TACKLING POVERTY FROM A DIFFERENT PERSPECTIVE, THE MONEY SYSTEM


ECONOMIC FUNDAMENTALS


An economy is comprised of a realised portion and a potential portion.

The realised portion of an economy consists of all the completed binary voluntary exchanges of goods and/or services within the community that possesses the economy. The economic relevance of completed exchanges is depends not so much on the time of completion but on the current economic relevance of the exchange as the exchanges can range from those just completed to those completed in the dim and distant past such as a major road network.

The potential portion of an economy consists of  all the potential voluntary exchanges of  goods and/or services within the same community and these can range from nearly completed exchanges to those that are just glitters in the eyes of members of the community.

What is fully embraced by the terms ‘completed’ and ‘potential’ is dependent on the particular universe of discourse that is being addressed. For our purposes here the universe is the immediate present.

Generically for convenience in what follows the term ‘item’ will be used to  refer to both goods and services.

A completed binary voluntary exchange is comprised of

Two exchanging parties A & B
Two items to be exchanged,
Ia, belonging to A, and
Ib, belonging to B
Two, mirror image exchange processes, taking place simultaneously,
A taking ownership of Ib, and
B taking ownership of Ia

Such completed binary exchanges are the fundamental building blocks of the realised portion of any economy. It is thus useful to give such successfully completed binary exchanges a generic term, a name that fits comfortably  within the universe of economic terms. I suggest that they be called ‘economic nuggets’, because of gold’s historical  role in economic life rather than ‘economic atoms’ which would also reflect their fundamental atomic nature from an economic perspective.

It is worth noting the following about such completed exchanges. The intrinsic worth accorded by A to both Ib and Ia must meet the following criterion Ib >/= Ia, and similarly for B Ia >/= Ib otherwise there would not have been an exchange, but, as the intrinsic worths involved are purely in the heads of A and of B, they do not need to coincide. When money is used in an exchange however they have to coincide.


INTRODUCTION OF MONEY INTO THE EXCHANGE PROCESS

But first before discussing the implications of introducing money into the exchange process we need to define some  terms relevant to the discussion.

Intrinsic worth is the relative value that a person accords, in their heads, at a point in time, to a specific item in comparison to the values that they accord to other items at the same point in time.
Quantified intrinsic worth is intrinsic worth that is externally represented in a commonly accepted and measurable way. This is usually, and conveniently, done by means of a numbering system.

Socially validated intrinsic worth is the quantified intrinsic worth of an item that at least two people nave agreed upon.

Money, in general terms money represents the quantified, socially validated, intrinsic worth accorded to the exchanged goods or services in an economy.

It is also essential that we recognise two different categories of money, old  and new.

Old money is money that has had the intrinsic worth that it represents socially validated. New money is money that has not yet had the intrinsic worth that it  represents socially validated.

Thus if new money is used in an exchange it has a direct bearing on the further actions required of its user in order for the binary exchange to be completed successfully and thus forming an economic nugget.

The obvious and completely natural way to socially validate the intrinsic worth being represented by new money is for it to participate in a successfully completed binary exchange.

Economy, is the collective result of the freedom to enter into voluntary exchanges, with others, of goods and/or services.

Currency  because a currency is a representation of the socially validated quantified intrinsic worth of the realised portion of an economy this is the umbrella term that is used to refer to society’s money as a whole.

Unit of currency this is the generic term that is used to refer to any single unit of currency.

Money is introduced into the exchange process in order to act as a stand-in, or general purpose surrogate,  for one of the exchanged items. It achieves this generality by representing the intrinsic worth of the item in question, whatever  that item might be, because intrinsic worth, although belonging to a specific exchangeable item in each instance, is nevertheless a general property of all exchangeable items.

When money is introduced into the exchange process the question that  naturally arises is, can this introduction disrupt  in anyway the formation of economic nuggets, these building blocks of the economy? The short answer is, only if new money is used and the further action[s] required of its user is/are not successfully executed.

Now let us look at the composition of two successfully completed exchanges, one involving the use of old money and the other one involving the use of new money.


AN EXCHANGE INVOLVING OLD MONEY

Two exchanging parties A & B
One item, Ib, to be exchanged [purchased] belonging to B
Intrinsic worth,W, of Ib agreed between A & B
One set of old money, Ma, belonging to A and equal to W
One sale comprised of two exchange processes
A gives Ma to B and
B gives Ib to A
The fact that old money is being used means that its user, A, has already supplied something of intrinsic worth W, equal to the value of the money, into the economy therefore the exchange is completed and an economic nugget has been correctly formed.


