Money should smile!
Ah, but how should this buck o' mine create value in my community? Let me count the possibilities.
Let's imagine that I am enormously proud of my lawn. Anyone who knows me knows this is only partly true. Sometimes I mow, sometimes not. I can say, though, that dandelions drive me nuts. When The Wife™ and I first moved in eleven years ago, we had not so much a lawn but a weed plantation. In three years, with just me and my trusty Weed Hound (a finer thing has never before been invented!), we have a proper Pacific Northwest lawn, mostly moss with touches of grass, but no dandelions.
Ah, but what if I didn't have the copious free time to pull weeds? Here's what I could do. I could wander through the local shops and explain to the shopkeeps the weed problem. If they're sympathetic (and who wouldn't be?), I could then offer to buy Peribucks from them at face value, redeemable for a Federal Reserve Notes. I could then offer a bounty on a pound of dandelions, one Peribuck per, and simply wait for the hoards of greedy kids most every neighborhood should have to take me up on this bounty.
If the yellow flower plague were severe enough, the shopkeeps could then segregate their choicest candies and treats to a special "Peribuck Only" section, where "real" money need not apply. Kids would grab their Weed Hounds (and really, what decent household doesn't have one of these in dandelion land?!?) and get to work earning the treats that will make them the envy of the lunchroom come Monday.
There are a couple of advantages to issuing Peribucks over Fed Notes. First, kids can circulate them amongst each other, perhaps at a premium. Not all kids will be hot for weed pulling, but maybe several will covet the segregated treats at the local shops. Weed pullers might be able to leverage this market demand for teeth rotters by charging a premium on their Peribucks. This premium might then lead to a surge in weed pulling interest. And let's not forget breakage, what all businesses hope will happen to their gift cards, etc. Peribucks might just be too pretty to spend, and will never therefore be redeemed for candies. They will instead be framed and proudly displayed by the diabetic kid in the neighborhood who channels his OCD into obsessive weed pulling.
Whatever the outcome, we win. I get the weeds pulled for less than offering the bounty with real money, and the shopkeepers gets to motivate kids with some selective sales techniques.
Before you scoff, let me point out that this scenario has already worked. According to Gwendolyn Hallsmith and Bernard Lietaer, authors of Creating Wealth: Growing Local Economies with Local Currencies (both interviewed on Episode 29 of the Extraenvironmentalist), a region in Japan issued just such notes for catching "exotic" fish (probably invasive) from a local lake. The local government required a portion of these notes to be used to pay local taxes, creating an exchange market between locals who like to fish and their neighbors who need to pay their taxes.
One scenario down, many to go. Let's say I live in a fairly remote area, and we in the community would like to build a bridge. They're expensive, and we don't like to pay more than we need to in Perry Staltor Land. Ordinarily, a municipality would sell bonds at interest. Investors would snap them up, giving us the construction capital for the bridge. We would then tax ourselves and use the tax revenues to essentially buy the bonds back from the investors at interest.
Ah, but there's an alternative. I could simply sell Peribucks to my neighbors. For every Peribuck I sell, a real Fed note goes into a special interest-bearing account. As long as my neighbors agree to honor my Peribucks and use them as currency, more and more money goes into the special account with only modest impact on the community. When the money in the account gets large enough, construction on the bridge starts. The community gets its bridge, and not only pays not one penny to outside bond buyers, but actually earns interest on the project.
Lest we hear scoffing again, let me mention that this, too, has happened in the real world. Ellen Brown notes that the Isle of Man used this scenario to build all manner of public works.
The Isle of Man wishes to retain its right to issue its own currency, believing it to be an important public statement of independence. . . . Retaining the island's own coinage also enables the Isle of Man Treasury to continue to benefit from the accrual of the interest on the income of the issued money supply.
So far, so good, I trust. Value is created with just some agreements with the neighbors and a printing press.
What if, though, I were to go rogue and just start counterfeiting Fed Notes? Would that have a deleterious impact on the community? Probably, but only just probably. Bear with me on this one. Let's first stipulate that my printed Peribucks were completely indistinguishable from the real Fed Notes. Let's further say that I spent them not on crack and guns, but on items of real value, like crops and machinery that produce things of value. Let's further say that the economy was at the time of my printing and spending in a tailspin, with actual Fed notes in increasingly short supply as those caught in the bubble defaulted on their loans, and others were liquidating their remaining assets to pay loans lest they default.
