A PCDForum Paper Release Date May 20, 1997
by David C. Korten
In the history of capitalism’s long expansionary cycles, it is finance
capital that usually rules in the final stage, displacing the inventors and
industrialists who launched the era, eclipsing the power of governments to
manage the course of economic events. …Since returns on capital are rising
faster than the productive output that must pay them, the process imposes
greater and greater burdens on commerce and societies.
William Greider, One World Ready or Not, p. 227.
What is this madness? The economy is booming. The stock market is setting
new records. The U.S. is again heralded as the world’s most competitive economy.
We are assured that we richer than ever before and getting richer by the day.
Yet we are also told there is no longer enough money to provide an adequate
education for our children, health care and safety nets for the poor, protection
for the environment, parks, a living wage for working people, public funding
for the arts and public radio, or adequate pensions for the elderly. By the
official wisdom, even though richer, we can no longer afford what we once took
for granted. How is it possible? What’s gone wrong?
A quick hint. The problem is most definitely not a lack of money. The world
is awash in it. The world’s 450 billionaires alone have combined financial
assets greater than the combined annual incomes of half of humanity.
The problem is this: a predatory global financial system, driven by the
single imperative of making ever more money for those who already have lots of
it, is rapidly depleting the real capital—the human, social, natural, and
even physical capital—on which our well- being depends.
The truly troubling part is that so many of us have become willing
accomplices to what is best described as a war of money against life. It starts,
in part, from our failure to recognize that money is not wealth. Wealth is
something that has real value in meeting our needs and fulfilling our wants.
Modern money is only a number on a piece of paper or an electronic trace in a
computer that by social convention gives its holder a claim on real
wealth. In our confusion we concentrate on the money to the neglect of those
things that actu ally sustain a good life.
It is striking how difficult our very language makes it to express the
critical difference between money and real wealth. When we are told that person
is wealthy or has a lot of money, we do not know whether she keeps boxes of
money under her bed, has bars of gold bullion stored in a bank vault, or is the
owner of vast empire of factories, buildings, land, or other physical assets.
Nor do such terms as capital, resources, and assets distinguish the differences.
For years, when someone spoke of “international capital flows” it
evoked in my mind imagines of huge ships transporting machine tools,
construction equip ment, and other instruments of production from one country to
another. But then I learned that an interna tional capital movement often
involves nothing more than a bank transferring some numbers from one account to
another—quite possibly solely within its own computer.
The difference between money and wealth is not trivial. Picture yourself
alone on a desert island with nothing to sustain yourself but a large trunk
filled with bundles of hundred dollar bills. The point becomes immediately
During a visit to Malaysia some years ago I met the Malaysian minister
responsible for forestry. In explaining Malaysia’s forestry policy he observed
that Malaysia would be better once its forests were cleared away and the money
from the sale was stashed in banks earning interest. The financial returns would
be greater. The image flashed into my mind of a barren and lifeless world
populated only by banks with their computers faithfully and endlessly
compounding the interest on the profits from timber sales.
The importance of the difference between money and wealth is not limited to
people who find themselves stranded on desert islands. It is basic to
understanding why the more money we have as a nation the less we can afford. It
is as well a key to understanding the underlying pathology of the global
Think of a modern money economy as comprised of two related subsystems. One
creates wealth. It consists of factories, homes, farms, stores, transportation
and communications facilities, the natural productive systems of the planet,
and people going to work in factories, hospitals, schools, stores, restaurants,
publishing houses, and elsewhere to produce the goods and services that sustain
us. The other creates and distributes money as a convenient mechanism for
allocating wealth. In a healthy economy the money system serves as dutiful
servant of wealth creation, allocating real capital to productive investment and
rewarding those who do productive work in relation to their contribution.
In a healthy economy, money is not the dominant value, nor is it the sole or
even dominant medium of exchange. Indeed, one of the most important indicators
of economic health is the presence of an active economy of affection and
reciprocity in which people do a great many useful things for one another with
no expectation of financial gain. Such voluntary sharing creates and maintains
the social fabric of trust and mutual caring of which the social capital of any
healthy family, community, or society is comprised.
