Theoretical

Theoretical Essay on The Nature of Money

This is an attempt to clarify a couple of issues that have recurred frequently in discussions about the theoretical aspects of money.

The most frequently and vehemently discussed topic is on value and I will show why there is never any consensus opinion. But first I want to show what happens when the format of money changes.

When we list the general functions of money an equivalence is assumed that should not exist. This list usually includes these functions:

1.     Medium of exchange 2.     Measure of value 3.     Transferor of value 4.     Store of value 5.     Symbol of trust

The first point I wish to make is that the first item on this list is an order of magnitude more important than the next four. It needs to be separated and set above the remainder to show the importance.

The next three items deal with assigning value which is the topic most vehemently discussed and which I will tackle next in this piece.

The last has several components, which I will identify and discuss briefly.

First, medium of exchange. Call this instead a social function and call it mutually acceptable evidence of a liquidity position.

I started this quest by asking myself why money existed sometimes as real stuff that was actually consumable like salt, tobacco, cocoa beans, and whiskey, and so on while other times and more frequently through history it existed as a symbolic representation of something real.  I.E. leather disks with pictures engraved of real stuff, pottery chips with engravings of real stuff, and warehouse receipts for real stuff in storage. Other times in history money has existed whose symbolic value is far more difficult to assign to anything real.

Cowry shells, feathers, diamonds, pearls, works of art, and the stone donuts of Yapp are all things whose value is inductive and not based in any utility value. But each of these has at one time or place served as money.

The credit money created as interest bearing claims upon future production is the dominant format today. The exponential growth of debt instruments where interest is commonly set higher than real world production leads to a dead end. Anyone familiar with exponential growth knows how bacteria which allowed to double in weight perhaps as little as 35 times would weigh as much as the planet earth. When Kondratieff made his study of business cycles, he was identifying the periodic collapse of interest bearing debt money. The entire system becomes an interlocked flow phenomenon. When the underlying physical economy is no longer able to meet the interest payments: never mind the principle; the entire edifice goes into a liquidation mode, which is a cascade failure. These quiet words dont reflect the panic and distress associated with such a liquidation phase.

This confusion of the medium of exchange function with the next three in the list that describe value is a root cause of the big arguments that develop over format of the money system.

Some time after a given money system goes into failure for whatever reason a new system will be developed which will probably incorporate some features of the system that just failed. Usually some features are identified which proved troublesome and these are rendered illegal. A period of spontaneous development of various innovations will take place after which a common system will be utilized.

The new socially acceptable evidence of a liquidity position is now extant.

So here, let me relist the functions of money, but with a new emphasis where I have replaced medium of exchange with evidence of a liquidity position.

Evidence of a liquidity position

1.     Measure of value 2.     Transferor of value 3.     Store of value 4.     Symbol of trust

This next portion will address the first three items on the list which all revolve around VALUE. But what is value?

I have watched several email discussion lists go into a frenzy over the topic and with no common agreement. After thirty days the various protagonists would usually retreat to their various positions and simply refrain from any more effort. The closest thing to agreement I have witnessed is when often several would agree that all value is imaginary.

Menger http://cepa.newschool.edu/het/profiles/menger.htm  said some enigmatic things about money and the inductive nature of value is one of those things.

I shall attempt to take this somewhat further, and shed some light on how some very basic assumptions about value in the money system cause the system to malfunction. I shall attempt to prove that money is in fact an act of communication: a special branch of language. Any piece of currency whether it is a paper representation, a digital entry, or even a gold coin is in fact a piece of evidence, which is a symbolic transfer of value. Also, I have come to believe that the language of money would serve us better if it could be altered to reflect symbolically the loss of value of real goods over time.

First, a montage of arguments advancing various positions regarding the topic of value.

The metallic specie argument: Usually this revolves around silver and gold in specific purities and weights. Even this is anything but simple. Down through the centuries both the purities and the scales have changed. A talent was about 57 pounds which milled into 6000 drachmas and both metals were used with a ratio of about 12 silver to one gold. Later, the German reichsthaler was 17dwt, 15gr, 2mi (20 dwt = 480 grains = 1 troy oz) and (one mite equaled .05 grain and 24 grains =one pennyweight [dwt]) I have copied these numbers accurately from the email sources without going back to check. The Dutch Guilder was 22.85 gram of 83% silver and the Stuiver was 1.31 gram of 33% silver. The congress of the United States decreed in 1792 that the dollar should be 371 grains of silver or 22.5 grains of gold and that these things should not be coined any other way upon penalty of death.

So, it is easy to see the confusion of weight and measures in the topic of metallic specie without even looking at the imaginary value.