AN EXCHANGE INVOLVING NEW MONEY

The completed exchange will exist in two mirror image halves dis-connected from one and other in time and location and only one participant is constant. The halves remain connected to one and other by only one thing and that is, the unchanging aggregate quantified intrinsic worth, W, of the items exchanged. W is reflected in the money used.

In each half of the exchange the constant participant plays different roles, in the first as buyer and in the second as seller.

First half of the exchange: [enacted in the present]

One item, Ib, to be sold, belonging to B 
One set of new money, Ma, possessed by A
A & B agree that the intrinsic worth, W, of Ib is reflected in Ma
A purchases Ib from B with Ma, or put the other way round,
B sells Ib to A for Ma

Second half of the exchange: [enacted after the first half]

One item, Ia, belonging to A, to be sold 
One set of money, Mc, category irrelevant, possessed by C
A & C agree that the intrinsic worth, W, of Ia is reflected in Mc
A sells Ia to C for Mc, or put the other way round,
C purchases Ia from A for Mc
Mc is then withdrawn from circulation because A has already expended intrinsic worth W when, earlier purchasing, Ib from B with Ma.

The completion of the second half of the exchange ensures the completion of the full exchange and thus the correct formation of the economic nugget.


A CAUSE OF POVERTY

From the foregoing it is hopefully clear that when we broadly view money as ‘the facilitator of exchange’ rather the more limited view of ‘the means of exchange’ then there is no theoretical reason why any member of a cash based society should be poverty stricken. Poverty is endemic however in our societies so there must be an on the ground reason for this to be. To find it we need to look at the current money system and its evolution.


THE EVOLUTION OF CURRENCY

In order to understand why the powerful in society have become fixated on ‘money as the means of exchange’ rather than on the broader ‘money as the facilitator of exchange’ it is useful to look at the  development of money over time.

During the social evolution of the concept of money the things that were used as money had intrinsic worth in themselves so that any  ‘money’ that you held was unlikely to either, gradually [through inflation] or suddenly [through changes in outer circumstances] become worthless.

A consequence of money having an intrinsic worth in its own right, e.g. gold,or legally attached to it under the gold standard if it was paper, was that money was always old, as define here, and naturally this kind of money, which was the only money that there was, could only be earned in trade or given as charity to somebody who had no money.

When paper money was introduced we adhered to the gold standard which meant that each unit of currency had to be legally backed by a fraction of the hoard of gold stored and held by the State. Under these circumstances money in itself had real intrinsic worth, even though it was only paper, because  legally it had to be convertable to gold, something with inherent intrinsic worth, thus it  was old money whether just printed or not.

When nations abandoned the gold standard for their paper money then the currency became a ‘fiat’  currency. This meant that there was no longer, even at one step removed for paper money, a real physical material, the intrinsic worth of which  attached, at least legally, to the currency. Money’s value under the current money system now had uncertain backing. With a change in the money system however new money’s value  could, naturally and rightfully, be linked to the value of the economic nugget that it played a role in forming. As we saw from the earlier section, titled ‘AN EXCHANGE INVOLVING NEW MONEY’, honest money, i.e.  new money that has successfully been converted to  old ,is the consequence of successfully completed halves of a binary exchange using the new money as the exchange facilitator.

Exchanges by ordinary citizens using new money will probably not be sufficient to address any real  needs for increases in the overall money supply so the National Currency Authority will have to keep a watchful eye on the Monetary supply statistics releasing new money into circulation when needed. The new money should be released to government for State expenses. Such releases of new money will not be inflationary provided that they correlate with the real need for new money in the economy.

For all this to be actualised however we will need to make many changes to how  the current money system, i.e. the system that administers the money, operates. This will be a multi-year project and because money is in a sense both the glue and the lubricant which keeps society together the whole of society will need to be involved. Involvement of the whole of Society will also be essential if the maximum number of beneficial changes to the system are to be conceived of and implemented.

EVOLUTION, SEX AND SPIRITUALITY

This summary is not available. Please click here to view the post.

THE PHYSICS OF MONEY

   THE PHYSICS OF MONEY

Background

The exchange process without money

The exchange process with money

Suggested method for

 uniquely linking newly issued money to

 the intrinsic value in real exchangeable items

Suggested changes to the money system

The benefits

Background

Even though money is a concept created by humans this concept springs from physical  reality, hence the above title ‘The  Physics of Money’. This reality is actually quite easily grasped by ordinary people. What ordinary people do not see however is  the logical connection that exists between money and this everyday reality. In this article I will try to demystify money for the ordinary person by explaining how money plays a role in this ordinary every day reality. Unfortunately money’s role can be either an honest one or a dishonest one. It is the honest role, of course, that we are primarly interested here but reference has to be made to the places where dishonesty is legally practiced.