Pathology enters the economic system when money becomes society’s defining
value and the primary currency of human exchange, grotesquely distorting public
values and goals. Money, once convenient a means of facilitating commerce,
comes to define the life purpose of individual and society. The human, social,
and natural capital on which the well- being of any society depends becomes
subject to sacrifice on the alter of money making. And money people prosper at
the expense of working people. It is a social pathology called finance
When financial assets and transactions grow faster than growth in the output
of real wealth, it is a strong indication that finance capitalism has taken
hold. A study by McKinsey and Company found that from 1980 to 1992 financial
assets in the OECD countries grew twice as fast as their underlying economies
and bullishly predicted that future financial growth would be three times real
output growth.(1) Indeed, as the Malaysian
minister noted, in the global economy money is growing a great deal faster than
Furthermore, the biggest profits are going to those who deal in pure
finance. For 1996, the shareholders of the seven largest U.S. money center banks
reaped an average total return of 44 percent. The 24 largest U.S. diversified
financial services companies yielded their shareholders an average total return
of 38.4 percent. Mutual funds specializing in finance averaged a 26.5 percent
return, besting all other industry categories by a wide margin. Funds
specializing in much touted technology stocks came in a poor second at 21
The growing dominance of money is also revealed in the increasing
monetization of human relationships. Not long ago, even in the most supposedly
advanced countries, half of the adult population worked without pay to maintain
home and community. These are among the most fundamental and important of functions in a healthy economy. Now, it typically takes two adults holding two to
three paid jobs between them to support a household. Child and home care is
either left undone or hired out. Community service becomes the work of public
employees — to the extent there is public money to pay them. As the social
capital of caring relations is depleted, family and community life fall into
Pyramids, Bubbles, and the Global Casino
Albania recently suffered a national crisis brought on the collapse of
fraudulent investment schemes. Westerners wise in the ways of the market were
bemused by the naivete of the Albanians who fell for “investment” schemes promising returns as high as 25 percent a month with no real business activity behind them. Using the classic pyramid scam, the perpetrators used money from new investors to pay the promised returns to earlier investors. The result was a national speculative frenzy. Farmers sold their flocks and urban dwellers their apartments to share in the promised bonanza of effortless wealth. The inevitable collapse sparked widespread riots, arson, and looting when the Albanian government failed to make up the losses.
Those inclined to laugh at the innocence of the Albanians should first consider their own response to the promises of those who propose investing social security contributions in a stock market that even Alan Greenspan, Chairman of the Federal Reserve, says is substantially over valued. The speculative financial bubble, which involves bidding up the price of an asset far beyond its underlying value, is little more than a sophisticated variant of the classic pyramid scam.
Investing in a bubble is a form of gambling and it isn’t entirely naïve. Who cares if there is nothing behind it? The bubble is the action. The trick is to place big bets and get out before it bursts. It is a game of nerves. The action gets especially exciting when banks are willing to accept the inflated assets as collateral and lend new money into existence to stake further play by the high rollers—who with leveraged money push the prices ever higher. This process of borrowing into bubbles with newly created money is key to making financial wealth increase faster than real wealth. Furthermore, when a leveraged bubble bursts and banks are left with substantial portfolios of uncollectible loans, governments are almost forced to step in with a bailout to stop a banking collapse—as the U.S. government did in the case of the Great Depression and the more recent Savings and Loan crisis—another transfer of claims to wealth from working people to money people.
Betting on bubbles is a favorite pastime in the big cyberspace casino known as the global financial market. The stock markets of newly emerging industrial countries such as Malaysia and Thailand are among the bubble betters favorites. As these markets have relatively few shares for sale, it doesn’t take much outside money to send prices skyrocketing. This in turn attracts more buyers—many of whom may have little idea of the soundness and potentials of the companies they are buying.
