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The Essential Nature of Money
Definitions
The question, "What is money?" may seem trivial to us, who in this modern
day make constant use of it, but it is confusion about the essence of
money which has allowed it to be abused and misallocated. Money in
classical economics is defined as (1) a medium of exchange, (2) a standard
of value, (3) a unit of account, (4) a store of value, and (5) a standard
of deferred payment. There are many problems with these definitions, but
their primary inadequacy is that they are functional definitions; they
tell what money does, not what it is. We need to understand the basic
essence of money. Once we have grasped its essence we can begin to design
exchange systems which will equitably serve the needs of people and the
Earth.
The process of economic exchange always involves two parties. The
fundamental exchange process is the barter exchange. When Smith delivers
to Jones a sack of flour and Jones gives to Smith a bushel of apples in
return, a complete barter transaction has occurred. Both parties are
satisfied, and both have profited from the exchange. The problem with
simple barter, of course, is that Jones may want Smith's flour, but he may
have nothing that Smith wants. In that case no trade can be made. The
fundamental purpose of money is to transcend this limitation of barter.
Bilgram and Levy assert that:
"We should ... define money as any medium of exchange adapted or designed
to meet the inadequacy of the method of exchanging things by simple
barter. Anything that accomplishes this object is 'Money.'"(5)
So money is a "medium of exchange" which transcends the limitations of
barter exchange. But what constitutes a medium of exchange, and how can
one trading partner get what he wants, even though he has nothing wanted
by the other? Bilgram and Levy go on to explain:
"The one quality which is peculiar to money alone is its general
acceptability in the market and in the discharge of debts. How does money
acquire this specific quality? It is manifestly due solely to a consensus
of the members of the community to accept certain valuable things, such as
coin and certain forms of credit, as mediums of exchange."(6)
We can see then that the essence of money is an agreement (consensus) to
accept something which in itself may have no fundamental utility to us,
but which we are assured can be exchanged in the market for something that
does.
Michael Linton, the originator of an exchange system called "LETS" (Local
Employment and Trading System), has provided us with an essential
definition of money. Linton defines money as "an information system we use
to deploy human effort."(7) This is a profound revelation and if we think
about it, it becomes clear that our acceptance of money is based upon its
informational content.
Whatever we use as money, then, carries information. The possession of
money, in whatever form, gives the holder a claim against the community of
traders. The legitimacy of that claim needs to be assured in some way. The
possession of money should be evidence that the holder has delivered value
to someone in the community, and therefore has a right to receive like
value in return, or that the holder has received it, by gift or other
transfer, from someone else who has delivered value.
Historical Forms of Money
Historically, many different forms of money have been used. But the forms
of money in common use have, over time, become progressively less
substantial and more ethereal. In earlier times, certain useful
commodities were used as money. These included such things as salt,
cattle, grain, and tobacco. Tobacco was a common form of money in colonial
America. Commodity money carries value within itself making it easy for
traders to evaluate its soundness. The use of commodities as a medium of
exchange really amounts to indirect barter. Such commodities can serve the
exchange function because they are useful in themselves and generally in
demand. I may have no use for tobacco myself, but if I know that it can be
easily traded, I may accept it in payment when I sell my goods or
services.
The use of precious metals as money is no different in nature from the use
of any other commodities. Gold and silver came to be widely used as money
because they provided the advantages of greater convenience and
durability, especially when stamped into coins of certified weight and
fineness.
Later, it became more common to use paper notes and base metal coins which
were symbolic representations of commodity money, typically gold or
silver, and could be delivered to the issuer who would exchange them for
the metal they represented. Modern banking developed on the basis of
issuing paper currency against "fractional reserves," i.e., the banks
issued more paper "claim checks" than they had gold to redeem.
Commodity money and redeemable paper have progressively given way to
non-redeemable notes, bank credit, and computerized accounts, which while
offering certain advantages, are easier for issuers to abuse and more
difficult for traders to evaluate.
Today, most of the money is in the form of bank credit, with a small
percentage also in the form of circulating paper notes of the central
bank, which in the United States is the Federal Reserve Bank. These notes,
however, are merely a physical representation of money which first emerged
as bank credit and later was exchanged for paper.
The Money Circuit
Money flows in circular fashion. In order to apprehend the meaning of
money one must first recognize this essential fact, that money has a
beginning and an ending; it is created and it is extinguished. This is
depicted in Figure 2.1, which shows money in the ideal. Money is first
created by a buyer who issues it to a seller as evidence of value
received. The money issued may be thought of as an I.O.U. which the buyer
uses to pay for the goods and services he bought. That I.O.U. might be
passed along from hand-to-hand as each recipient in turn uses it to pay
for his/her own purchase. Eventually, it must come back to the originator
of the I.O.U. who redeems it by selling something of value.
As an example, consider the process depicted in Figure 2.1. The
originator, Mr. Able, buys something of value from Mr. Baker. He gives Mr.
Baker his I.O.U. as evidence of value received. Baker then uses the I.O.U.
to buy something from Mr. Cook, who, in turn uses it to buy something from
Ms. Drew. The I.O.U. may continue to change hands any number of times as
others use it to buy and sell (as indicated by the dashed lines between
Ms. Drew and Mr. Young), but eventually, it must return to Mr. Able. At
that point, Able has fulfilled his commitment to redeem the money he
issued (the I.O.U.). He does this by selling goods or services equal in
value to those which he received when he made his original purchase,
accepting as payment his own I.O.U., i.e. the money which he originally
created.
