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What is Money?

by rdf Fri Jan 2nd, 2009 at 11:43:38 AM EST

With investments falling in price recently people have been looking at the whole concept of money and value more closely again. Money is a topic which has confounded thinkers for several thousand years, so I don't think I'll be able to explain it either. Instead I'll just ask some questions.

Until the invention of paper money, money was based upon some relatively rare tangible object. Silver and gold have been popular choices for a long time. Their virtue was that one can't counterfeit them, although there have been cases of adulteration and "clipping".

Having a governing body issue coinage was a way of simplifying trade since the provenance eliminated the need to verify each coin every time a trade was done. The problem with gold and silver is that the "wealth" of a society was based upon an arbitrary commodity which had insignificant purpose aside from as a medium of exchange. Jewelry is just another way to hold on to this commodity.

It was only in the past 100 years or so that gold and silver have been needed for actual industrial production. Silver in photography and some electronics and gold in electronics. Even today industrial use of gold is only about 20% of the amount mined.

With the rise of mercantilism and industrialization the limits on the actual amount of gold and silver acted as a barrier to trade. One might have a large amount of grain to sell, but if the buyer didn't have the gold to pay for it there was no deal. This led to the creation of credit. So "money" was now created without any connection to scarce commodities, but only based upon a promise. From letters of credit to central banks and the issuance of paper money has been a long path in time, but a short leap conceptually.

Once we permit trade to take place based upon credit then we have allowed money to be created outside the direct control of national mints. Credit is a promise and the "value" of the promise is based upon expectations that the loan will be paid in a timely fashion.

Those who see the evil in "fractional banking" and "fiat money" have confused a specific mechanism for the creation of credit with the idea that money is based upon trust, regardless of how this is defined. So proposals to limit banks to lending only what they have in reserve, for example, just put the entire creation of the money supply in the hands of the government. If they fail to put enough money into circulation (either in the form of paper or bonds) then trade becomes constrained just as it was with a limited amount of coinage in circulation.

Proposals to substitute something for credit all are variations on going back to the old system. Should we base wealth on land or a basket of commodities? If so then how do you determine the "value" of these things. We have seen recently that land and oil can change value just as rapidly as anything else. There are no physical commodities which have a value independent of what people assign to them.

One could argue that the use of credit has worked well since it became the norm in the 20th Century, but this isn't true. There have been dozens of revaluations of money and a successions of international mechanisms set up to deal with problems. Going off the gold stand, Bretton Woods, the creation of the IMF and World Bank have all been attempts to systematize a process which is fundamentally based only on trust. We are now going through the latest international convulsion over money and will probably see some new ad hoc mechanisms put in place to restore confidence.

As I said, I don't have any ideas, but it seems to me that we will be stuck with trust-based credit for the foreseeable future.

Money is a solvent -- so said Hornborg (The Power of the Machine) and his argument is pretty convincing imho.

The difference between theory and practise in practise ...
by DeAnander (de_at_daclarke_dot_org) on Fri Jan 2nd, 2009 at 02:14:41 PM EST
I see transactions as friction and money as the lubricant. Sharing OTH is fairly friction-free, and hardly in need of much lubing. Whether the concept of sharing enabled the intertubez, or the other way round, I am not sure.

You can't be me, I'm taken
by Sven Triloqvist on Fri Jan 2nd, 2009 at 02:31:16 PM EST
[ Parent ]
I see Money as value-in-motion or Dynamic Value which exists only in the transient instant of exchange - the "Transaction".

Capital, or "Money's Worth", on the other hand, I see as Static Value or potential Money.

Conventional Economics is based upon the assumption that Money is Credit, and is either interest-bearing credit created by Banks, or non-interest-bearing notes and coins minted by governments.

That's bollocks of course, like other axioms of conventional Economics.

While credit aka "time to pay" is a necessary element of a monetary system it need not be Money and as rdf pointed out, it historically was not.

The truth of it is that wherever a barter system incorporates "time to pay" or credit between seller and buyer, then the result is a monetary system.

As I have pointed out several times recently, the Swiss WIR business to business barter system is just such a system, where money's worth of goods and services changes hands on credit terms. Settlement of credit is not in Swiss Francs, but in "Swiss Franc's Worth" of goods and services.

ie transactions are not settled for official "fiat" Swiss Francs either in bank-note form or entries in bank ledgers, but by reference to Swiss Francs as an abstract Value Unit.

The reason for the longevity and sustainability of the WIR has been that the pragmatic Swiss do not leave settlement of credit to trust alone, but secure trust by mandating that members give security over their property. ie the WIR is a property-backed monetary system.

That's fine for businesses, but in order to extend such a system to Joe Public you need forms of "Money's Worth" which businesses (and other Joes) will find acceptable in exchange, and a trust framework as well.

Here I advocate Units redeemable in (say)

 Energy - in 10 Kilowatt Hour chunks

which would be pretty much universally acceptable.

Or, most importantly, in the right to exclusively occupy land for a period of time such as

Equity Shares

These would necessarily be geographically constrained I that you couldn't redeem (say) a Swedish Equity Share/Land Rental Unit against occupation of land in Norway.

The necessary framework of trust would be provided simply by an agreement - the Guarantee Society - and would be backed by provisions made by both sellers and buyers (who both benefit from the mutual guarantee) into a "Pool" in mutual ownership.

A "service-provider-formerly-known-as-a-Bank" would manage the system in return for a fee, including a performance based element to keep them honest.

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

by ChrisCook (cojockathotmaildotcom) on Fri Jan 2nd, 2009 at 03:41:26 PM EST

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