Re-sit Essay: Political Philosophy and Humanities in a Global Age
Yolande Jansen
David Hwan
10324275
The financial system of the 21st century: debt, neoliberalism and decentralized cryptocurrency.
1. Introduction
The contemporary financial modern world has in many ways radically changed. The most recent development is that our monetary currency in the virtual banking system is no longer tied to the Bretton Woods Gold Standard since 1971, thus a connection with an intrinsically valuable object of which there is a limited amount is lost. This means in essence that money, and thus credit and debt, exists because we all believe it exists (Graeber, 2011). Because banks loan money to each other and their clients freely, the amount of real existing paper money is only a fraction of the total outstanding debt and credit. Financial institutions, non-governmental and not democratically chosen, decide whether or not new money is created, as happened after the 2008 subprime mortgage crisis. Seeing as financial institutions as well as governmental organisations control and make policy based on the credit and debit of our monetary system, it is interesting to look at the development and the impact of our modern monetary system.
The impact of the current monetary system is interesting in particular because of the political aspect that debt has. In terms of financial debt, one is indebted is one owes any amount of money to another person or entity. That debt has impact on our moral standards and more importantly, our moral status. For instance, those who are constantly in debt are to blame themselves for the debt they are in (Chakravartty & Ferreira da Silva, 2012). After the period of slavery, it has been mostly blacks and Hispanics that are in constant (financial) debt. The nature and the way debt has a moral implication in our society is an important aspect I will treat when looking at what the control of financial institutions means.
In relation to the moral status debt implies, the way debt is constructed and controlled is quintessential for our review of debt in the 21st century. Financial institutions such as IMF, but also national banks and governments guide the way debt is created, remitted and regulated between countries, but also within. Since the 2008 financial crisis, many fingers have been pointed towards those who are to be held accountable for the housing bubble that was created and then bursted, resulting in the impoverishment of many (already poor) households throughout the world. In the aftermath, is has become painfully apparent that those institutions that should take responsibility for the financial system and its fragility, are not targeted or the system rectified at all. The same centralized control is being effectuated and those who lost everything have not gained anything in the process of what some would say should be the reclamation of control (Chakravartty & Ferreira da Silva, 2012). Therefore, I will look at the development of financial institutions and what their central control means in relation to neoliberalism.
Lastly, this article strives to stay up to date with modern evolution. A new monetary system is slowly emerging, namely that of E-money and virtual crypyocurrency. Within this new system, one aspect stands tall and breaks with what now is our tradition of monetary control: the regulation is completely decentralized, and control lies with the user, and not some centralized higher authority. The goal of this article, and the chapters leading up to the final one, will all be aimed at questioning whether or not the emerging virtual monetary system will provide a solution for what is a challenging series of problems.
2. The nature and development of debt
2.1. The moral nature of debt
Before we came to the idea of money in terms of gold, silver or nowadays even bank accounts with nothing more than a number on your screen, the creation of money and thus debt by trading and value-assessment of goods happened in different ways (Graeber, 2011). As Nietsche (1887) already observed when looking at creditor and debtor, the way man calculates his worth according to what he owes or owns is one of the most primitive and personal of relations. The ability to measure one’s possession against another results in a calculation of the worth of oneself. The human as a calculating and intelligent being differs from animals in exactly this way: by being able to measure itself against another. As Nietzsche believed, all our morality comes from this relation between what we have and what we owe or own (The language Nietzsche spoke, German, just like in Dutch uses the word debt ‘Schuld’ for both debt and guilt).
According to Graeber (2011), what has happened in our modern world where financialization of every day life has taken place, we have all become these little machines and corporations that owe each other this or that amount and have to work hard in order to pay these debts for our houses or our children’s schools or our new car. The payment of these debts has become the centre of our definition of morality, simply because they are not being paid and that inability to pay back defines part of our moral status. A particular light should be shone on the relation between minority lenders who’s relation to the white borrower is quite different from other relations (Chakravartty & Ferreira da Silva, 2012). Because of the racial history in which property was owned by the white supremacists and not so much by the minorities, blacks and Hispanics are much more reliant on consumer credit and wage compared to those with capital (black families after slavery never started out with capital). When for example the 2008 bubble burst, it was against the untrustworthiness of these minority debtors that had been bet to earn money. The strong moral conviction that prevails through the debtor, but because of history especially the black debtor, is that of the weak man/woman who cannot lead himself to economic empowerment, always lazy and therefore in debt, which leads to a dangerous vicious circle.