But first ,what is this everyday reality that I am speaking of?

All life forms, whilst they are alive, have constant exchanges with their environments and these exchanges are vital for the life form’s continued survival.

For us humans an every day example of this would be our breathing which is essential for our continued survival. We inhale into our lungs air containing oxygen in order to infuse the oxygen into our bloodstreams. Simultaneously our lungs extract CO2 from our bloodstreams so that the extracted CO2 can be excreted along with the exhaled air.

The breath is just one of the vital exchanges that we humans are dependent upon for our survival. These vital exchanges can be split into two groups those requiring the involvement of our fellow human beings and those not necessarily involving our fellow humans. The exchanges with our fellows can range from conversations to the exchanges of goods and/or services. Now it is these latter exchanges that we are particularly interested in here because, these days, money plays a central role in them and they too are vital for our continue physical survival. The role that money plays is a facilitative one as will hopefully become clear.

Unfortunately, as metioned above, money can also be created dishonestly. This is because it  can be created independent of any actual link to particular real goods or services. Such money, being indistinguishable from honest money, does however play the normal facilitative role of money in exchanges, but it does so dishonestly because it is claiming to represent the intrinsic value in particular goods or services which it simply cannot do because it is not uniquely linked to any particular exchangeable goods or services.

Individuals who put such money into circulation are prosecuted and gaoled, sadly not for their economic crime, e.g. theft , that they have committed, but for usurping the State’s money producing role. This is not to say that the State and its agents do not produce such fraudulent money, they do. The State sees it as its right to do so, publically stating that  this is done in order to better manage the economy. Ordinary people have become accustomed to this dishonest practice. There is even an accepted, rather than pejorative, name for it in the USA. It is titled, QE, or quantative easing, by the US Federal Reserve.

Undoubtedly exchanges of goods and services have to take place if we humans are to survive.

In a healthy society these exchanges are voluntarily. Such voluntary exchanges form the rock solid foundation for any healthy economy, the only foundation in fact. This in turn provides the basis for the continued survival of the human community. Basically without such exchanges the members of the human community would die and the community, without members, would cease to exist and so would its economy.

Interestingly such exchanges do not require the use of money but once the concept of money was conceived, money, because of its facilitative utility soon became regarded as a vital part of any exchange process. It came to be viewed in this way because it has the ability to facilitate binary exchanges, enabling them to happen at any time in any place and to include an unknown third party in the process thus widening the possibilities for making exchanges.

The exchange process without money

Two parties A & B agree with one and other to voluntarily  exchange two items with one and other, item IA, belonging to A,  is swopped with item IB, belonging to B, i.e. the ownership of the two items is exchanged.

It is safe to say that because the exchange was completed voluntarily neither party,  although they are now  in possession of different items, experienced any loss of value through the transaction. So for each of them the intrinsic values that they accord to IA and IB must be the same. Notice, however, that in an exchange not invoving money the intrinsic values accorded by A do not necessarily have to be the same as those accorded by B.

As already noted such completed exchanges are what make up any healthy economy. They are the indivisible economic events, or atoms, that form the essential building blocks of a healthy economy.  We shall call them economic nuggets because they are literally equivalent  to gold nuggets in economic terms. 

Now if we wish to maintain a healthy economy the formation of economic nuggets must remain the same, even when money becomes part of the exchange process. However the potential for serious disruption of their formation is a very real possibility when newly issued money is introduced into the exchange process. To avoid this happening special preventative measures need to be taken as explained below.

The exchange process with money

Quite simply money is a stand-in, or surrogate, for the intrinsic value of one of the items being exchanged. Clearly if the exchange is to properly form an economic nugget then the money involved in the exchange must be honest, not fraudulent.

For money to act as an honest stand-in it must be old money, i.e. already be representing the intrinsic value of a particular exchangeable item. So if money is not to disrupt the formation of an economic nugget the money must be honest, it cannot just claim to represent intrinsic value, it must uniquely represent the intrinsic value of a real exchangeable item. If not the money is counterfeit in the full meaning of the word. It is pretending to represent an intrinsic value which does not exist because the exchangeable item in which the value should inhere does not exist. The money is thus fraudulent and consequently the formation of a healthy economic nugget  is compromised. In economic terms the nugget is, corrupted.

