A series of 3 excerpts on commonifying the fictitious commodities identified by Karl Polanyi, i.e. land, money and labor, from an essay by Gary Flomenhoft:
Money as a false commodity
The administration of purchasing power, in other words creation of the money supply, is currently regulated by quasi-private central banks such as the US Federal Reserve Bank, but is mainly controlled by private banks. According to a recent publication by the Bank of England, private banks create 97% of the money supply through the issuance of loans to borrowers 10. “This confirms that banks create money when they grant a loan: they invent a fictitious customer deposit, which the central bank and all users of our monetary system, consider to be ‘money’, indistinguishable from ‘real’ deposits not newly invented by the banks. Thus banks do not just grant credit, they create credit, and simultaneously they create money” (Warner, 2014, p.74). “Central banks increase money supply by purchasing government bonds with money created for that purpose” (Farley et al, 2013), so-called monetizing the debt. This central bank money is often called “vertical money”, while money created by the banking system is called “horizontal money”. So the entire money supply is essentially administered by the market as Polanyi stated as a requirement of a market society. The money supply is very flexible as determined by demand for credit, but every dollar creates interest payments to banks, which increases the cost of items purchased such as homes, and decreases consumer welfare.
Market administration of the money supply and other financial products also violates the theory of consumer welfare, the invisible hand, and the magic of the market. Greater demand for currencies, credit, and financial products, rather than leading to market entry and lower prices, leads to rising asset prices until the bubble bursts. Hyman Minsky called the end stage of financial capital the “Ponzi stage”, where there are no more productive investments available to be made in the economy, so finance goes mainly into speculative activities, driving up asset prices (Minsky, 1992, p. 9). While asset prices are rising, banks are willing to extend rising amounts of credit, increasing the money supply, but when asset prices are falling banks call in loans and reduce lending, thereby shrinking the money supply. This is referred to as pro-cyclical monetary policy, which exacerbates recessions and unemployment due to shrinking demand in times of falling asset values. What is needed is counter-cyclical monetary policy. Some control is exerted by central banks through adjustment of reserve rates, interest rates and open market operations, but they don’t directly control the money supply.
Since monetary policy is out of the hands of governments, in order to address monetary contraction they often respond with Keynesian expansionary fiscal policies to address monetary contraction. That is the only tool they have at their disposal. By additional spending or reduction of taxes, governments are able to inject more money into the economy, and counteract some of the pro-cyclical trends of bank money. This goes directly against the principle of market administration of purchasing power, and is an example of one of the mitigating responses to pure neo-liberal, laissez-faire policies that Polanyi devotes his entire book to explaining. “Grave evils would be produced in this fashion unless the tendencies inherent in market institutions were checked by conscious social direction made effective through legislation” (Polanyi, 1944, p. 129).
There is also a biophysical limitation to the infinite emission of credit by private banks. All bank credit is issued with interest compounded continuously or annually as a condition of loans. Therefore, the money supply must continually expand and the economy must grow in order to obtain the funds to pay back interest on the entire money supply. This creates a perpetual growth imperative, which has resulted in the 2014 ecological footprint measured at 50% overshoot of the planet’s biocapacity11. “Robbed of the protective covering of social institutions…Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed (Polanyi 1944, p. 73). And thus it is today as planetary overshoot has already exceeded boundaries for biodiversity and the nitrogen cycle (Rockström 2009, p. 472), and the climate destabilizes from excess greenhouse gasses.
Marion King (M.K.) Hubbert identified the basic problem with our current debt and interest based monetary system in his essay entitled, “Exponential Growth as a Transient Phenomenon in Human History”
Over time, due to our debt-interest based money system, the value of money declines, making products more expensive. This perpetual decline in the value of money has resulted in one dollar in 2014 being worth the equivalent of four cents in 1913 (bls.gov), a total depreciation in 100 years of 25 times its value, or -3.16% per year compounded annually. The most stable currency in the world at the time, the Deutch Mark was worth 20 cents (pfennigs) in 2001, based on a 1950 starting point of one Deutch Mark13. This constant reduction in the value of money due to the debt-interest money system, results in perpetual price inflation, which is accounted for in economic models as an annual rate of 2-3% inflation. For consumer welfare prices should be going down, not up. Constantly depreciating currency results in prices always rising and labor needing to constantly sell itself for higher wages on labor markets.
Since land is usually appreciating faster than wages, this creates a treadmill for the average worker trying to keep up with constant consumer price and land price inflation. If the value of money was constant, then competition in real commodities would decrease prices benefitting consumers. In reality economists look at deflation with horror as it decreases demand and results in recession, and makes loans harder to repay due to increasing value of money compared to income. Since nearly the entire money supply is issued through commercial loans, it would create default and monetary crisis if there was constant price deflation. By using the concept of “real” prices adjusted for monetary inflation, we can disaggregate the portion of prices due to increased product costs, and the portion due to currency depreciation. Since nominal prices of microelectronics have declined without adjusting for “real” prices, this is an even more impressive achievement. It means that the prices of microchips have declined faster than prices have increased due to currency deflation. So if prices are inflating at 3.16% per year due to currency depreciation, that means that the price of microchips are declining in real terms faster than 3.16% per year.
Solutions to commodity money
The fact that 97% of the money supply is created by interest bearing loans is the crux of the problem. It adds the cost of interest to everything, and causes a growth imperative due to the need for economic expansion to provide the money for interest payments. Many economists and writers over the years have recommended 100% reserve requirements, most recently in an IMF working paper by Jaromir Benes and Michael Kumhof, called “The Chicago Plan revisited”. This refers to the plan by U of Chicago economists led by Frank Knight in the 1930’s and also supported by Irving Fisher and Henry Simons, to require 100% reserve requirements on all bank loans, which would transfer to government the function of creating the money supply through 100% vertical money, ideally interest free, by spending it on public goods. Lincoln’s Greenbacks were a successful example of interest-free government money. Greenbacks were created interest-free to pay Civil War soldier’s wages. With 100% reserves banks would just become intermediaries between savers and borrowers.
Several intermediate steps have been proposed. The JAK bank in Sweden issues loans interest free which would decrease the perpetual growth imperative, and perpetual inflation. However, the JAK Bank lends out only money it has on hand and does not add to the money supply. Coincidentally, JAK stands for Jord, Arbete, Kapital in Swedish – or Land, Labour, Capital in English. Public Banks such as the Bank of North Dakota have been proposed as a way to transfer some seigniorage to the public sector. Banks are able to create credit while states are prohibited by the US Constitution. The Bank of North Dakota receives all deposits of state revenues, and uses them to leverage many loan programs for agriculture, industry, commerce, and student loans. Even more decentralized would be a system of municipal public banks creating credit for their infrastructure needs, at minimal interest, and paid back by tax money, with revenue going to the municipality instead of to banks. A voluntary decentralized approach is also possible. Around 70-80% of all bank loans in the US are for mortgages. If non-profit financial institutions were formed to take on the financing of nonmarket land in community land trusts, then we could begin to escape the Polanyi matrix. These banks could establish credit on the basis of the JAK bank which takes equity in properties instead of interest, and can begin to remove the use of money as an extractive commodity.
For the problem of monetary speculation, a financial speculation tax or Tobin Tax has been proposed worldwide as a means to reduce the level of speculation in financial assets, but would not change the creation of money. To eliminate the commodity nature of money, the creation of the money supply would have to be transferred to government, and maintained at a stable price level.”