Thursday, August 2, 2012

THE MONEY SYSTEM


INTRODUCTION

Exchanges with the world outside of the organism are an essential feature of life and in this regard human life is no different to all other life forms.

The only difference is that humans have distinguished some of these exchanges from the rest and created a conceptual label for this grouping of exchanges. The conceptual label for these exchanges is; economic exchanges.

We here are only interested in healthy exchanges, that is exchanges that benefit the life form concerned. Thus from here on, unless stated otherwise, any reference to an exchange presumes that it is a healthy one.

Economic exchanges embrace some, but not all, of the exchanges that take place between human beings. Economic exchanges that are healthy involve mutually acceptable exchanges of goods and/or services between parties. When these exchanges are considered as a whole they are referred to as an economy.

We distinguish these particular exchanges from other exchanges because we want to organise and manage them in a way that benefits us. In other words we want to try to ensure that the exchanges enhance our lives rather than threaten or degrade them in some way.

For us to be able to do this management thing, in any sphere of life including this one, we need to be able to think meaningfully about the sphere and for this we need to be able to construct mental models of the sphere, models that mirror aspects of the sphere concerned. In order to achieve this we have to identify and then label, with concepts, the relevant features of the sphere concerned.

The life sphere we are concerned with here is that of economic exchanges and what follows hereunder is an in depth exploration of that sphere and the only proper, the only honest, role that money can play within it.


ENSURING HONEST MONEY


What is honest money?

Money is only usable if all members of the community in which it is used share the experience that it is exchangeable, at any point in time for real goods and/or services to the value that the money reflects. One could justifiably call the money of such a currency honest money. In short it could be said that members of such a community have, gained through personal experience, faith in the stability and trustworthiness of their currency.

Unfortunately this cannot be said with any conviction for many currencies around the world today including our own. Is it possible to have honest money? How do we ensure that our money is honest? Is it possible to achieve this?

In order to be able to ensure that we can answer these questions in the affirmative we need to reacquaint ourselves with the basics of our economic lives.


The basics of our economic lives

Voluntary exchanges of real goods and/or services

Economies come into existence only because some of the real goods and/or services existing within a community are exchangeable within that community. That means that community members are freely able to exchange such goods and/or services with one and other. Such completed exchanges are the fundamental building blocks, or indivisible atomic units, out of which any economy is built.

It is worth noting here that these indivisible atomic units of an economy do not include money as one of their components. This is because money is just a very useful conceptual addition to economic life but not the basis of it. Exchange, without the use of money, is known as bartering.

Now historically gold has always been regarded ,almost universally, as the good that can be guaranteed to be exchangeable for any other good and/or service on offer. Thus psychologically it will be useful for us to regard such bartered exchanges as the real gold out of which any healthy economy is built and in order to enshrine this evocative metaphor in our economic discourse we will refer to a completed, a bartered, economic exchange as an 'economic nugget'.

The problem with bartering

However bartering is a very time and effort consuming business. This is because of the difficulty of finding someone who has for exchange something that you want and who in turn wants something of equivalent value to themselves that you are wiling to exchange. This major difficulty hampers the frequency with which bartered exchanges are entered into within any community where the economy is based on bartering, thus drastically reducing the amount of economic activity that takes place.

Money, the way out of the bartering problem

Basically when arranging a bartered exchange of goods and/or services the parties involved would have to accord relative values to the goods and/or services involved. Having done that the parties involved are then in a position to determine whether they were suitably equivalent in value. If they were the exchange would proceed otherwise it would not. Now these relative values are obviously only existant in the heads of the parties concerned and it was only once it was realised that these values could be stated in some external form. Then money was created in order to reflect, these internal values, in the external world.

The acceptance of the externalisation of the values of real goods and/or services in the form of money transformed the bartering process because it enabled the two halves of the exchange process to be separated from one and other in time, in location, and in the matching of needs Money offered the possibility of the involvement of one, or more, additional parties and their offerings in the initial exchange process enabling it to be completed. 

Note Full completion of the initial exchange process, even though involving more parties, is still necessary for the honest creation of an 'economic nugget'.

Money does this by enabling one party to an initial exchange, A, to give, not real goods and/or services to the other party to the exchange, B, but money in exchange for the real goods and/or services supplied by B to A.

Money is acting here as a temporary surrogate for the real goods and/or services that still need to be supplied into the community by A in order to complete the initial exchange and thus create an 'economic nugget'.

Comparing bartered exchanges with exchanges where money is used

In a bartering exchange process, the completion of which results in an 'economic nugget', the two parties to the process are simultaneously both givers and receivers. Thus in bartering, i.e. when no money is involved, a completed exchange process has the following four elements:

  1. Two exchanging parties A and B
  2. Two sets of exchangeable goods and/or services, GSa and GSb

and the process works to completion as follows:

  1. A and B exchange GSa and GSb with one and other.
However when money becomes involved and the two halves of the process are separated from one and other both halves still need to achieve completion in order for the exchange process to become an 'economic nugget'. Thus with the use of money as facilitator of exchange a completed exchange process necessarily has the following seven elements:

  1. Three exchanging parties A,B and C
  2. Two sets of exchangeable goods and/or services, GSa and GSb, supplied by A and by B respectively
  3. Two sets of money, Ma and Mc, used by A and by C respectively, the money being to the value of the goods and/or services involved in the exchange process

and the process works as follows:

  1. In exchange for receipt of GSb A pays B with Ma
  2. In exchange for receipt of GSa C pays A with Mc.

It is essential however for the completion of any exchange using money that the money involved is honest money. In this instance for example both monies, Ma and Mc, need to be comprised of honest money if the exchange is to result in an 'economic nugget'.