In this scenario, I'd say my counterfeiting would be a boon to my neighbors. It would infuse liquidity to a region in dire need of it. And yes, there is some precedent to this as well.
In WWII, the Germans started Operation Bernhard. Printers, artists, fabric specialists and other experts were interred in a prison camp and told to counterfeit the British Five Pound Note. They did such a good job the notes were accepted as genuine by the Bank of England! How much was made?
Beginning in 1942, the work of engraving the complex printing plates, developing the appropriate rag-based paper with the correct watermarks, and breaking the code to generate valid serial numbers was extremely difficult, but by the time [the concentration camp] Sachsenhausen was evacuated in April 1945 the printing press had produced 8,965,080 banknotes with a total value of £134,610,810. The notes are considered among the most perfect counterfeits ever produced, being almost impossible to distinguish from the real currency.
(See the movie. If you see in on DVD, they interview the author and one of the participants, and you get to know how the forgeries could be distinguished from the real thing.)
Now, did this £134,610,810 help or hurt the British economy? It's hard to say. After all, WWII was a time when pounds were being converted into tons of explosives that destroyed items valued in the production of everyday German life. German bombs, in return, were literally destroying the British currency; every time a bomb hit a bank and burned real notes, every time it sank an investment-intensive ship or downed an expensive plane. This was creative destruction writ large (the Marxist definition, not Schumpeter's). Though the money usually went to paying British spies, that £134,610,810 might have helped the British economy more than it helped the German one. Again, it's hard to say.
I'm going to posit one scenario of outright forgery where the counterfeit bills are more beneficial to the economy than those issued by banks. To do so, I'm going to share a bit of speculation from this entry of mine.
In her book Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Captialism, Yves Smith noted something called "derivatives," financial instruments that base their value on something else. Smith noted such an instrument that looked like a scam:
For instance, consider this piece of artwork:
Maximum of [0:NP x [7 x [(LIBOR2 x 1/LIBOR) - (LIBOR4 x LIBOR-3)]] x days in the month/360
NP = $600
LIBOR =6 month dollar LIBOR rates
The beauty of this formula is that no matter what values were plugged in the value was always zero. The client was paying $4 million a month for three years for the privilege of having an utterly worthless contract.
(Yves Smith, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Captialism, St. Martin's Press, 2010, pp. 149-150. I emboldened.)
Who issued this instrument? Undoubtedly an investment bank. Consider this investment bank example (called a "commodities trading unit"):
An extreme example of banks carrying on recklessly is Citigroup and its Philbro commodities trading unit. Let's start with the obvious: commodities trading is not a financial activity that the government should be backstopping. There are already active commodities exchanges that serve the useful social function of helping producers and manufacturers hedge against price changes. The Philbro unit is not an important or even an ancillary part of the crucial credit infrastructure that the authorities rushed to save. And Citigroup is already heavily dependent on government support, with the Treasury soon to be a 34% owner.
But it gets even better. The Philbro operation . . . is a proprietary trading business, which means it was gambling with your and my money.
(Smith, ibid, p. 279, boldly going mine.)
Do you see what happened there? Because Smith assumes that commercial banks lend depositor money, she is assuming that the Philbro investment bank used Citigroup deposits to fund speculative investments. Honestly, I don't know how Philbro is funded. Just for the sake of argument, though, let's get back to the role of a commercial bank and lending and ask a hypothetical question:
What if a bank extended itself a line of credit?
In other words, what if a bank lent money to itself?
If true, this turns the whole Philbro example Smith provides completely on its head. Let's speculate that commercial banks fund their proprietary investment bank branches entirely through lines of credit provided by the commercial branch. How much credit they extend depends entirely on how much of a fractional reserve the commercial bank has at the moment. This means the prop trading branch might be funded by the month, by the year, or even by the day. Essentially, the prop traders are given a dollar limit to their trading based on the reserve. Just like the limit on a credit card, they must not exceed this amount.
Ideally, the prop trader bankers would seek out profitable stocks to buy, except stocks and bonds carry risk; sometimes they appreciate, sometimes not. Why not lower the risk to zero?
