I bought my first Fiat in 1997. It was an early 80s Fiorino, which basically meant that it was a Fiat 127 (their smallest, cheapest model of that era) with the rear end chopped off and a 1.5m x 1.5m x 1.5m cargo cube patched in instead. Mine was the definitive example of what the British are talking about when they describe a vehicle as “clapped out”. For the incredibly simple vehicle that it was, virtually every part of it was defective in one way or another. For no logical reason though, I kept getting it fixed, and I may well have put more mileage on that sad little beast than on any other car I’ve ever owned. I used to drive it over a thousand kilometers per week between teaching jobs at one point, and I took major excursions with it from Finland to England, from the southern tip of Finland to the northern tip of Norway, and a few times around all of the Baltic states. I had the body and frame patch welded a few times. I had a new exhaust system put in. I had the gearbox replaced when the original blew on England’s M5. I had the head gasket and valves done. I had the crank shaft bearings replaced. I had the wheel bearings replaced repeatedly, and I can’t remember how many little seals and joints I had done over the course of the time I owned the beast.
My sons and I dubbed it “Smokey,” in part as a tribute to the legendary lead singer of the Miracles, but more directly for the visible evidence of all of the different sorts of oils it was burning.
Eventually, when I moved to the city of Espoo, I brought it with me, unregistered, and left it in a public parking lot near my house. While I was out of town for a couple weeks one time the city took it for abandoned garbage and had it towed it away and crushed. I was hurt by this more for the loss of the tools and parts for other cars that I had stored in the back of it than for the loss of the Fiat itself, but there was little I could do about it. I still had the memories.
Aside from parts cars for Smokey that were basically given to me, I owned one other Fiat over the years: a 2001 Punto that I bought brand new. That was the only time I ever bought a new car, and it was a huge financial mistake. I sold it less than a year later because I was having too much difficulty keeping up with the payments.
So overall for me the name “Fiat” is strongly associated with making mistakes and wasting money. In hearing talk lately about the problems of the global financial system being based on “value by fiat” then, I can’t help but smile to myself at the irony.
Value by fiat (small f) is basically taken to be the alternative to “trading on some fixed value commodity,” which usually means some precious metal. It basically means that some government-based institution issues some currency which it legally states “is legal tender for all debts, public and private,” without any more basis for its value than that. Is than an inherently bad thing? Let’s stop and think about it.
The best way to conceptualize this mess, I believe, is to think of the first season of outstanding television series, Lost, only in at least 1000 times larger scale. We’re stuck in this mysterious environment where we’re going to have to find ways to overcome our mutual suspicions and resentments and work together if we’re going to survive. We can actually do pretty well though if we find a workable mechanism for cooperation. We have to find some way of measuring give and take; of seeing who is doing their fair share; of making sure we get things in return from people when the group is too big to know everyone personally and to exchange favors on the value of reputation and personal alliance alone. How can we do that?
One way would be on the basis of pure barter: goods for goods, favor for favor. But that has the problem of limited accruability. If I want to work hard and save up enough credit to get people to help me build a really big boat I need some measurable way of guaranteeing that I can call in those favors, or get the equivalent service from others if I need it.
For that purpose I might be able to stockpile some commodity that my neighbors are willing to do what I want in order to get. In prisons, I’m told, the best commodity for to stock up on to buy favors with is cigarettes. In ancient Rome it would have been salt. In other primitive societies they were paid in some form of “bling” or another that they could show off. (How do you think gold became valuable to begin with? How do you think the Europeans were able to get the Native Americans to give them land in exchange for cheap beads and trinkets?)
But if we’re in a position where we have to build a cooperative community rather quickly, it might be problematic to do so on the basis of who happens to have best managed to scramble and stockpile the commodities that others want. (In Lost this was the problem with Sawyer in the early phases of his character’s development.) What we need is a system by which people are encouraged to work together rather than against each other. That might be rather idealistic sounding, but it also might be a practical necessity.
So maybe in that sort of situation we might want to do sort of like Ithica, New York has done and start printing some sort of certificates which are recognized within the community as meaning, “I’ve done an hour’s worth of basic labor for one of my neighbors, and so now I’m entitled to someone doing an hour’s worth of basic labor for me.” What makes these papers valuable is that there is a certain social understanding which backs them up, based on mutual trust and respect. As long as we can build those things, this sort of currency can thrive on the basis of nothing more than the word of the people printing them up and passing them around.