At least until its bubble burst in December 1994, Mexico was one of the hot emerging markets. Over a period of five years seventy billion dollars in foreign money flowed into Mexico attracted by high interest bonds and a rocketing stock prices. The experts say that probably no more than 10 percent of this foreign money actually financed anything resembling productive investment. Most of it was used to pay off other foreign debts, import luxury goods, and finance capital flight. Then panic hit. Stocks and bonds denominated in pesos lost 30 percent of their value in just two days. The highly overvalued peso plummeted against the dollar.
A sharply devalued peso significantly changed the terms of trade between Mexico and the United States, pricing most American goods out of the Mexican market and destroying hundreds of thousands of American jobs. Threat of default on its foreign financial obligations forced the Mexican government to take austerity measures that put an estimated 750,000 Mexicans out of work.
Like the losers in the Albanian pyramid scheme, the Wall Street bankers and investment houses that were holding peso denominated stocks and bonds turned to their government for relief. President Clinton assembled a bailout package of loans and guarantees that put as much as $50 billion in U.S. taxpayer money at risk to shore up the speculator’s holdings with public money. Once again finance capitalism demonstrated its commitment to a mixed economy. Privatize gains. Socialize loses.
Betting on financial bubbles is only one of the lucrative games that attract players to the global casino. There are as well opportunities to speculate on short-term price movements, buy and sell simultaneously in different markets to profit from minute price differences, and bet on derivatives contracts. While economists have become exceedingly facile in rationalizing how such activities actually benefit society, in truth they are more accurately described as forms of legal theft by which a clever few expropriate rights to the real wealth of society while contributing more to its depletion than to its creation.
Consuming Capital to Make Money
William Greider, in his newly released book One World Ready or Not, observes that corporations get caught in the trap of having to compete for investment funds against the often more lucrative financial games of the world of pure finance. With the rare exception of companies with a hot product or distinctive market niche, in an unregulated global economy most corporations have little choice but to use their economic and political power to externalize ever growing portions of their costs onto the community. The dynamics of a competitive global economy favor the cost externalization process because they pit workers and communities against one another in a deadly race to the bottom. By competing for the jobs corporations offer, workers and communities are compelled to deplete real capital to make corporations more profitable.
Responding to the pressures of financial markets, corporations:
■ Move production to countries and localities where they can pay less than a living wage or use the threat of moving jobs to break up labor unions and bargain down wages. Gains from productive activity are thus shifted from working people to money people. Furthermore, the stress of attempting to maintain self and family on insecure jobs paying less than a family wage results in family breakdown and violence and depletes the social capital of society.
■ Hire young women in places like the Mexican maquiladoras under conditions that lead to their physical burnout after three or four years. Once eyesight problems, allergies, kidney problems, and repetitive stress injuries deplete their efficiency they are replaced by a fresh supply of younger women. Such practices destroy lives and deplete society’s human capital.
■ Strip mine forests, fisheries, and mineral deposits, dump wastes, and aggressively market toxic chemicals — depleting the earth’s natural capital to turn it into money.
■ Fight environmental and other regulations essential to the long-term health and viability of the society. They further demand direct public subsidies, subsidized infrastructure, and relief from their fair share of taxes. This shifts a greater share of the tax burden onto working people, who are already struggling to live on declining wages and deal with the decline in public services, undermines the credibility and performance of government in its essential functions, erodes the legitimacy of democratic government, and erodes society’s institutional capital. The money people who benefit from the dismantling of government shield themselves from the consequences by turning to the private economy for schooling, health care, and the security of gated communities.
Corporate managers are forced into a short-term view even in regard to their own operations. They cut investments on research and employee training essential to the corporation’s future prospects. As they downsize and close plants in denial of any responsibilities to once loyal and productive employees the sharp employee quickly learns to use the job only to build a resume to attract the attention of a higher bidder. These actions erode the corporation’s own human, intellectual, social, and physical capital.
Intent on making ever more money for the money people — even at the cost of depleting the natural, human, institutional, and social capital on which the very survival of society depends — the money system becomes like a cancer that consumes its host and ultimately destroys itself.
