Money, Taxes and Political Economy: Taking Control

“Allow me to issue and control a nation’s currency, and I care not who makes its laws.” (Mayer Rothschild, 1791)

“(Money is) the fundamental principle of social organization in capitalism.” (Doug Henwood)

“Money is power, economic power in fluid form, the primary instrument of social control.” (Me)

We live in interesting times. The United States is a nominal democracy wherein the people are supposed to exercise a modicum of control over the political economy. While most people are at least somewhat politically aware, the citizenry as a whole is relatively unconcerned over the financial system, and is relatively ignorant about how it functions. To a degree, this is understandable. The prevailing economic mythology has done an excellent job in obfuscating and misrepresenting economic and financial reality so that “experts” can manipulate the system for the benefit of their rich patrons with minimal scrutiny or political interference. What follows is my attempt to briefly and succinctly discuss our current system and its ramifications.

What continues to escape most folks is the extent to which our economy is a monetary economy, our society primarily controlled by directing the flows of money. I suppose that one could argue that our society is excessively monetary in character (probably true), or that money, profits and interest are the root of all evil (complete nonsense). The reality is that our large population requires a complex society which can only be organized around money. Also, it is the way things are currently, and this reality needs to be dealt with before other changes can be reasonably contemplated. In short, it is not possible to fully understand how our society functions without understanding the role of money in social organization and social control.

Money is created by the banking system. At one time it was associated with precious commodities such as gold. This was prior to the development of modern economies which create economic interdependencies which, in turn, make money integral to complex social organization, hence, inherently valuable insofar as it is essential for economic interaction. While gold may still perform a stabilizing function in international currency transactions, it functions as a speculative commodity, nothing more. This is as it should be. Any attempt to base modern money on a commodity is counterproductive. Money is, and should be, simply a legally established means of exchange, a small piece of economic power easily transferable, designed to facilitate exchanges, thereby directing the flow of economic and other activity. The amount of money in circulation is a political determination regarding the desired level of economic exchanges in relation to the size of the economy and economic policy. The store of value which supports the value of money is the real economy.

To say that our current financial system deviates from a desirable financial system is an understatement, to put it mildly. For starters, our financial system (money creation and banking, primarily) is in private hands for private profit. Nothing wrong with profit per se, however, having the financial system in private hands virtually guarantees that the financial flows will be manipulated to facilitate private profits at the expense of the political economy as a whole. This is the problem inherent in private control which government regulation seeks to moderate, with limited success at best. Eventually, the private financiers seek to redirect the flow of money into financial speculation and paper wealth resulting in asset inflation as the real economy is starved for funds. This is happening now. It is unrealistic to expect private individuals and organizations seeking personal and organizational gain to manage the flow of money in such a way as to benefit society as a whole. The financial system is integral to the management of the economy at the macro level, and needs to be treated as a government run utility. Private business is fine, but private control of the economy is nuts.

In addition to being a privatized financial system, our system is also a debt based system. Every dollar in the system exists because someone or some entity has borrowed money. No joke. The single biggest borrower in the US is the federal government. Not everyone is in debt, of course. There are creditors who hold the debt, debtors and creditors being in balance. System wide, the entire money supply is a consequence of someone owing money to someone else. In our present system, increasing the money supply to accommodate an expanding economy entails increasing the systemic debt. Debt which must be repaid with interest. Interest which compounds. A never ending, geometrically increasing claim on future earnings. An increasing claim which requires the economy to grow exponentially and/or systemic wealth to shift from debtors to creditors and/or inflation to ameliorate the interest burden of the debt. A system which to be sustainable requires mechanisms to counter unsustainable debt service at the systemic level. These mechanisms do not currently exist, hence, the system is unsustainable in the long run, and probably in the short run as well.

Crucial to understanding our debt-based financial system is an awareness of the unsustainable nature of compound interest. For example, a 3% interest rate is usually considered a low return on investment. Being conservative, however, you opt for safety and purchase a $1,000 Certificate of Deposit at the Bank of Rome in the year zero, with automatic renewal and the interest compounding. How much will your CD be worth in the year 100 AD? $19,200. Not exactly spectacular. How about the year 500 AD? Your heirs would collect $2,621,876,900 and be eternally grateful. If they let the CD roll over until the year 2000 AD, it would theoretically be worth $47,726,000,000,000,000,000,000,000, many times the value of the entire planet. Now there are two obvious conclusions: A) either 3% interest is a lot better deal than you originally thought or B) 3% compound interest is totally unsustainable in the long run and circumstances would intervene to prevent your 2000 year old CD from being honored. Obviously, answer B reflects reality.

Hopefully, what the above example illustrates is the long term non-sustainability of compound interest. A healthy, sustainable political economy will deal with this reality by developing means, such as a graduated tax on income and accumulated wealth, which at a certain level of accumulation offsets the compounding effect, bringing the system into equilibrium. This hasn’t been done in the past. In fact, the unsustainable nature of compound interest and the consequences to the economy are never discussed as this would call into question the entire structure of the capitalist economy. As a consequence, the problem has been dealt with by destructive bankruptcies, crashes and depressions, which serve to eliminate unserviceable debt in cataclysmic fashion. This is the situation we find ourselves in now, with increasing income/wealth inequality, ultimately leading to system-wide break down. One must assume that this break down is foreseen by the financial elites who will use the opportunity to rearrange the financial system to be even more favorable to them. A form of financial feudalism with great riches for the oligarchs and debt servitude for the rest.

What must be kept in mind is the extent to which the financial system is rules and regulations maintained by power. Rules and regulations established by powerful nations with powerful armies and dominant economies. Rules and regulations which control money creation and banking which, in turn, are the instruments of world-wide economic control, the arbiters of economic interdependencies. An undemocratic system which can and must be changed if we are ever to have a just and sustainable economy. A system justified by economic mythology and endless propaganda which misrepresents money and wealth and the dysfunctional systemic consequences of concentrated wealth (money-power).

An essential part of democratic control of the financial system is the use of taxes both to redirect spending from private decision making (individual and organizational) to public decision making, and to ameliorate the dysfunctional economic and political consequences of excessive income/wealth disparity. Of particular significance is the need to greatly reduce the power of the huge transnational corporations and financial elites who currently dominate our society. Yet, this clear need has been camouflaged by massive elite propaganda which has successfully convinced an astonishingly gullible citizenry that money is a thing, a piece of personal property imbued with “property rights,” and that taxes are a form of legal theft which diminishes our rights and freedoms. Folks can’t seem to comprehend that money is not a thing but a social/legal construct, the means by which we direct the economic activity of the polity, and that the rich and the corporations have no divine right to rule the political economy (as they currently do), and that progressive taxation is an essential and integral part of a just and sustainable society.

What also seems to have gone unnoticed is the extent to which public expenditures are essential both to provide employment opportunities (particularly in view of corporate outsourcing) and to provide those things which cannot be individually purchased like clean air, clean water, and environmental clean-up. If one were to compile a list of priorities of what needs to be done to assure a sustainable future with quality of life for all, the overwhelming majority of things needing doing like universal health care, affordable education, and restructuring society to deal with global warming and peak oil, fall within the sphere of political decision making, not the individual market transactions of a consumer society. Additionally, advances in technology and automation have dramatically reduced the number of people required to produce “things,” hence, the majority of post-industrial jobs will involve services, such as free ongoing education for all funded through taxes. It is all quite simple. A social vision needs to be established at the macro level consistent with the constraints of the real economy, then money is allocated with the intent of implementing the vision. The financial system needs to support the real economy which, in turn, needs to support the social vision.