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This blog post on a Libertarian site takes an Austrian school approach to money - ie the World according to Rothbard and Mises.

Money » The Cobden Centre

Many people know the Bank of England is creating new money through quantitative easing but if the quantity of money is being increased, how is that quantity being measured? What is counted as money?

Their recognition of the reality in our current deficit-based system that money is a bank created credit object leads them to a model that appears to fairly accurately relate monetary changes in their measure "MA" with actual economic activity.

But getting right the circulation of goods and services and the creation of new productive assets is one thing. The relationship between money and productive assets, on the other hand, particularly land, is quite another.

My post in response to this blog item follows

Interesting post: congratulations.

Clearly you have identified a monetary measure more in line with reality than the conventional mess.

I see you quote Rothbard:

Money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market.

I think Rothbard's assumption is in error.

Money is not an object - a thing - it is a relationship.

As John Law put it in 1705 in "Money & Trade Consider'd..."

Money is not the Value for which Goods are exchanged, but the Value by which they are exchanged:

E C Riegel in his "Flight from Inflation" summarises the monetary relationship as follows:

The purpose of Money is to facilitate barter by splitting the transaction into two parts, the acceptor of Money reserving the power to requisition Value from any trader at any time.

The method of Money is to employ a concept of Value in terms of a Value Unit dissociated from any object. The monetary unit is any adopted value, which value is the basis relative to which other values may be expressed.

I prefer to define terms slightly differently.

A monetary system as I see it comprises goods and services circulating with "time to pay" (aka credit) by reference to a Value Standard (Unit of measure) and within a framework of trust.

By way of example there is the Swiss WIR - a trade credit clearing system, which has been operating since 1934 - and where billions of Swiss Francs' worth of goods and services change hands not FOR fiat Swiss Francs, but by reference to Swiss francs as a Value Standard.

The framework of trust - ie the enforcement mechanism or protocol in respect of debit balances - is provided by charges over WIR members' property. ie the WIR is a property-backed monetary system.

There are numerous proprietary barter systems all incorporating credit/time to pay - such as Bartercard - and all of them are monetary systems in microcosm.

What the Austrians think of as money, I would define as currency, being the unit of value FOR which people are accustomed to exchange goods and services.

John Law is relevant again here:

Every thing receives a Value from its use, and the Value is raised, according to its Quality, Quantity and Demand.

By that criterion gold is not really much of a currency, because you cannot live in it; heat your home or run your car on it; or type an email with it.

In my view, the three basic factors of production which have a generally acceptable use value are location (ie a Unit redeemable in land rental value); Energy ( eg a Unit redeemable in - say - 10 Kilowatt Hours) and Knowledge (ie the time value of intellectual property and the time value of an individual's innate knowledge, experience, gumption, contacts and everything else that dies with him).

It is our capacity to carry out unqualified labour (manpower) and our knowledge, individually and collectively, which back the credit we may issue as a sovereign individual.

But note that most of the bank created "money" in existence today is in fact based upon the use value of land, having come into existence as interest-bearing loans backed by mortgages. ie our money is largely deficit-based but asset-backed.

In my view, there is a fundamental qualitative distinction between "money" in circulation - which you have successfully isolated - and the vast bulk of money in existence which is what inflated asset prices (particularly land), and is essentially static.

All that QE does is replace this property-based private "static" credit with public credit. This money=credit can only cause inflation if it is lent or spent into circulation.

Since most UK wealth has become concentrated in few hands - which is what always happens when compounding interest combines with private property in land - then the solution to the crisis must necessarily involve systemic fiscal reform

This is in addition to a new approach to re-basing currencies upon Value generated by the issuer; rather than upon a claim over Value issued ex nihilo by a credit intermediary.

The key point is the recognition - to which you refer - that a unit of measure or "Value Standard", as I refer to it, is not necessarily the same as a unit of Currency, which is a generally acceptable ("fungible") object redeemable in value - whatever value.

In my analysis, a sustainable monetary system requires:

(a) an accounting system;

(b) credit or "time to pay";

(c) a Value Standard or unit of measure;

(d) one or more fungible currency Units;

(e) a framework of trust.

I see Money as a relationship, not an object: currency is an object.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Oct 8th, 2009 at 05:08:16 AM EST

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