Money Rediscovered
The great German philosopher Martin Heidegger once said that the thing that are most difficult to think about are the things that are most familiar to us. In simple terms, Crypto is money Rediscovered
Money is something that we all use every day. We use it to buy Noodles, we get paid for work, we use it to pay our bills.
Most of the time, we tend to take money for granted. We may think about money only if we have no money or little money, and if we have enough money or even too much, we may contemplate how to spend money.
In this familiarity with money, a very crucial question tends to get lost, and it is the question of how money is created. We have two forms of money, Paper, and electronic money.
There is no seen difference between these two kinds of money. They are both denominated in the same currency.
If you buy a packet of noodles, it still costs the same regardless of the type used. So the difference between the two seems to be merely a matter of convenience.
However, when we ask this question how is money created? We see that there is a crucial difference between the two kinds of money.
Let me start with paper money, created by the central bank. Electronic money, however, is a little trickier. The account we have in the banks are called deposit account, and so this kind of money sits on deposit accounts.
In principle, the above is the case — it, however, very misleading in terms of understanding how money works in the economy because electronic money is created by commercial banks when they issue new loans.
How does this work, how do commercial banks create money?
So imagine that I go into a bank and I get a loan of $1m. This loan will rarely be paid out in cash, so what really happens, two things happen the bank issues the loan and thereby records that now I owe the bank $1m at the same time they then credit my deposit account, meaning that now the bank owes me $1m.
The trick, however, is that this account money can be used as money. In other words, it is money, so when I start spending my $1m, I merely transfer money from my account in my bank to someone else’s account in his or her bank. In this process, the electronic money is not somehow transferred in — to pay for money and then transferred back into electronic money, so essentially, what happens when banks issue a loan of say $1m. They create $1m worth of new money and simply add this to the total supply of money in the economy.
If we look at the total money supply in Africa countries or comparable economies. We see a paper pattern, which is paper money making up about 75% of the money in circulation, and electronic account money makes up 25% of the total money supply, and that's not even counting the money that is stashed away in the Tax heavens or elsewhere.
We get excited about all these ways of paying for things, not only with plastic cards but internet banking and smartphones. We have to remember that the price we've paid for this convenience is that we have essentially privatized the creation of money.
So is this a problem? I believe that it is a problem.
It creates inequality,
it creates instability, and
it creates a concentration of power.
Taking on instability. Banks' willingness to create new money and lend it into - the economy depends on the overall cycles of the economy, so when the economy is booming, house prices are going up and stock prices rising. The banks are very keen to create new money.
This, however, has the effect of inflating the prices in the economy. Even more so, the highest prices go up even further, and stock prices go up even further, and then we have bubbles. Ultimately these bubbles are going to burst. We saw this burst in 2008, and in other financial crises, we see year-on-year in Nigeria.
When these bubbles burst, the banks go in reverse, and they become reluctant to create new money, and in turn, this contributes to deflation of prices. So house prices which are already falling will fall even more and the same for stock prices. So in this situation. The banks are actually worsening the crisis that is already going on. So in other words, banks have an incentive structure for creating money when we don't need it and hold it back when the economy actually needs money.
We can compare this a little bit to a Supermarket that sells cold bottle water when the weather is at -75°C, but then when it 75°C the Supermarket closes.
The inequality problem, as we all know when we borrow money we have to pay interests, and we can think of interest as a kind of text on money, so we pay this text to the banks to participate in the economy.
If you're rich, if you already have money, and assets you can borrow more money at a very low-interest rate.
If you have little money, however, you have to pay a high interest rate, and if you're poor, and you have no money at all, then you can't borrow anything. So I think the way money is created is a key explanation for not only the Equality inequalities, that we have in our societies, but also for why this inequality just keeps rising, and this growing inequality applies to individuals and also applies to countries, so we see some countries paying high-interest rates and thereby becoming poorer and poorer, and we see other countries getting richer and richer.
The third point has to do with power.
So if you can decide when not to create money, if banks can decide, how much new money to create, - if banks can decide the price at which money is lent into the economy, and for what purposes. Then Banks have too much power not only over the economy but over society.
By privatizing our money system, we have essentially handed over a very vital societal power to the centralized banking system. I believe that's why many politicians today appear very impotent. It's because the crucial decisions aren't made in the Senate anyway. They're made in the boardroom of major private banking corporations.
Is cryptocurrency the solution to this?
It may sound as if what we need is a money revolution and an entirely new money system. I believe that what we only need is an update of the centralized system to a Decentralized structure.
What do you think we need?
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