Not only is his personal relation towards the creditor that of a lower standard (Graeber, 2011), is is also the case according to Chakravartty & Ferreira da Silva (2012), that the financialization of our every day life, and as a particular example the subprime mortgage crisis have all thrived on the construction of the other, the non-Western other who does not have the same moral and intellectual capacities, leading him to debt. What is problematic for the individual in neoliberalism and the relation of debt and minorities, has to do with the assumption that for example with the 2008 crisis, the high-risk subprime loans that were given to minorities were in fact assumed to be unpayable by the debtors. This seems to imply that betting against these individuals, assumes and then by the vicious circle proves that these people lack certain moral attributes such as self-productivity or determination. The debt and thus encompassed relationship that was created in a situation of racial power led to the marking of a fixed moral position. That moral position, according to Lazzarato (2009) is a fixed one because the indebted man has to rely on just his earnings every day not to save but to bay back his never ending debt. These so-called non-owners can never make use of the benefits of the financial system because they are always in debt, especially with the high interest on subprime mortgages, never being able to take risks and leading to a strong asymmetry between those with savings and those always in debt.
2.2. Currency in modern society
We see in the development of debt, that by trade in a quantity of goods, the creditor has the means to determine in a specific amount what a debtor owes (or is worth in moral terms) (Graeber, 2011). The role of the modern state therein is very important. The relation between debtor and creditor is personal one, and a moral complaint about being indebted to someone else is in principle not an easy case (even though you were free to discuss your own terms based on what you have, most economists would say). Keynes (1930) however underlines the role of the state when it comes to the personal relation between debtor and creditor. Even though the terms are usually discussed between the two parties, the state determines the laws and conditions that form the framework of debt in society. Because the state enforces the terms agreed on by the parties and regulates the legal terms, it has in essence the power the re-edit the dictionary, as Keynes puts it. Strikingly, the institution that has in the modern financial world a key role in the regulation of debt is not a governmentally owned organization. I am of course talking about banks and in the case of the U.S. the U.S. Federal Reserve, and together with the government, by controlling the flow and creation of money, they have no limit to what they can create when it comes to virtual money. After the 2008 financial crisis, the financial system completely broke down and the solution was simply the creation of extra money out of thin air, providing almost no repercussions when it came to the debt this financial institutions could have had towards society (Chakravartty & Ferreira da Silva, 2012).
A crucial break with the financial system in a the old days, before the modern banking system, is also the link to reality (Graeber, 2011). In the oldest systems of trade, though one could indebt oneself with what for example 10 pigs, even though he did not have 10 pigs, there was at least a relation to what existed in a community. If the community only had a single pig, the barter of 10.000 pigs would be outrageous. The same goes for gold. Given that there is a fixed amount of gold on the planet, even when new discoveries are very well possible, there is no unlimited supply. When the main currency all other currencies were still linked to was gold, our effective money supply was thus also limited by a fixed number. When in 1971 the world, through a series of financial and political upheaval, broke with the gold standard, the capitalist system reached that of virtually unlimited heights. Not only could banks create more book credits than they had on cash reserve, which had already happened in Medieval Europe but not to extreme degrees due to the risk of debtors all at the same time taking back their money, in the modern financial conglomerate the connections between banks and governments are so tights that they can always lend from each other or the government, in effect being able to create an unlimited supply. It is exactly this great amount of virtual money that creates significant changes in relationships between people (and countries) (Lazzarato, 2009). The buying money, or real money is not the same money fluctuating between stocks and bonds and banks. The latter is virtual and is regulated and controlled by financial institutions, which crucially, is outside of democratic control.