Now if it was always the case that honest money was involved in exchanges there would be no problems for the health of any economy. Ensuring that this is the case, that Ma and Mc are comprised of honest money, is however under our current money system not a foregone conclusion.

Ensuring the honesty of money

What is counterfeit money?

As already explained above money is a material representation of the value accorded to real goods and/or services. Now for the money to be honest each unit of currency must be representing the values in a definite set of of real goods and/or services otherwise, in the purist sense of this word, the money is counterfeit. Counterfeit items being items that appear to observers to be something that they are not.

Thus in purist terms counterfeit money means that the money states that it represents the values in an actual set of real goods and/or services but in reality there are actually no real goods and or services for the money to represent the values of, consequently the money is just a sham.

Unfortunately because money is a totally human creation a dis-connection between money and the values of real goods and/or services that it is supposed to represent has been accepted into the money system. This is shown by the definition of counterfeit money given in Wikipedia,

Counterfeit money is currency that is produced without the legal sanction of the state or government to resemble some official form of currency closely enough that it may be confused for genuine currency. Producing or using counterfeit money is a form of fraud or forgery.

In other words counterfeit money is money which simulates legally authorised money whilst not in fact being authorised.

This is a very weak definition of counterfeit money because it relies on the State to ensure that, in its production of money, it maintains the integrity of the link between actual goods and/or services and their value represented by the officially sanctioned money. This, as we all know, is honoured by the State and its agents more in the breach than in practice.

A more rigorous definition of counterfeit money would read as follows:

Counterfeit money is currency that has no backing in real goods and or services to the value that it purports to represent.

This is the definition of 'counterfeit money' that is intended in all uses of this phrase here.

What is honest money?

Honest money is currency that has the backing of, the value attached to, actual goods and/or services.

This definition of honest money is what is intended in all uses of the phrase here.

To maintain a healthy economy the challenge is to produce and put into circulation only honest money.


Producing and putting into circulation honest money

The concept of money was invented for the purpose of facilitating voluntary exchanges of real goods and/or services between members of a community.

Clearly if money is to function to the optimum in its role as a facilitator of voluntary exchanges it needs to be equally accessible to everyone in a community. It is thus a public good. Not only does it hinder money's purpose but it is morally wrong for money and the system which controls its distribution in society to become the income generating possession of any group within society. In a growing and changing economy however there is a constant need for 'new money' to be issued, how is this to be fairly and justly done?

The reality is that all new money is, at the point of issue, counterfeit because it has not yet been connected to the equivalent value actual real goods and/or services that it is serving as a surrogate for.

How is this connection to be achieved then?

It is best achieved when new money is issued to one party in an exchange who needs some money and who then goes on to complete the exchange in full by supplying, equivalent in value to the money, real goods and/or services to a third party and thus ensuring the exchange is turned into an 'economic nugget'.

If the issued money is not responded to in this manner by the person to whom it was issued then the money remains counterfeit, or dishonest.

Have a look at www.ces.org.za for a working alternative currency system that successfully operates according to this principle.


The production and circulation of dishonest money

The consequences of the production and circulation of dishonest money are wide ranging and destructive of both individuals and the community at large, as well as of the whole economy.

The biggest problem in modern economies is that dishonest money is legally part and parcel of their fabric. This is because there are official producers of 'new money ' who have no intention of themselves ever supplying goods and/or services of equivalent value into the community. These producers are the State and the banks who, these days, are in fact the major suppliers of new money into the economy. The banks do so under the Fractional Reserve Banking [FRB] rules which authorise them to issue new money provided that the quantity of new money issued falls within a stipulated multiple of the quantity of  fully accessible deposits of honest money that they hold.


The negative implications of FRB

Firstly because banks issue new money as though it was honest money, even though they accept no obligation to supply equivalent value real goods and/or services into the community thus making the money counterfeit.

They use this newly issued money to make loans to people on which they charge interest, profiting from it as though it was honest money. This although legal is quite clearly fraudulent. In any event the costs of issuing new money should be borne by the fiscus not by its initial recipients, newly issued money should be free to the first recipients.

Secondly people who live in cash poor communities and who have real goods and/or services to exchange are prevented from doing so by the lack of money in their communities. This has the effect of constraining the growth of the economy and keeping people in poverty.

Thirdly counterfeit money in circulation debases the value of the already existing honest money by stealing some of the honest money's value. In this way its issuers, i.e. the banks, are pocketing this stolen value for themselves whilst ordinary citizens' wealth is constantly eroded. Citizens experience this as continuous price escalation, known as inflation.