Skip to content

Finance = Trust?

Money is power. It is a social construction. In fact, all media of exchange are. As soon as you start putting something in between trading bread for fish, you rely on a belief that the ‘something in between’, like gold or shells, will in the end get you something else that will roughly equal the worth of the thing you traded it for.

Money – in whatever form – also is a means of power; it can buy you stuff from others (increasing your status, fun and ensuring your survival) and it can buy you people – if not as slaves, it can at least buys you their time. This power exists as long as you can reasonably believe your money still has worth. As soon as you have anything of value, including money, you are exposed to the volatility of losing it.

As long as the dispersal of money is balanced, it is very useful since trade is incredibly simplified. You wouldn’t want to go without money, and when abolished new forms of it will immediately be invented.

Because money is a social construction, it must be socially managed. Managing money has tremendous impact, since the power to control money effectively constitutes huge power over other people. The value of money therefore should be a common good.

Money is a good like any other, in the sense that if there is more of it it’s relative value will shrink. Creating more money shrinks it’s value. Controlling the amount of money in an economy is crucial. If the money devaluates, everybody loses – except for them with debt.

So how has money been created? In other words, how did the believe that money constitutes value grow? At first, something  limited available and durable was used, like gold. When stored in banks, the paper saying you owned it became a medium of exchange. As long as you believed the paper could be traded back for gold, it’s value would hold. In 1971, in the US the link between gold and money was abolished. More money could be created – as long as people still believed in its worth.

Banks not only store money. What would you do if you were a banker and had all that money lying there? Why not lend it out and ask some interest? This is what happens. Banks have to lend their own money, but can do so at lower interest – with central banks. They can re-lend it, as long as about ten percent of the loans are kept as collateral. It’s only trust that not everyone will come back to get their savings that enables banks to lend out more than they actually have.

Europe has a central bank in Frankfurt, which is owned by the national governments (through their respective government-owned central banks who all have non-transferable shares). The US central bank, the FED, is not owned by the government, but by private corporations.[1]

I consider the private ownership of the American central bank a systemic problem in maintaining a trustworthy monetary system.

Trust has to be nurtured. While finance, with it’s numbers and calculations, may look like hard science, its ultimate basis is belief and trust. This also holds for loans; a bank typically lends out money if and only if it believes you will be able to repay it. With a mortgage, through your salary, and in the case of business investments through the revenues that can be expected. But business revenues are never certain. However well risks are assessed, there always is a matter of trust involved.

This trust is perhaps the ultimate common good. If this trust is violated, the financial system collapses and with it trade systems responsible for crucial aspects of society like food distribution.

The question is: how can this essential trust be maintained against the tremendous powers that come with having and controlling money?

  1. [1]In theory the FED is a private-public partnership, but in practice most power and all stocks reside with private shareholders, mainly banks. See for a not exceptionally well documented but quite clear summary of the structure of the FED: http://www.globalresearch.ca/index.php?context=va&aid=10489