2.3. Financial institutions and neoliberalism
In 1963, Martin Luther King Jr. said in his famous “I have a dream†speech that regarding the promise to black men for the unalienable rights they were promised in the Declaration of Independence, that “[…] instead of honouring this sacred obligation, America has given the Negro people a bad check, a check which has come back marked “insufficient fundsâ€.â€
The above quote reflects in a clear way what turn the financial institutions that guide nations but also the international relations have taken. Since the financial globalisation it has been the same U.S. from the above quote who led the way and advanced their capitalism within the global world (Chakravartty & Ferreira da Silva, 2012). These banks and other important financial regulators such as the World Trade Organisation and the International Monetary Fund are part of the hegemonic role the West has played in all of our political thought (Harvey, 2007). On an international scale, this means that these institutions and the discourse that pervades them, have control over what the financial world sees as the global set of rules, as discussed earlier by Keynes. As loans between countries which impact the financial leeway within a country are legalized and controlled by the neoliberal institution IMF, the relevance of such an institution is huge as they can also penalize a country for not abiding.
The way the financial institutions globally work can make us better understand the role banks and governments play in the national scheme. For example the U.S. Federal Reserve, controlling interest rates, can dictate whether or not those indebted countries have to take foreign investments and thus give in to control (Harvey, 2007). Some countries such as Mexico for example, could not pay the interest they had to pay on their debts-interest payments and needed help and structural adjustment from the U.S. But this control is not limited the debt between countries. Also the state can control the rise of debt within a country, for example by cutting on social wage, making housing more expensive. Harvey names as an example the privatization of social housing, leading to lower wage classes having to buy houses they normally would not be able to afford given their salaries, except when they had to turn to loans from bank.
The most recent illustration of what happens when impoverished classes have to take loans they cannot afford is of course the recent and much named 2008 crisis. Banks had begun selling mortgages to people who could not really afford these houses, selling the whole package as a credit that was based on the assumption that the economy could grow forever (Chakravartty & Ferreira da Silva, 2012). These subprime mortgages were given especially to the already impoverished poor black families who after the crisis were in humongous debt. Relate this to the earlier mentioned reliance on wage and the fact that the lenders (banks) knew that most of the minorities would not be able to pay back their debts. Through their position and knowledge the banks bet on these loans not being repaid and in that way spread their risks globally to secure their profit. The way the subprime mortgage system worked was by lending extremely risky loans and betting against their default with a third party. The whole system was based on the assumption that the market and money flow could grow endlessly on paper, and when the Lehman Brothers fell, all interconnected institutions collapsed. But the responsibility was not taken by them or the higher-ups. Even though there was an extreme amount of interest on the loans, which made sure that minorities did not even pay back their loan but only their interest, it was the minorities who took the fall and lost their housing. In a moral sense, it was their lack of creditworthiness, or as mentioned earlier their natural laziness, that caused the crises according to the borrowers. So the privatization of financial institutions such as banks did not lead to what the government states to be beneficial to all the people (Lazzarato, 2009). The self-regulating system leads to a control of the mighty few at the expense of the loss of freedom by those who are always paying back debt and the constant moral state of the individual as a failed financial cog, the impoverished minority, always in debt because his own laziness.
Of course, after the crisis, it was not the ones who caused the subprime crisis that had the most harm. Financiers were bailed out by the creation of new money from the government (of course that money was purely imaginary and not really there) and those who held the mortgages were left to the “mercy†of the court (Graeber, 2011). The same financial system and the corresponding institutions are still in place. It is exactly that control of interest, loans between countries and the overall centralization of financial power that is so problematic about our current financial system. It has so strongly perpetuated our way of life that one sometimes feel they are a fighting against too strong of a system, too deeply rooted in our shared society. But as this article does not only shine light on problems, it also turns to new idealism, and possible solutions.
