What is Money and Where Does it Come From?

What is money?  Where does it come from? How is new money created? Innocent and simple enough questions on the surface, but in fact they are not so easy to answer. Don’t just take my word for it: lots of people far cleverer than me have had a bash at explaining it; thousands of PHDs have been earned, and millions of words have been written by economists, financial gurus and journalists. If we could only work out some definitive answers to these questions, maybe we could start making a lot more money, spread it around a bit, and finally claw our way out of the ongoing global economic recession which has been crippling most of the world for more than five years now.   

Simple Money

Life in the Twenty First Century is complicated.  We are part of a global economy, and most of us are dependent on the activity of thousands of interconnected international organisations – energy providers, food producers, manufacturers, retailers, transport companies - for our very survival.  We need money to live, we need jobs to earn money, and in order to receive our salaries we need bank accounts. We need to build a good credit history to access funding such as credit cards, loans and mortgages, just to buy the basic stuff we need to function at all in today’s world, like cars and houses.

 I recently heard about a British chap called Mark Boyle, who decided, for political and personal reasons, to try and live without using any money at all.  He started off by giving away most of his possessions and finding a way to live rent and mortgage free. His solution was to move into an old caravan in an orchard somewhere between Bristol and Bath. Now that sounds like a pretty good start to me, and preferable, say, to living in a rickety shed somewhere in the Outer Hebrides. But I digress.  From the apples in the orchard, and from fruit and vegetables he grew there, Mark was able to feed himself a basic diet, and have cider and other produce for the purpose of bartering.  When he was travelling away from the orchard he subsisted by raiding the contents of supermarket skips.

In this way he managed to survive for two whole years: an impressive achievement, I think.  Mark says he regards those two money-free years as the happiest time of his life, but I think he also realises it was an anomaly, a kind of time-out from reality and normal life.  Whilst it is possible to subsist like that when you are young, healthy and unattached, it is certainly impossible to continue indefinitely, especially if you want to acquire a spouse and children.

It was an interesting experiment, however, and sometimes I even dream of trying it out myself, especially on a warm summer’s day when the idea of living the life of a New-Age Traveller and drifting around the British Isles in a gypsy caravan seems romantic and appealing. This is just a fantasy of course, as I am sure that a single week of living in a confined space without electricity, a plumbed-in toilet or running water, in close proximity to my better half’s socks, would dispel it for ever.

So, tempting as it sounds to have a go at creating my own version of The Good Life, the harsh reality is that I am forced, like everyone else, to conform to social norms, get a job, earn a living and pay my taxes, mortgage and bills.  My entire life has been built up around the acquisition, husbandry and deployment of money.  Which brings me back to my original question: what IS this stuff called money, that apparently makes the world go round, that people lie and cheat for; kill each other for, and give up the best years of their lives to earn?

Unfortunately even senior bankers, financial experts and economists would be hard-pushed to give a definitive explanation.  In fact, they are likely to come up with an extremely complicated explanation, with lots of figures, statistics and graphs that most of us would struggle to understand.  In the past it was simpler: for most of us, money came in the form of hard cash, and was acquired on a weekly basis, in a brown-paper pay packet.  You earned it, you spent it, and when it was gone it was gone.  Simple!

Now our relationship to money is more complicated. We do not often get to see our entire monthly salary in the form of actual cash, let alone our life savings and other financial assets. We know how much money we have from figures on a bank statement, or more likely these days, just from flickering characters on a screen. The theory is that, at the end of the month our salary is transferred from our employer’s account into our personal bank account.  Obviously, no physical transfer actually occurs, it is just those elusive, flickering electronic characters on our computer screens that change. 

Complicated Money

In order for this system to function correctly, a lot of complex mechanisms need to be in place, working accurately and talking to each other.  That is a hell of a lot of technology, all in the hands of the commercial banks, a hell of a lot of assets based on trust in the financial institutions, their personnel and their technology. When you stop and think about it, there is an awful lot that can go wrong.  Just thinking about the last five years, much of this financial infrastructure HAS gone wrong already, hasn’t it?

Think about it: the sub-prime mortgage crisis in the USA, rogue traders who have managed to bring some of the longest-established banks to their knees, numerous financial mis-selling scandals, LIBORgate, computer systems that have malfunctioned and crashed, hackers and fraudsters who have broken into our accounts and into banking databases and stolen our identities and spent our life savings.  The list is endless, and yet life goes on.  We still entrust everything we have and everything we hold dear to the current financial and social system.  Because that is what money is, isn’t it? A social system based on trust.  

Most of this economics stuff is very dry and boring of course. Personally speaking, when faced with a long-winded document rammed with technical financial jargon, and worse still, lots of incomprehensible diagrams, charts and graphs, I tend to panic and break out in a cold sweat. So I was delighted to come across a couple of interesting articles in the Bank of England’s recent Quarterly Bulletin that I could actually understand.  There are two related articles, Money in the modern economy: an introduction, and Money Creation in the Modern Economy, both by Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.  At last!  The definitive answer!  OK, maybe not the last word, but two great articles well-written, jargon-free and easy to understand.  I recommend you read them for a better understanding of some economic basics, including Monetary Policy, and the roles of the Central and commercial banks.

Here is a link to the Bank Of England’s own website where the full text is available to read and download. 

I give the final word to Mark Boyle, the cash-free man. This is an excerpt from a posting by him on the Guardian’s GreenLiving blog. Talking about ecological problems including environmental destruction, sweatshops, factory farms, and wars over resources, he makes this point:-

One of the critical causes of those symptoms is the fact we no longer have to see the direct repercussions our purchases have on the people, environment and animals they affect. The degrees of separation between the consumer and the consumed have increased so much that we're completely unaware of the levels of destruction and suffering embodied in the stuff we buy. The tool that has enabled this separation is money.

Food for thought! Thanks Mark, very interesting.  

Footnote to my boss: just because I seem to have established in theory that money no longer actually exists, don't think you can get away without paying me this month.