In theory that is the basic foundation of pretty much all of the world’s major currencies these days: they are based on the cooperative understanding between the people who are (theoretically) part of the democratic governments which the federal banks answer to. So what makes a Euro valuable is how much the average European is willing to do to get one, and how much shops are willing to give him in return for it. That’s really all there is to it. The same applies to the respective dollars of the US, Canada, Australia, Hong Kong, etc.; and to the pounds, rand, rupees, lira, litas, latis and other such paper money found in different parts of the world.
The big question is, how do you maintain that trust, symbolized by this paper money, within the society? How do you prevent those who have contributed nothing from printing their own certificates which would indicate that others owe them something, thus destroying everyone’s trust in the system? In this regard it makes no difference whether we are talking about corrupt bankers paying themselves official dividends or counterfeiters operating through entirely unofficial channels; the result is the same: some get money for nothing and as a result the whole monetary system is considerably weakened. So how can we safeguard against this?
There isn’t really any foolproof system. Whenever someone comes up with a “foolproof” economic program, someone else invents a greater fool to foil it.
Trial and error has proven that it doesn’t really work for a national government to make its own money, distributed through salaries for soldiers and teachers and the like. That model quickly leads to people thinking of the money as worthless paper. Money creation needs to be shrouded in mystery to really work. New money needs to be based on a promise that more new work will get done. But promised to whom? Well, to each other, sort of. How? By way of special organizations set up for that purpose. What are we going to call those organizations? They’ll probably have to be called “banks.” You sort of see the problem.
It would sort of help if there were a cleaner distinction between the sort of banks that print up money in order to enable people to measure the value of the work they are doing for each other; banks which people can save their money up in, loaning part of it to other people at a reasonable interest rate, like the lovable old Baileys did; banks which provide basic payment services such as checking accounts and electronic money transfers; banks which loan money on speculation to new entrepreneurs, sharing the risk of the business not working out; and banks which are effectively bookies for people placing bets on the stock market, placing a few institutional bets of their own as they go. All of these are legitimate businesses in their own right. The problem is that all of these banking functions are helplessly and hopelessly entangled with each other, and people are gradually starting to realize how badly those within this sector have been using the resulting confusion to their criminal advantage. To make matters worse, banks and insurance companies have conglomerated together, making all new levels of criminal abuse possible.
I’m not saying that the banking or insurance businesses are inherently criminal, but if there is one section of society which needs to be extremely tightly regulated by a democratically elected government, it is definitely “financial services”. Those who try to build fortunes by playing the system and enslaving others, contributing nothing useful to the economy, definitely need to be punished far more harshly than current law enables us to.
The greatest criminal abuse in the banking sector in the world these days is probably happening in the United States, as the result of business deregulation of the Reagan era. But I must say “probably” because there are plenty of other examples of abusive banking practices around the world. The European Central Bank, which prints Euros, has its own considerable moral problems in terms of what it is demanding of northern Europeans in exchange for the service of creating more money to be borrowed by southern Governments. Meanwhile there is the question of how much money the Chinese government is making for its people, and how fairly, on that basis, they can buy stuff from America and Europe in exchange for the stuff they send to America and Europe. Thus the Chinese government is holding more financial reserves –– more promises that work must be done for them –– than any organization outside of the major American banks.
Now of course those who are ripping off these systems have to be careful not to take their personal pocket lining processes so far that the money they have amassed for themselves becomes entirely useless. These days the criminals within the system are cutting it pretty close in this regard. The gap between the de facto peasants and serfs in Western society and their de facto lords and counts these days is as great as it has ever been historically in empires on the verge of collapse. Thanks to the Internet these days these contemporary peasants are quite aware of how the lords of the banking sector have come to live lives of obscene luxury at their expense. How far things can go before this leads to waves of currency collapses and revolutions remains to be seen, but the risk is palpable.
Given that there is no foolproof system, I would not recommend abandoning the “value by fiat” system wholesale in favor of system based on the value of “bling” (silver or gold), oil, wheat , salt or anything else. Ultimately currency has to be a matter of trust within the society, and for that to be based on the word of those we authorize to print these notes is as good a system as any, as long as we have some way to hold them to account for their actions. To restore trust in the system what is really needed is for those on the bottom to see that they still have some collective say regarding what those at the top can get away with. The biggest crooks and abusers of public trust need to be punished, and harshly. Steps also need to be taken to break down the social and economic barriers between the counts and the serfs.
Going back to the Lost analogy, our survival really does depend on our being able to somewhat trust each other and find means of overcoming our mutual antagonisms and competitions for power and influence. The societies which will survive will be those in which members recognize that they face greater threats than each other. The financial system will inevitably either be a reflection of that trust, or the lack thereof. And if we can’t trust each other and find ways of working together, an unstable financial system is the least of our problems.