Commodity arguments usually revolve around the market basket concept advocated by Hayek, Reigle, Borsodi and others. Ivor Pearce, Prof. of economics, university of Southampton and Kevin Dowd have each made arguments for the Commodity Pound Sterling. This argument in 1996 is basically the same as advanced by Irving Fisher in 1934 for stabilizing a gold dollar. Each advocated creation of an index number based on the market basket concept which in turn served as the numeraire referenced in a fixed manner to the silver pound or the gold dollar respectively.

As others have pointed out any effort to create a specie or specie and commodities money system will always simultaneously create a class of privileged brokers in the specie.

I personally like the market basket of commodities concept where the metals are simply included within the basket. I have also advocated simplifying the basket to only include food stuffs. No matter what your position in life or your politics, bottom line is we all have to eat or starve. When the original creation of new money is tied to food, I believe food supply and distribution problems will disappear. This model could also be thought of as a derivative of the land value argument (below) where the food production is not referenced to the size of the land holding. Efficiency of production is now emphasized.

Shann Turnbull of Australia made a good argument in favor of an energy dollar based upon a Kilowatt Hour of electricity (is this 50 cycle or 60 cycle, single phase or three phase?) which would be issued in the form of vouchers redeemable for electricity.

John Pozzi argues for a Global Resource Bank based upon the total resource base of the planet.

Followers of Henry George advocate a land dollar that would be remitted as land rent to the state. (Is this land with or without rocks, and does my swamp hole with the alligator qualify?)

The Channel Islands of Guernsey and Jersey created their own system loosely based upon the pound sterling but not redeemable in silver. The notes were accepted in remission for taxes and are often sited in arguments that say basically that if the currency is acceptable for taxes, that will be enough to assure validity.

A variety of schemes based upon time have sprung up. Ithaca Hours is just the latest incarnation. This system has been used previously in California from 1885 to 1895 and later by Robert Owen (1920s?). Professor Robert Blain of the University of Illinois at Edwardsville has written an argument justifying using hours as the unit of value for a money system. Available from me in ms word or adobe format.

Proudhan is probably the best known classic economist who advocated the mutual credit system of which LETS is the latest model. The JAK system could be called a mutual credit bank with a 100% reserve requirement.

Prof. Auriti http://www.moneymaker.com/italy/lire-1e.htm  has shown how value is inducted into the present debt money system where a claim is written against property and such claims circulate with interest due to the claim writer. In this model, the value is property - real, personal, or intellectual and the induced value of the debt lies in the claim upon future production of said property. Prof. Auriti has also shown how the interest due to the claim writer assures that a percentage of all property will in time become owned by the claim writer. This system is sometimes referred to as hypothecated debt money.

Each of these systems assumes constant value money or even an increase in value in the hypothecated debt system.

But even this does not explain exactly what value is. I said before that there is some agreement that value is imaginary, but what is being imagined? Next, with three scenarios, I shall try to show by example where the true value is.

In these examples, you will be offered two solutions to a problem. You may choose only one; and then, try to ascertain what was the underlying value that led you to the choice.

In the first example, you are Jewish, and escaping Nazi Germany. You can only carry so much stuff with you. The choice you must make is whether to carry a two kilogram bag of gold coins or two kilograms of family pictures. Please now, time is important, make your choice.

Second example: You are middle aged, worldly wise, educated and able. However, due to your recent divorce, attorneys, and a downturn in business you are now bankrupt and homeless. Emotionally you are a wreck and near suicide. A very rich uncle offers you one of two items. He assures you either will be a way out of your situation. The first is a controlling stock interest in Firestone Tire. The second is clear title to a 75 rental unit apartment complex. Make your choice!

(I will help you in this more complex scenario. You are emotionally a wreck from stress, homeless and bankrupt. You dont need more stress; you need a roof over your head and a place to unwind without problems.)

The third situation is again simpler. Your boat is capsizing in heavy water, and even tho you are a great swimmer, it is obvious that you are in big trouble. As the boat is overturning a couple of things go flying in different directions. The first is that two kilogram bag of gold you just recovered from the wreck below and the second is a two kilogram life preserver. Within seconds both will be out of reach; make your choice!

These examples should illustrate that the ultimate value is situation specific, individual specific, and the underlying unspoken value assessment will be made toward the choice that gives the better survival into the future whether the time is short or long.

Value is imaginary, individual specific and situation specific!

Money is a special branch of communication that could be studied with the tools of the linguist perhaps better than the tools of the economist.

When we give or receive money, we are giving or receiving a symbolic evidence of a liquidity position the value of which varies with situations and people.

The language of money is not accurately reflecting reality, which is why it is the continuous source of problems.

If money is to function correctly as a medium of exchange, store of value, and transfer agent of value, the linguistics of money i.e. the logical syntax of money will function better when it reflects the real world loss of utility.

Now, let me digress backward in time and try to illustrate how money has developed and when, where and how the structural syntax of money took a bad fork in development that causes it to malfunction.