The CEO of a publicly owned corporation who fails to maximize profits because of a moral aversion to engaging in such predatory practices is almost certain to be eliminated by the system, even he — they are almost all men — runs an otherwise profitable operation. Where the shareholders don’t step in, a corporate raider most surely will.
Pacific Lumber Company for years pioneered the development of sustainable logging practices on its substantial holdings of ancient redwood timber stands in California. It also provided generous benefits to its employees, fully funded its pension fund, and maintained a no layoffs policy during downturns in the timber market. This made it a good citizen. It also made it a prime takeover target. Corporate raider Charles Hurwitz gained control in a hostile takeover. He immediately doubled the cutting rate of the company’s holding of thousand-year-old trees, reaming a mile and a half corridor into the middle of the forest that he jeeringly named “Our wildlife-biologist study trail.” He then drained $55 million from the company’s $93 million pension fund and invested the remaining $38 million in annuities of the Executive Life Insurance Company—which had financed the junk bonds used to make the purchase and subsequently failed. This stand of redwoods is now the subject of a last-ditch effort by environmentalists to save it from clear cutting.
Professional buy-out artists are drawn like bees to honey by a socially responsible firm that internalizes its environmental costs, pays union wages, invests in worker training, fully funds its pension fund, and pays its full share of taxes. To the serious money person, these are inefficiencies to be eliminated.
Over the last several years the biggest corporations have performed as the financial markets have demanded — increasing their profits by an average of 20 percent a year. In 1996, the thirty U.S. corporations whose stock prices comprise the basis of the Dow Jones Industrial Average averaged total returns to their shareholders of 28.2 percent for the year, a substantial increase from the five year average of 18.3 percent. Each such increase in annual returns to shareholders further lifts the floor under investor expectations and increases the pressure on top managers to main such returns in the future — by any means.
The global corporation is arguably the most powerful instrument for concentrating power and wealth ever devised by humans. Many command larger economies than most countries. Indeed, of the 100 largest economies in the world 51 are corporations. The economy of Mitsubishi is larger than that of Indonesia, the world’s fourth most populous country and a land of enormous natural wealth. Without the extraordinary ability of the corporation to concentrate financial wealth the world might well have no billionaires at all.
Healing the Money System
To heal society we must heal the money system. This will involve a two fold process of reducing money’s importance in our lives and restoring its appropriate role in service to the wealth creation process. As we embark on the healing journey we should keep in mind that in a society in which relationships are defined by love, generosity, and community the importance of money in mediating personal exchange and allocating resources is likely to decline markedly. The healing process will require work at both individual and collective levels and will have a variety of elements.
It will be necessary to demyth money. Given the importance of money in defining our values and priorities it is remarkable that our education in money rarely goes beyond teaching children how to count it. Even advanced courses rarely go beyond teaching the mechanics of interest compounding. I earned MBA and PhD degrees from one of the world’s leading graduate schools of business. I learned some accounting and how to analyze financial statements, but I was never taught the difference between making money and creating wealth, nor how to distinguish between productive and predatory investments. Such lessons should be a basic part of any education for business or responsible citizenship.
We will need to reweave the social fabric. This will require reducing monetary dependence and restoring nonmonetary exchanges through a process that selectively delinks individuals, families, and communities from dependence on the predatory institutions of a global economy, down-scaling consumption to reduce dependence on paid work, increasing reliance on local products to meet basic needs, and strengthening the engagement of all persons in the productive life of family and community.
The truly monumental task will be to redesign the money system to make money the servant of wealth creation. Radical institutional and policy innovations will be required far beyond anything currently under discussion. Among other things, corrective measures will need to: (1) make speculation unprofitable, (2) limit the growth of financial bubbles; (3) increase incentives for cooperation among people and communities; (4) reward productive work and investment; (5) create a just distribution of claims to real wealth; (6) provide incentives for patient and locally rooted investment in real assets; and (7) strengthen the social fabric of family and community. The purpose of such measures is not to increase global growth and competition. Rather it is to create healthy and prosperous societies that provide economic security and just rewards for productive contribution to their members, have a strong and caring social fabric, and live in balance with their environment. The required measures will surely inconvenience corporations and financial speculators, but theirs are not the interests that human societies exist to serve.
