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14. What is Modern Finance?

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From the book: Tax Your Imagination! Alternative Economics 101 (The road to a debt-free and inflation-free economy)

14. What is Modern Finance?

The social setting of Modern Finance

Old Europe was a hierarchal caste-like society. As in the Big History model, power was divided between the Church, State, and landowners, with the Church on top. Hereditary tradition and the threat of violence ensconced them all. Peasants paid their taxes with a share of the harvests. The landowners were rich, but the least powerful. They were required to support the status quo through loans and gifts. Gold was held in high regard, and wealth derived from owning land, but privileges were the root of power. The Church and State had more privileges than the landowning nobles.

In agrarian societies, war was conducted on a limited scale. The more a nation fought, the less food was grown. An army needed to plunder to survive. The goal of war was to infuse the treasury, but more often than not, war led to depletion. The reach of government was limited by practical considerations. In the long-term, a generation of young and strong producers could be lost. The nobles, therefore, were fair-weather friends to the state. They only wanted to support winning wars. It is the nature of war, however, that debt and inflation will conquer both sides off the battlefield. Lives and plunder were only one measure. War creates many secondary social pressures.

A study of the exchequer, written in 1180, reveals a limited financial system. It required little effort to manage the accounting needs of an agrarian nation. Like today, a problem could be shifted temporarily and claim to be solved. A reading of the Magna Carta (1215) however, reveals many issues concerning debt, taxes and inheritance. Money was a problem of growing legal, fiscal and social complexity.

The landowning families had two paths of advancement: the military (the black) and the church (the red). A lack of war, or a distaste for it, meant fewer opportunities for advancement. People adorned the cloth for less than holy reasons. The church, state and military can resemble a conspiracy of the craven.

As agrarianism waned, middle-class artisans in the form of guilds grew. They were the pillars of the fledgling military-industrial complex. Shields, swords and chariots were needed by the government, as well as the other accoutrements of pomp and circumstance for the ruling classes. Consumption by the government and the wealthy, for war or peace, drove much of the economy.

Technological skills enhanced the importance of the artisans, and their own appetite became an economic force. The Bible was printed in the common language in 1456, and literacy increased. A burgeoning middle class began to question ecclesiastical and political authority.

The monopoly status of a guild, or a royal warrant to supply the crown, arouse resentment. A discussion of rights, fairness and economics, which was practically moot under feudalism, began to be explored. Modern finance caps all these discussions. A society based on class of birth was eventually obliterated. It was not replaced with commonwealth; it was replaced with the friendly competition of a gaming table.

The Rise of Commerce

Mercantilism encouraged trade, self-reliance, invention and personal ambition. The luxury of nobility was having food and servants. Entrepreneurs began to own factories, gardens and hire their own servants. After many centuries of battle, man felt that he had the upper hand over nature. He could engineer perfection through the power of reason and labor. The caste system fell away and ambition was freed from tradition.

 Modern finance was an outgrowth of the first joint-stock corporations, the tea-trading companies. A joint-stock company embraced the idea of common ownership and pooled resources, like commonwealth (or communism), but it is non-cooperative amongst the owners. The stockholders are only interested in their share, not one another. They are held together by the gamblers bond of betting on the same horse. Gamblers want predictable rules and "controlled risk.' Commercial settlements, or colonies, were granted by favor of the State. They expanded the claim of the nation, and required military protection. The state expected a share of the gains, and the investors expected protection. Investing in colonies was expected to supply a high return without the cost of war, resources or lives. The Lords of Trade would manage a system.

Like an army, a corporation has a predatory outlook and needs to plunder to survive. Trade becomes more aggressive and efficient, and less cooperative with outsiders. The farther it reaches, the larger its size and overhead, which increases financial pressures. Governments have always had fiscal problems, but it was corporations that gave birth to the modern budget mentality. Managers can only measure quantitative results. The Quality of Life for laborers was not a factor. Unlike government, a corporation has no duty to the many. A hierarchal society generally has a low regard for those on the bottom. Corporations reduce all members of society to a source of revenue, including its own people.

For a growing economy to function, more money needs to be in supply. Finance is the money-side of the chit-for-product exchange. A lot more money was needed to support mercantilism, which is why the initial expeditions were primarily interested in gold and silver. Only later did the resources of the new continents become apparent and desired.

The exchequer system was inadequate. A new modern approach was needed, in part, "to keep the poor and idle employed.' With the discovery of the Americas, more capital, financial, physical and human, was needed to explore and exploit the new lands. A radically new vision of ambition was formed. There was literally a new world to conquer. The serfs were freed from their crops. A changed vision of the future took root in all classes. The future would not be the same as the past.

The intent of modern finance was to create more money. It was believed that an increase in cash would be enough to solve the fiscal problems once and for all.  Money would be manufactured. The same as with other items, plenty was better than scarcity. Paper money would finance expeditions, promote the expansion of material wealth, allow society to develop, and provide income for both the government and investors. It was the perfect winning formula. Because of boom and bust, it did accomplish these goals temporarily, and then it made all the original fiscal problems worse.

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Steve grew up in a family business, was a history major in college, and has owned a small business for 25 years. Practical experience (mistakes) have led him to recognize that political rhetoric and educated analysis often falls short of reality. (more...)

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