are, we are all enemies in the money market  competing to earn money to pay back our loans. This mechanism creates competition and scarcity and makes us act as rivals even if we are colleagues, neighbours or PhD students at different universities. The result is that we compete for money because there is not enough for all of us.

Conclusion: Everyday we compete to hunt for scarce money the same way animals hunt for food on their territory. This may be one of the most futile behaviors we have developed, as it separates us from each other. Even though it is not our intention, the design of our capitalistic money system creates and stimulates this.

5. Money concentrated in the hands of few

Our capitalistic money system leads to a Pareto distribution: money concentrates itself in the hands of a minority. The more you have, the more you get.

Many people believe that since everybody pays interest, we are all equal. However we should not forget that while everybody pays interest, those who profit most from interest payments are people who can make their money work for them. This generally result in richest 10% of the population receiving interest payments from 80% of the others (the taxpayers); which is also true in many countries. Below you can see a comparison of household interest payments and interest returns in Germany. The data shows that 1 billion € worth of interest payments were transfered per day in 2001 in Germany from those who borrowed to those who lent money. In France, the blogger Olivier Berruyer also found out that in 2010, 90% of the French population paid 16 billion € to the wealthiest 10% of the population to pay for French government debt services. This is the opposite of a fair money distribution and demonstrates that every democracy is characterized by an unbalanced distribution of wealth.

Conclusion: Capitalistic money creates an unfair stream of ongoing revenues from those who pay interest to those one who benefit from interest payments. This leads to the opposite of a sustainable society.

6. The result: monetary and banking crises, wealth inequality and a non-democratic system

Due to the instability of this system, we must reset it every time the poorer members of society are no longer able to pay for the interest. It is just like the end of a monopoly game, where you must redistribute the money to carry on playing. The World Bank has identified no less than 96 major banking crises and 178 monetary crises over the past 25 years. We are reaching the end of the game, because most households as well as states and companies are drowning in compound interest they can no longer afford to pay for.

We have reached the point that the 500 richest people on the earth have as much money as the 500 poorest million people. Wealth inequality has never been so proliferated.

The laws and decisions that are currently being made are far from democratic: ECB, WTO, IMF & the Bâle Agreement, to name just a few, do not represent the people. Therefore there is a huge need to address these questions in a democratic way.

Conclusion: Monetary crises are part of the design of the capitalistic model. Such a system has lead to the exponential growth of wealth inequality and has failed to become part of a democratic discourse. Despite the fact that crises are becoming increasingly frequent, neither their origin nor the similiarites between crises have been addressed.

Capitalistic money, what would you do?

That being said, the problem is not money itself, but the rules that govern our monetary system: debt issued by private banks with interest (which becomes compound interest) combined with a lack of consideration for the environmet and ethical purposes.

We can change the rules and play a different game, a fair one that creates abundance, respects the limits of the earth and puts humans at its centre. The governance of this new game should be discussed democratically at a global as well as at a local level and include various economic actors.

In the coming weeks and months on, we will present some alternatives to our monetary system that already exist : JAK Bank, mutual credit system, basic income, micro-loan, p2p Finance, Crowdfunding etc… More to come soon !

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