3. Cryptocurrency
When talking about poverty, Ferguson (2009), states that poverty, and in our case we are looking at the indebted black man in the neo-colonial age, has much more to do with the presence of banks and their failure as efficient financials institutions. Because there are no efficient credit networks and money cannot be safely deposited, the idle rich are able to profit from the so-called industrious poor. As Harvery (2007) puts, it is exactly the unaccountability of large financial institutions such as the private power of national banks, the IMF, the World Bank and the WTO that make “a mockery of any credible concern about democratizationâ€. We are looking at a financial system where the control is outside of democracy, and therefore this article looks to a different way of currency, questioning whether or not this provides solutions to our posed problems.
3.1. Idealism of cryptocurrency
The rise of cryptocurrency has, like most 21st century technological development, been a quick one, the most prominent and known currency being Bitcoin. Though the technology of cryptocurrency is rather complicated with the blockchain system, the use of time stamps and the miners, its ideology is not. Using Bitcoin as the earliest successful example, cryptocurrency has a simple goal: the ability to do payments without any centralized financial institution in play (Nakamoto, 2008). The vision of cryptocurrency is that of a world where third parties are not necessary for the trustworthiness of the financial system. In the current state, financial institutions receive money from one party, and transfer it to the other party. The whole monetary system is thus based on the trust in these institutions to be able to pay the money. But according to cryptocurrency ideology, part of the problem is that we do not know for sure whether or not our money “existsâ€. The degree of control and centralization of these financial institutions as the third party trustees is something cryptocurrency poses as problematic (or unnecessary) and wants to do away with. According to Nakamoto (creator of the Bitcoin system), the current trust based model is inherently weak and inefficient.
The hope for cryptocurrency, even though it is already partly in place and has been used on multiple periods in the past 10 years, is that of a currency existing in a completely open and decentralized manner. This system of these electronic transactions do not rely on trust, but on proof of existence (Nakamoto, 2008). This is so because cryptocurrency is more comparable to gold supply more than anything, as the amount of coins within for example the Bitcoin system are fixed. There is an underlying ideology in play, set in motion by Nakamoto. The idea of decentralized control and the digital proof of money is also supposed to be radically democratic (Franco, 2015). As the system works, every single person can verify the realness of the coins in the system, and none can alter the worth of money without a supermajority consensus of all the users. Every single player in the digital chain is a small controlling bank because of the mathematical fact that no single entity can alter the code of cryptocurrency. The egalitarian and open system of Bitcoin is build in such an anonymous way that everyone regardless of race, colour, culture, identity or sex can participate and be part of the larger network. Of course the way the system works is crucial.
3.2. Mechanisms of cryptocurrency
In simple terms, taking Bitcoin as an example, there exists a known amount of digital coins like there exists an amount of gold in the world (Nakamoto, 2008). Every single computer (and thus person) is able to ‘mine’ these coins, and these coins in turn are tradable. The necessary condition about being able to trade digitally is of course the assurance that your coin is really worth something. The most important problem is the double-spending problem, where a digital coin is used twice. The system of Bitcoin ensures the trust that banks normally provide, by encrypting a digital proof within each coin. In essence, the coin’s history and time stamps that are linked to each coin proof the realness of the digital coin. A coin that does not have the digital proof of being real, meaning that its history matches another coin with the longest history in the so-called block chain system, is not integrated in the system and trade. Therefore every single coin has only one single code and because of the control by all computers, no fake coin can emerge. Bitcoin (and other digital currencies) thus ensure a limited but quite tangible supply of currency without the control of a third party.
An important aspect about the digital system is the need for an open system. All transactions are public so the coins can be verified, and users are all anonymously displayed as part of the system, to ensure that the trades are verified by all (Nakamoto, 2008). The so-called block chain system is essential for the system, defining the blocks of transactions and the history of the coin to ensure its realness, making all the users being able to see that the transfer history. Persons are represented as public keys, linked to computers but leaving the actual person unidentified. So the privacy is ensured, whilst keeping the trust within former transactions that define the realness of the coin in place.