It is essential here to draw a distinction between new money and old money. New money is money that has not yet been uniquely linked to a real intrinsic value. That is the intrinsic value inhering in a real exchangeable item whereas old money has been so linked.

Thus old money,  because it  cannot help but honestly represent the intrinsic value of existing exchangeable items can never be fraudulent. So when old money is used as the surrogate in the exchange process the formation of an economic nugget will not be compromised in any way.

The problem of corrupted nugget formation occurs when newly issued money is used as a surrogate for an exchangeable item. This is because the newly issued money cannot honestly claim to represent the intrinsic value of an exchangeable item. For it to do so a deliberate effort has got to be made to uniquely link the newly issued money to the intrinsic value of a particular exchangeable item. Once this is done it then becomes old money and can honestly claim to represent the intrinsic value inherent in a real exchangeable item.

Ensuring that this happens will require a change in the way the current money system operates.

Suggested method for uniquely linking newly issued money to the intrinsic value in real exchangeable items.

The intrinsic value that inheres in exchangeable items resides in the heads of the people wanting to make exchanges of the items. It belongs to nobody else.

The workings of the suggested money system are predicated on the above fact. The current money system simply ignores it.

As already pointed out unfortunately once intrinsic values become externalised in the form of money it becomes possible for the externalising agents [i.e. the monetary authorities] to lay false claim to the value in the money. This is a temptation that the authorities have unfortunately succumbed to time and again throughout history.

In previous eras money had to have a physical form and for this reason alone money had to have a central controlling body to oversee its production and issuance. This made it easy for the members of the controlling body to lose sight of the fact that the intrinsic values of exchangable items, externalised in money, actually belonged to the people making the exchanges, not to anybody else particularly the monetary authorities.

In the current era of ubiquitous electronics there is no reason to be bound by the  physical constraints of previous eras. Now, provided that an individual has a cell phone, money, both old and new, can be issued electronically to the individual when and where it is needed. The only constraints on this practice will be the ones that are logically neccessary to mantain the honesty of the money.

The banks are already issuing money electronically. They do this by means of credit and debit cards. These cards can be used to make payments at the point of purchase and in due course the money involved in the transaction is transferred electronically from the purchaser’s bank account to the supplier’s bank account.

Unfortunately under the present monetary system before people can make use of these cards they have to have a bank account and for this they have to already have money.

People with little or no money cannot have a bank account, thus a credit or debit card, nor can they enter into voluntary exchanges of goods and services that involve money. This situation is highly undesirable both from an individual and from a societal health point of view.

The situation can be rectified however by adjusting the money system to operate in a different way to that in which it currently operates. This change is not a radical one as the bulk of the money system can remain unchanged.

Suggested changes to the money system

The change will be in how money is created, put into circulation and removed from circulation. Physical money will be discarded completely, replacing it with electronic money. Electronic money, both new and old, will be issued directly to individuals at their  point of need. Further more in order to impede the accumulation of money in financial centres individuals will be encouraged to spend their money within their proximate community by levying an ‘out of community’ tax on money spent outside of their proximate community.

The following points list some of the most important changes. Other ones will of course be uncovered as the reformed money system is fully developed.

1. Money is only ever recorded and held in an electronic form. It will no longer exist in any ‘hard copy’ form.

2. Thus the national currency  will only need to have a single unit of currency [UoC].

3. An independent National Currency Authority [NCA] will need to be established. It will look after and keep a record of every UoC created.

4. Because each UoC is intended to be representing an economic nugget it will exist as a uniquely identified record on the national currency database [NCDB]. The NCDB wiII be the electronic equivalent of a central bank’s gold holding.

5. The NCA will maintain the NCDB.  

6. The NCDB will also  contain a recorded history of the identities of the successive holders of each UoC.

7. Through strict controls on the amount of new UoCs issued into circulation at any one time the NCA will ensure that the national currency contains the absolute minimum of new UoCs, and thus the national currency will never be deliberately debased as currently happens.

8. All UoC will be held only on the NCDB.  Outside of the NCA they will only appear as the recorded amounts of UoC held by, economically functional entities[EFE’s]. EFE’s are either real persons, or legal persons.

9. The amounts of recorded UoCs held outside of the NCA will, just as is currently the case, require regular auditing to ensure the integrity of the recordings.

