The toxic effects of fraudulent money

A simple parable on the creation of money shows the many ways in which a fraudulent money system turns humanity into a radical perversion of itself.

Perhaps the most powerful defining feature of modern societies is the monetary system at their foundation. To convey some of the absurdities of this system, economist and former hedge fund manager Bernard Lietaer wrote a parable titled, “The Eleventh Round” in his book, The Future of Money.

From barter to money

Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, they brought their chickens, eggs, hams, breads and other produce to the market to exchange them for other items they needed. One day, a prosperous-looking stranger came by and proposed the villagers a helpful innovation: he rolled out a large cowhide, cut perfect leather rounds out of it, and put an elaborate stamp on each round.

He then gave ten rounds to each family and explained that each round represented the value of one chicken. “Now you can trade and bargain with the rounds instead of bartering the stuff,” he explained. That seemed to make sense, and it made the villagers’ lives easier. Everybody was impressed with the wealthy stranger’s solution.

However, his service wasn’t free. He told the villagers that, in a year’s time, he would return, and wanted the villagers to repay him 11 cowhide rounds. The 11th round was a token of appreciation for the technological improvement he just made possible in their community. The wealthy stranger was, in fact, a moneychanger - a banker. The villagers wondered where that 11th round could possibly come from, but the banker reassured them: “don’t worry, you’ll see…”

From mutual support to rivalry

With the size of the community and their annual production remaining the same during that following year, a problem emerged. Namely, that 11th round for each family was never created, and in order for ten families to come up with 11 rounds, one family had to lose all their allocated rounds. In other words, one in 11 families inevitably faced bankruptcy. Clearly, there would be winners and there would be losers in the banker’s new money system, which changed the way families related to one another: people started to become a bit less generous in offering their neighbors a helping hand if they suffered a misfortune.

While using the banker’s rounds was more convenient than barter, the new system discouraged the cooperation and mutual support that was previously taken for granted. In its place arose competition and rivalry among the families. Another effect of the banker’s new system was the polarization of wealth. Because one in eleven families could go bankrupt, they were forced to sell their land to their more fortunate neighbors, or surrender it to the banker. Over the years, the cohesive community changed beyond recognition: it now consisted of a few wealthy families that owned most land and others that were destitute.

The wealthy families loved the banker and acted as partners in his system, but now they also needed to protect their possessions and their families from those who felt cheated by the system. In this sense, Lietaer’s parable begins to show how interest based money introduces insecurity, competition, and greed into the economy. It also corrodes the fabric of society, splitting it into two classes that become hostile to one another.

The imperative of growth

These dynamics can’t be eliminated from society so long as the necessities of life remain denominated in interest-based money. In fact, they’re just the start of the its toxic effects. The system also created the pressure for perpetual economic growth. The community’s inability to come up with 11 rounds to repay the banker would lead to one of two possible outcomes: default or inflation. Namely, the villagers could tar-and-feather the banker and refuse to repay his rounds. Alternatively, they might agree to borrow more cow-hide rounds from the banker, and keep the system going. The families that emerged as winners in the banker’s system favored cooperating with him and borrowing more.

The banker would issue new cowhide rounds, but he’d allocate them preferentially to the families that were most likely to pay him back - the ones with the most wealth. He might also lend more rounds to the most ambitious among the community members - those, for example, who could convince the banker that they can grow their flock of chickens in the future, since one chicken equals one interest-based money round. Any entrepreneurial-minded villager who could grow his chicken flock by more than 10% per year might qualify for more rounds.

In fact, as long as enough villagers could commit to expanding their chicken production, the banker stood ready to issue them more rounds, since that generated more interest income for him. Over time, some families would go bankrupt, some would lose their land and effectively become serfs to wealthier families, but as long as the chicken production grew, the overall system could expand without any issues.

However, there came a point in time when the community grew more chickens than anyone wanted or needed, and the leading families decided it would be necessary to create additional demand for chickens and chicken products, since the production of chickens was making them wealthier and wealthier. They encouraged each family to have a feather-filled bedding and change it regularly; they declared chickens and eggs to be health foods for children, grownups and elderly alike; they even invented festivals with huge egg-throwing battles for the villagers’ entertainment.

Green to brown to red

With time, the green and fertile fields surrounding the village started to turn brown and foul. All the vegetation was stripped away to plant grain to feed more chickens. The ponds and streams, once full of fish became cesspools of stinking manure. The system was now ruining the community’s life and many wanted to end it and go back to the old ways of living. But the community’s wealthiest families, supported by the banker, proposed a different plan.

They said there was another village nearby where they had plenty of fertile fields and some chicken production could be outsourced to them. And if they wouldn’t oblige… well, our community outnumbers theirs, so they’ll have to agree, one way or another. At any rate, the growth had to be preserved, else the banker couldn’t issue more rounds and bankruptcies in the community would soar. Even the banker might fail.

In another few years, many villages fought bitter wars among each other for the remaining fertile green spaces that could support a few more years of economic growth. But in spite of all that, the pace of growth began to slow and debts began to rise in proportion to income. Our original community was now spending most of their remaining cowhide rounds servicing the debts they owed to the banker. Those who couldn’t went bankrupt, lost their possessions, and were forced to accept any work they could find, often at subsistence wages or less. Now fewer and fewer of them could afford to buy chickens or eggs, they no longer replaced their feather bedding and mud-throwing became the new egg-throwing at village festivals.

Scarcity amidst the abundance

“This island is almost made of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish in Great Britain at the same time.” - Aneurin Bevan, Welsh Labour leader

The natural abundance they started with, gave way to austerity and scarcity. Returning to growth required creating more “goods and services,” which meant converting nature’s abundance into anything that could be sold for the banker’s rounds. Forests had to be converted to timber, ideas into intellectual property and traditional herbal medicines had to be packaged, approved and regulated. Even seeds and water had to become for profit “products.” Collecting and conserving them was banned and stiff punishments awaited “hoarders.” Mutual support and social reciprocity had to become paid, for-profit services.

The ultimate result of the new system was that the vast commons, the abundance that was once available to all villagers, became cordoned off, exploited and commodified until very little was left outside the banker’s money realm.

The system must be scrapped and replaced

Lietaer’s tale is flawed in that it assumes that money came into circulation as a replacement for barter. That’s not how money originated. In spite of that, his parable is a valid illustration of why debt-based money is profoundly toxic to society and why, if left to itself and the game’s winners, can turn humanity into a radical perversion of itself, exemplified in a small predatory financier “elite,” served and protected by a ruthless Praetorian guard.

One does not need to be a socialist or a communist to notice the profound depravity among many of these people. This is the Epstein class, which seems to have been present throughout history, a by-product of a fraudulent money system. Transcending this system, confining it to history’s trash heap and engineering a new, improved operating system for society is the single most important task we need to accomplish in order to direct the development of human societies toward the beautiful and the divine. I can’t think of a single reason why we shouldn’t; this is our nature, and our choice is to allow it to blossom, or to allow it to remain stunted.

Alex Krainer – @NakedHedgie is the creator of I-System Trend Following and publisher of daily TrendCompass investor reports which cover over 200 financial and commodities markets. One-month test drive is always free of charge, no jumping through hoops to cancel. To start your trial subscription, drop us an email at TrendCompass@ISystem-TF.com, or:

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