Which came first, the money or the capitalist? Capitalism is a system that describes how governments, businesses, and citizens interact around money. While the system affects how money flows, money itself also impacts the system, just as the quality and volume of water in a river can change the structure of its borders. How is money and its flow affecting the capitalist system in the United States of America today?
The Impact of Digital Currencies on Capitalism
In the computer age, money itself is changing shape. Where value was once held in metals like gold and silver, then paper money, codes in a computer program may be the next step in money’s evolution. In RSnake’s conversation with financial expert Jake Moilanen, Founder & CTO of TXX Group Inc. and GP at Seraph Group, Moilanen postulated that Bitcoin will eventually replace gold as a key investment. Digital currencies are moving from the fringes of society to the mainstream. Brands like Gucci, Starbucks and Microsoft now accept payment in crypto. How will these new currencies affect capitalism as we know it? The jury is still out. According to a White House fact sheet, only 16% of adult Americans have purchased cryptocurrencies. Their influence on the economy and capitalism is still small. But there is no telling what the future may hold. It could be that cryptocurrencies bolster capitalism. Many digital currencies like Bitcoin are decentralized; the government has no control over their value. This system is closer to pure capitalism in which the value of Bitcoin is determined by the users themselves with no top-down intervention. In this sense, digital currencies are pro-capitalist. Cryptocurrencies could also put pressure on capitalism. When people mine crypto (like Bitcoin), they are essentially adding capital to the system. In the short-term, this could stimulate the economy. In the long term, it could increase inflation. So far, crypto has been at the center of at least two boom and bust cycles – the first in 2013 and the most recent in 2022. The crypto market continues to be unstable in the face of regulatory crackdowns. Cryptocurrencies could also undermine capitalism. Many governments, including ours, are considering the possibility of issuing their own digital currency. China has already been experimenting with this. There is a possibility government-issued cryptocurrency would give governments more control over the economic system. Cryptocurrency transactions are not private, and accounts could be frozen or deleted at the press of a button. This power could be attractive to a government interested in increased control.
The Federal Reserve and Capitalism
The Federal Reserve influences both the amount of money in the system, and its rate of flow. This in turn impacts the system as a whole. True capitalism is free of government intervention. However, there are downsides to this like monopolies, inflation, and a boom-and-bust economy. Most governments today do intervene in their economies to some extent and have central banks that help moderate how money flows. The Federal Reserve (Fed) was founded in 1913 after J.P. Morgan personally bailed out several banks to save them from going under in 1907. As a result, Morgan put pressure on the government to create a central banking system. While the 12 Federal Reserve Banks are privately owned, they are mandated to serve the public interest. The Board of Governors of the Federal Reserve System are nominated by the president and must be approved by the Senate. The Fed helps regulate the economy in a few important ways. Here are some of them.
The Fed helps regulate inflation through the interest rates it charges to banks. The exact mechanisms are complicated, but the bottom line is that when the Fed raises or lowers its rates, so do other banks. When the economy is sluggish and needs to be stimulated, the Fed will lower interest rates. This makes it more appealing to borrow money, and can help money circulate in the economy more freely. When inflation is too high, the Fed raises interest rates. This makes borrowing less attractive and slows spending.
Adding Money to the System and Absorbing It
The Fed can also add money into the system. It did this most recently during the COVID- 19 pandemic to boost confidence in the economy. It does this by buying U.S. Treasury bonds and other securities from its member banks. The banks then have new money for their reserves, making them able to lend it freely. If there is too much money circulating, the Fed can sell securities back to the banks, removing capital from the system.
The Fed also sets an amount that banks must keep in reserve. When reserve amounts are lower, the banks can lend more money. When they are higher, the supply of money contracts. As of 2020, the reserve requirement ratio was reduced to 0%. Although the Federal Reserve is arguably a step away from pure capitalism, its supporters say it helps modulate its ups and downs of capitalism.
The Impact of Income Inequality on Capitalism
Economic systems can also be affected by how money is distributed in a society. Income inequality occurs in most industrialized societies to varying degrees – some people are rich and some are poor. But does this impact the economy? Many people have tried to answer this question with mixed results. According to a review of existing studies on the subject, some research found income inequality had a positive effect on the economy, some found it had a negative effect, and some found there was no effect at all. Another study found that income inequality stimulated the economy and was good for capitalism up to a certain point (a Gini coefficient of 27%). Basically, when some people in a society have more money and use it to start businesses, this creates jobs and has a positive effect overall. However, if the balance is tipped too far and wealth is concentrated in the hands of too few people, there is negative fall-out. In this case, the elite classes overly influence the economy through lobbying and rent-seeking. This makes competition unfair, slows growth, and can lead to political unrest, which in turn can threaten capitalism.
The Potential for a Universal Basic Income in a Capitalist Society
Recently, the idea of universal basic income (UBI) has gained traction in some circles. The idea isn’t new, Thomas Paine first proposed it in 1795. Lately, it has gained more momentum not only as a way to help people who lose their jobs due to automation or out-sourcing, but also as a means to lift the poorest out of poverty. During the COVID-19 pandemic, many governments inched towards this idea by granting subsidies to people who couldn’t work due to health restrictions. If the U.S. government were to adopt this approach, would the economy still be called capitalist? Giving everyone a monthly stiped is more reminiscent of socialism or communism. Oddly enough, Milton Friedman, champion of free-market capitalism proposed something similar that he called “negative income tax,” in 1962. While it would increase the role of government, a universal basic income wouldn’t necessarily alter people’s ability to own property or act in their own self-interest – other pillars of capitalism. As a result, it is possible for a society to be capitalist and offer its citizens a UBI. Still, there are important questions that remain about these kinds of policies. One of them is its high cost. The other is whether or not a government that supported its citizens in this way would also seek more control over their lives. It would be easy to deny UBI based on a citizen’s political views, for example.
Today, there are many forces at work influencing capitalism. Changing technology and shifting social priorities are all putting pressure on the system to change. Will capitalism as we know it survive? The chances are that capitalism itself will last into the future, though it may look different than it does today. For more on capitalism and its inner workings, listen to RSnake’s conversation with Jake Moilanen.