And here I'd like you, Dear Reader, to consider the "worthless" derivative Smith noted. "The client was paying $4 million a month for three years for the privilege of having an utterly worthless contract." What if that was the point? Bear with me. Let's say not only the banker who created and sold this "worthless" contract knew it's true worth, but so did the buyer. What if the buyer had been another proprietary trading bank investor? Furthermore, what if there existed a very similar contract — worthless, but costing $4 million a month for three years — that was bought by the original seller?
Here's what would happen. Each of the two commercial bank lends that $4 million a month, creating the money through their prop trading subsidiary's line of credit. On the receiving end, $4 million a month flows to each prop trading subsidiary as cold, hard cash. After the paying the banker who made these transactions, the each bank pockets the difference, depositing this very real money in its vaults.
Two banks have just created money, in this case a cool $4 million a month, and given it to themselves. Yes, the instruments that backed that money creation were worth exactly zero, but they also carried exactly that much risk. Zero. It would be like money laundering, if washing machines could somehow be built to actually make clothes out of nothing.
I hope I just blew your mind. If I haven't, let me continue to try.
Most of us are familiar with lines of credit through personal experience. We must never borrow more than the limit, and we must always pay the monthly charges and the interest. What we never encounter in our personal experience is money that is lent without interest. There's no law governing how much interest banks must charge on their lines of credit. Since the prop trading desk is sitting in the bank itself, why would they charge any interest at all?
Thought of in this way, any purchase made by a commercial bank's prop trading unit becomes profitable even if the purchase loses money. Why? As long as the prop trader sells the asset before it loses 100% of its value, the difference becomes equity that can be applied to the commercial bank's reserves.
It's like counterfeiting, isn't it? Except that, if true, it is also perfectly legal.
I don't think anyone would continue to argue that, if the above is true, and I counterfeited money and spent it in ways that facilitate the growth of economic activity in the real world, that my money would be worth more to society than the banks'. It's a hard case to make, I know. What we really need to do is not to only shut down my printing press, but to shut down the "legitimate" one. We need to reenact the strictures separating commercial from investment banking established in the Glass-Steagall Act.
(And for those interested, I attempted to make an illustrated version of this speculation. It's not my worst work.)
Here's my final take on money circulation. What a dollar or Peribuck is worth is really less important than the transaction that created it. If the transaction properly valued items in the real world that led to increased value in that world, they are produced properly. If they are based on the kind of derivative money creation valuing nothing of productive value, like the Yves Smith example above, they are much less than productive, they are outright detrimental.
Just like in a living organism, one can grow, or one can have growths.
To follow that analogy, imagine that the creation of each dollar in our economy corresponds to a body's cell.
Healthy cells in our bodies consume nutrients and contribute to the overall health of the body by using those nutrients to perform a specific task. Some help digest food. Some detect light. Some transmit signals. Some secrete enzymes. Some attack foreign bodies. Some move when told to move. As long as each cell works as it should, it earns its keep.
In a body afflicted with cancer, however, the cancerous cells absorb nutrients but provide no benefit, do no work. Worse, those cells that absorb the most nutrients and replicate the fastest become dominant, leading to an evolutionary race of random mutations that rewards which cell lines will out-compete the others. Eventually, unless the cancer is halted by the body's immune system or treatment, the cancer will absorb too much of the available nutrients and the tasks otherwise performed by the cells will be overlooked, leading to the body's death. The tumor "wins."
When bankers get greedy and try to make lots of money through maximizing methods such as those outlined in this original post — high-interest and high-fee credit card and "payday loan" lending, funding investment banks with collateral-free loans from commercial banks — monetary growth metastasizes into growths, into money tumors. Bankers have in their hot profit pursuit confused the dollars they make in profit with dollars that are good for maintaining a sustainable economy; confused sound dollars with unsound. They conflated their product, money, the tertiary economy of their creation — a creation good only for facilitating the transfer of items in the primary and secondary economies — as a means unto itself, one that can grow without relation to actual worth.
They have created growths.
One can either submit to an economy of these cancerous dollars, or one can print one's own and base them on sound lending and credit principals.
I like the latter.