10. Every EFE will have to be registered with the NCA before they can be involved in any monetary transactions.

11. Every ‘person’ EFE will have to be recorded as a member of an identified community comprised only of persons proximate to the EFE in question.

12. All ‘legal person’ EFE’s will have to be recorded as members of a single national community.

13. Every EFE will have to have an account with the NCA. These accounts will be maintained by the NCA on a EFE database [EFEDB].

14. Every EFE will be required to have a bank account registered with the NCA.

15. The NCA will keep a record, on the EFEDB, of every UoC, old and, new if any, issued  to individual EFEs.

16. Only the NCA will be allowed to issue new UoCs or to remove old UoCs from circulation.

17. The preferred means of EFE access to the NCA will be electronic.This will not preclude face to face or email interaction with the NCA when necessary.

18. It will be essential for the NCA to provide, for every EFE,the means for secure electronic access to the money system.

19. Many positive benefits to individuals and to the community as a whole will arise from a switch to a solely electronic currency thus the State should bear the electronic transmission costs of all monetary transactions between individual EFEs and the NCA. This means that  the State will bear the electronic transmission costs between the NCA and banks as they too are EFEs.

20. For those at the lowest levels of the economy cell phones are likely to be the only means of access to the NCA’s systems and thus money. Therefore the State must fund cell phones for EFEs where necessary.

21. Every monetary transaction entered into by an EFE will have to start its life with the NCA.

22. When an EFE wants to make a payment to another EFE the NCA would first check to see if the receiving EFE was a member of the same community as the paying EFE.

22.1. If yes the NCA would ensure that the ‘out of community’ tax register on the transaction was set to zero and proceed to step 23.

22.2. If no the NCA would calculate the tax payable on this ‘out of community’ transaction and put this amount in the ‘out of community’ tax register before proceeding to step 23.

23. The NCA would check to see if the paying EFE had enough funds in its bank account to make the full payment, i.e. transaction plus tax, if any.

23.1. If yes the NCA would first take the tax portion of the transaction, if any, for itself before passing the transaction through to the receiving EFE’s bank account. The tax  portion could be used to defray the NCA’s operating costs.

23.2. If no the NCA would fist check to see if the required amount of new money could be issued to the paying EFE. [EFE’s would have an enforced limit on the number of unredeemed new UoCs that could be issued to them.]

23.2.1. If yes it would transfer the new UoCs to the EFE’s bank account and add them to the amount of new, i.e. unredeemed, UoCs issued to the EFE and proceed to step 23.1..

23.2.2. If no it would halt the transaction and inform the paying EFE accordingly.

24. If money from another EFE was to be deposited into the EFE’s bank account then the NCA would first check to see if the recieving EFE has any record of new UoCs issued to it.

24.1 If no then the money would be immediately transferred to the EFE’s bank account.

24.2 If yes the NCA would, before transferring the deposited UoCs to the EFE’s bank account,

24.2.1. Deduct from the deposited UoCs the number of UoCs equivalent to the number of new UoCs previously issued to the EFE and reduce the amount of previously issued new UoCs accordingly.

24.2.2. Pass the remainder of the deposited UoCs, if any, through to the EFE’s bank account.

24.2.3. The deducted, deposited UoCs, would be removed from circulation and placed on hold awaiting their re-issue into circulation through the national treasury.

25. The NCA in conjunction with the Dept of Statistics would constantly monitor the percentage change in the size of the economy.

26. At regular intervals, based on these statistics, the NCA would issue into circulation via the National Treasury the volume of additional UoCs, if any, needed in the economy. These UoCs would come first from the UoCs currently on hold then, if there are insufficient UoCs on hold to meet the need, issue new UoCs. Under these circumstances these new UoCs would not be inflationary.

The benefits

1. Adherence to procedures 22 to 24 would ensure that newly issued UoCs  become old UoCs without corrupting the formation of economic nuggets.

2.  The controlled issuing of new money to individuals at the point of need would eliminate cash starved individuals and communities and begin a natural process of eradicating  poverty.

3. The elimination of cash starved communities would naturally boost the economy and in due course drastically reduce poverty.

4.  The switch to an electronic currency would eliminate the need for

a) the infrastructure established to handle and secure physical money and

b) all the infrastructure’s associated costs.

5.The criminal uses of money would become impossible once the switch to an electronic currency takes place because of suggestions 8, 9 and 10 above.

6. Any criminal activity that flourishes because of the anonymity accorded to the holders of money under the current money system would be threatened once suggestion 6 above is implemented.

Rory Short  2014/04/27