Because we have so little experience in designing money systems to create societies that work for people and nature in nonexploitative ways, we will need to be creative. There are no tested guidelines. Thus, the following suggestions are put forward less as prescriptions than as possibilities meriting further examination. Each represents a sharp departure from conventional wisdom and practice.
■ Strengthen development of local currencies. A common currency exclusive to its members is one means of defining a community with a mutual interest in productive exchange among its members. It does not preclude exchange with those beyond its borders, but creates a desirable local preference consistent with creating and maintaining a strong social fabric. A key public policy measure to strengthen local currencies would except them from taxation by any other than the local jurisdictions that sponsor them.
■ Introduce Zero or negative interest rate money. We take the idea of interest bearing money so much for granted that it is difficult to imagine any other kind. Interest gives money a curiously exclusive advantage as a means of storing wealth. Holding virtually any real asset involves a cost to the holder. Forests, factories, farming land, buildings, and personal skills must be maintained. Technologies become outmoded. Even gold must be stored and guarded. Only those who store their savings in money expect a secure, cost free return that with no effort on their part increases their future claim on the real resources that others have in the interim born the costs of creating and maintaining.
This gives the money person a considerable and inappropriate advantage over those who engage in real work and investment. This advantage is one reason why our money system so perversely advantages money people over working people. The argument can be made that the only appropriate place to store value is in real assets that will have real future value. Money, by contrast, should be purely a medium of exchange. A negative interest rate or holding charge on money, a device well tested in a number of local currency schemes, provides an incentive to keep money moving, because the longer a person holds it the less value it has. In a world of electronic money and debit cards this is an easy process to administer. A negative interest rate also encourages investment in real productive assets that continuously create value.
■ Limit debt. In our present monetary system virtually all money is created by banks lending it into existence, i.e., by creating new debt. Since loans must be paid back with interest, it is impossible for all borrowers to pay the bank both its principle and accrued interest unless total borrowing grows faster than old debts must be repaid. If overall debt does not grow, then some borrowers are inevitably forced into default, thus forfeiting their material assets to the bank. Beyond favoring the bankers, the system favors the rich in general. The wealthy borrow to leverage higher return investments, thus increasing their rate of positive accumulation. The poor borrow primarily for consumption, thus working themselves into an ever deeper financial hole.
The alternative is for government to create money by spending it into existence for public purposes, such as investment in education and public infrastructure, while placing limits on private and public borrowing. Borrowing to finance purchase of stocks and other purely financial instruments might be prohibited entirely. There might also be an absolute ceiling on the amount an individual or corporation is allowed to borrow for any purpose. This would increase equity investment relative to borrowing and reduce opportunities for a wealthy few to monopolize control of productive assets and create financial bubbles with borrowed money.
■ Tax Speculative and other Unearned Gains. If there is any place where a tax increase is justified it is in taxing away speculative profits that enrich private individuals at public expense. Appropriate measures would encourage long-term investments in real assets. A first step would be a small tax on all purely financial transactions such as the exchange of one currency for another or the exchange of money for a financial instrument like a stock or bond. A second step would be a time graduated capital gains tax. Profits from the sale of any asset held less than a week might be taxed at a confiscatory rate of 90 percent or more on the ground the gains are almost certainly speculative. Profits from the sale of a productive asset held more than 20 years might be taxed at a concessionary rate of 10 percent or less. A third step might be to tax land at its fair rental value, an idea proposed years ago by economist Henry George. The tax would apply only to the rental value of the land itself, not to physical improvements, thus encouraging investment in physical improvements while eliminating the incentives for land speculation.
Many of the best minds of our time are engaged in finding ways for the already wealthy to use the money system to claim ever more of the world’s real wealth for themselves. Remarkably few are concerned with how we might redesign money to serve a society that works for all people. It is time to change that.