The way new money is created is not done by financial institutions or governments either. The worth of one coin obviously depends on the worth the public assigns to it, but the creation of new coins (or parts of coins) are all executed by ‘miners’ (Nakamoto, 2008). A miner is comparable to the seeker of gold, searching and decoding the system for coins. The coins are encrypted, and the more coins in play, the harder it is to encrypt new ones. In easy terms, that means it takes more computers and more time, exponentially as the search for the ‘digital gold’ continues. There is however not one single party who controls when coins are mined, because all users can mine coins (if that is how they wish to spend their time).
3.3. Relation to debt, financial institutions and neoliberalism
Recalling the problems posed in the previous chapters we are in our current monetary system stuck with a moral status that is created by debt, and the terms of debt in turn are controlled by centralized, non-democratic and neoliberal financial institutions. Of these two aspects, cryptocurrency does not prima facie offer solutions for the first problem. The moral status of an individual based on what he owns or owes, is still the same with whatever currency is around. The interesting aspect about the cryptocurrency however is the system of control, and what this will to do the regulation of debt. There are three aspects that change if cryptocurrency would become the default way of exchange: power over money flows is decentralized, the amount of money is fixed and the political character of debt might change.
The most important factor is that in principle, the power of financial institutions as they stand now, will be radically different. No longer will they be able to hold bank accounts of people, because all individuals own their own bank account in the form of cryptocurrency. The tinkering with creation of money made prior to the 2008 financial crisis will no longer be possible because of the decentralized open control all users have over the money flow. Thus the collapsing of the monetary system, resulting in the bankruptcy and decay of those already in debt, will no longer happen in the way it in the past has done. This might mean a big collapse once, but no multiple collapses through unrealistic assumptions of endless growth.
Of course, the function the bank will be able to retain is that of lending. Given that lending is simply a system of asking for something with the promise of paying it back later, in theory banks would still be able to offer that service. But so would everybody else. The creation of debt from one institution that controls the interest is no longer necessary. Private entities offering a lending service, basing their interest on the market fluctuations are all able to flourish without the need for licensing or lobbying with a capitalist non-democratic institution such as the U.S. Federal Reserve or World Bank. Though the picture might be too macro-economic and theoretic, and even slightly anarchistic, the mere idea of a more democratic and open lending system with mathematical proof instead of needed trust in financial institutions is a pleasant idea to play with.
There is also positive perspective with regards to the decrease of debtors being created out of thin air in a capitalist society. If the money supply is again fixed to a standard like in the days of the gold standard, such as is the case with cryptocurrency, it is no longer possible (or at least limited ) as in recent decennia to create money out of thin air, and thus offering loans and corresponding debt to those who might not be able to pay back due to racial history is limited to other suppliers on the market. The assumption that money can be created forever is simply untrue in a cryptocurrency system and schemes such as the subprime mortgages that benefit the rich and discriminate the poor are in limited way possible by financial constructions.
Lastly, the political power that comes with the influence of hegemonic financial institutions might decay, depending on how the laws and regulation regarding cryptocurrency and corresponding loans will be formatted. Seeing as the worth of money is no longer officially tied to the U.S. dollar, but to the amount of digital coins in the world, there are possibilities that neoliberalism and capitalism will lose its national and international power. The fact that all individuals can participate, even on an international scale, will call for more than just the initiative of one single country and political ideology. Countries with a lot of manpower to mine cryptocurrency, such as China or India, might be able to get an edge on Western society and base the money control and the effects on debts between countries (and thus people) on other things than the need for spreading Western power across countries.
4. Discussion
However interesting and useful it is to look at cryptocurrency and its influence on neoliberalism, debt and financial institutions, it is not without warning. A new and yet unregulated system poses problems on a grand scale, and we are far from living up to the ideal of cryptocurrency. For the practice in the real world, a democratic way of creating regulation and legislation and a critical mind will be key in the movement towards a decentralized and radically democratic monetary system.
Bibliography
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Franco, P. (2015). Understanding Bitcoin: Cryptography, engineering and economics. Wiley, United Kingdom.
Graeber, 2011
Harvey, D. (2007). Neoliberalism as Creative Destruction. The Annals of the American Academy, 610, pp. 23-43.
Keynes
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Nietsche