Now think of a group of traders who agree to accept each other's I.O.U.'s
as payment in trade. Suppose they design a standardized form for their
I.O.U.'s so that they are indistinguishable from one another. These
standardized I.O.U.'s can take whatever form the community of traders has
agreed to use for this purpose. They may be in the form of paper
certificates, metal tokens or coins, or simply numbers in an account
ledger. Each member of the group obtains a supply of these standardized
I.O.U.'s or notes of fixed denomination, which s/he can now spend into
circulation.
Now the originator, Mr. Able, instead of using his own personal I.O.U. to
pay for his purchase, gives Mr. Baker standardized notes (I.O.U.'s). As
before, Mr. Baker, then uses that money to buy something from Mr. Cook,
who, in turn, uses it to buy something from Ms. Drew, and so on. Mr. Able
is still committed to redeem the notes he issued and must eventually sell
something, accepting as payment notes equivalent in amount to those he
originally issued by buying.
This conceptualization of money is further elucidated by E. C. Riegel's
excellent exposition:
"Money simply does not exist until it has been accepted in exchange. Hence
two factors are necessary for money creation: a buyer, who issues it, and
a seller, who accepts it. Since the seller expects, in turn, to reissue
the money to some seller, it will be seen that money springs from mutual
interest and cooperative action among traders, and not from authority.
That the Government can issue money for the people ..., is an utter
fallacy. Money can be issued only by a buyer for himself, and he must in
turn be a competitive seller to recapture it and thus complete the cycle.
"A would-be money issuer must, in exchange for the goods or services he
buys from the market, place goods or services on the market. In this
simple rule of equity lies the essence of money."(8)
Riegel conceived a "private enterprise money" which closely conforms to
this ideal.(9)
In the current system of banking, however, an originator of money must
first obtain authorization from a commercial bank before he can put money
into circulation. Typically, this is done by making an application for a
"loan." The bank will evaluate Mr. Able's "credit-worthiness" and the
value of his collateral. Let's say that Able offers his farm as collateral
against the "loan." He signs an agreement known as a mortgage, and, in
turn, the bank then credits his account for so many dollars representing
the principal amount of the loan. This is depicted in Figure 2.2. In
effect, Mr. Able gives the bank a legal claim (the mortgage) to his farm
in return for standardized I.O.U.'s (bank credit or cash notes) which
others will accept as payment for purchases. In terms of the prevailing
practice, he has obtained authorization to write checks or draw cash up to
the amount of his "loan."
Mr. Able, as before, has obligated himself to the community to redeem, by
selling, the same amount of money he issued by spending. But, in addition,
he has also obligated himself to return to the bank the amount of money he
"borrowed," plus interest. Thus, he must make sales sufficient to recover
not only the amount of money he issued ("borrowed"), but he must also
obtain an additional amount in order to pay the interest. If he is
successful in doing so, he can reclaim his mortgage from the bank; if not,
he loses his farm. When he repays the bank, the money he issued is
extinguished. The redemption phase of the process is depicted in Figure
2.3. Note that the diagram shows a dashed line labelled "interest" coming
to Mr. Able from outside the circuit and going to the bank.
In this scenario, Mr. Able is still the issuer, not the bank. The bank has
not really loaned anything; it has simply converted the value of Mr.
Able's farm into negotiable form. It has used its legal authority to
"create" money by adding so much credit to Mr. Able's checking account or
giving him the equivalent amount in the form of Federal Reserve Notes in
return for his mortgage or I.O.U. The extra amount of money required of
Mr. Able to pay the interest is not available within the circuit; it can
only come from some other similar circuit, i.e. money issued by some other
trader ("borrower") who has also gone in debt to the bank. If that
happens, the second borrower will not be able to earn back enough money to
redeem his mortgage. Thus, the charging of interest on the bank "loans"
upon which new money is based causes a deficiency of money in circulation,
preventing some debtors from earning back enough to redeem their
collateral. Thus, the prevailing system guarantees that there will be a
steady parade of losers.(10)
It is one thing for those who have earned money to charge interest for its
use; it is quite another for banks to charge interest on newly created
money based on debt. In the latter case the money supply must be
continually expanded in order to prevent economic stagnation. In the
prevailing monetary milieu, the federal government has assumed the role of
perpetual borrower. By monetizing part of the government budget deficits,
the Federal Reserve (commonly called the FED) prevents the supply of money
from lagging too far behind the growth of "debt" incurred by private
"borrowers." The prevailing monetary policies of the FED will determine
whether money is "easy" or "tight," i.e., whether monetization of
government debt will be sufficient to provide private "borrowers" with the
amounts of money needed to pay their "debts," or whether it will fall
short. These actions by the FED are largely responsible for the "business
cycle" and periodic inflation and depression.
Taking Back Your Power
by Allen Aslan Heart
WHAT CAN YOU DO? Stop playing THEIR game. Take back
your power. Stop paying taxes that are not legal or lawful. Stop paying
bills you don't really owe. Stop using THEIR money. There ARE ways if you
open your mind and look for the gaps in their fences that keep the sheeple
in their pasture. Are you chattel or a real person? You are the one who
makes that choice.
© 2007,
Allen
Aslan Heart / White Eagle Soaring of the
Little Shell Pembina Band,
a
Treaty
Tribe of the Ojibwe Nation
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