The first items of barter were food and clothing. Supplies were often short of needs and scarcity became part of the meme set later incorporated into money. When metals initially became coined into money, the scarcity of gold reflected accurately the scarcity of goods and matched accurately the facts of the period.

Centuries later Malthus and Darwin wrote their treatises. The meme sets expressed by these models seamlessly integrated into the syntax linguistics of money. Hell, it's a jungle out there! The fools will always over breed the food supply. Might as well allow the survival of the fittest to run its natural course. Let the fools die so that there will be less to feed in the next generation!

In the 1930s, history records the play out of these meme sets in full expression. The record shows that farmers destroyed food even while people starved. The language of money was verboten.

However, in the same time period in Worgl Austria the ideas of Silvo Gesell were tried out and a successful example was illustrated in action. What Gesell did was to restructure the syntax of money to more accurately reflect reality. As a symbolic representation of value, the demurraged currency inspired by Gesell modified the meme sets associated with value.

Where in the past the paper money currency reflected a static unchanging constant value gold, this new money symbolically reflected a constant loss of value. The direct consequence became quickly apparent. Now, in the barter of goods and services for medium of exchange and the medium of exchange for goods and services, people no longer had any desire to retain the medium of exchange.

The symbolic imputation of value to money is still there, but now it is a value that is not permanently retained. The utility of value is shown as a time forward loss. The time value of money is now expressed as a forward utility loss. The value utility shows a time forward loss. (I have rephrased this in three ways very deliberately. Reread the three phrases until it becomes clear to you.)

When we barter our goods, property, or labor services for money we are accepting a symbolic piece of evidence, which carries some imagined value. This is liquidity. When we barter our liquidity evidence for real goods, property, or labor services, again the value received will be whatever we happen to believe will give us the best survival forward into the future. There is in every barter a difference in perception of the value given and the value received. Every successful barter where both parties are happy is an example where each party to the barter perceives that he has received more value than he gave!

When the evidence of liquidity is designed to be permanent or possibly to even increase in value, then the preference will be statistically toward collecting the liquidity evidence. And so, we witness the mad scramble of intelligent and energetic people worldwide to acquire evidence of liquidity.

If the logical syntax of money were altered to reflect the real world time utility of goods: i.e. a loss over time, then the money would be only desired as a temporary evidence of liquidity, and the preference would be statistically toward acquiring real goods, property, and services.

If a regularly assessed franking charge is subtracted from whatever value index numeraire the money evidence represents, then this franking charge can be made to pay the cost of supplying the money system. This has the simultaneous effect of preventing liquidity preference that is known more generally as the love of money.

The fourth item in my new list of functions of money is symbol of trust. Once general recognition is made of the truth of Michael Lintons statement that money is an information system for deploying human effort then the trustworthiness of the symbol will be addressed.

The cost of money should be based upon the cost of accurate conveyance of information. This can be further subdivided into assuring the identity of principles to the transaction, proving non-counterfeit of documents, and some guarantee of specific performance of contract.

This is the situation where money serves us best.

Here now is my revised list that describes money in terms of function.

Socially acceptable evidence of a liquidity position

1.     Measure of value 2.     Transferor of value 3.     Store of value 4.     Symbol of trust (a)    conveyance of accurate information (b)    assurance of identity of participants to transactions (c)    guarantee of specific performance to contracts

**** end of theoretical on money **** credits below ****

This writing did not spring from a vacuum. I give much credit to all the people who have preceded including but not limited to: Thomas Greco  http://www.azstarnet.com/~circ/tgwrit.htm Bernard Lietaer http://www.transaction.net Hans Eisenkolb http://www.sunshinecable.com/~eisehan and Giacinto Auriti http://www.moneymaker.com/italy/lire-1e.htm

The writing by Dr. Erhard Gloetzl of Germany explains how these Gesell inspired ideas could be integrated into the present system with little disruption. This rather long and involved exposition downloads rather slowly because it is 80+ pages with a number of graphs and diagrams. http://userpage.fu-berlin.de/~roehrigw/gloetzl/howand.htm

The material on the transition from food and clothing shortages to gold to Malthus and Darwin and shortage as an integral part of the money meme came directly as a result of material advanced by Hyman Blumenstock (just do a search by name). Or click here: http://people.montana.com/~calsch/Hyman1.html http://people.montana.com/~calsch/Hyman1.html The interview of Bernard Lietaer by Sarah Van Gelder titled Beyond Greed and Scarcity cries out a question Why? by the very title. Again, just do a search.

Cal

Addendum on security; personal and social.

Personal security as it exists today usually is a claim on future production and most often is in the forms of various debt based financial instruments loaned into existence.  Personal security of tomorrow should exist based upon an ownership position based on capitol credits earned by working within the industry or by providing some of the industries needs during your working career.

To further investigate these concepts read what Shann Turnbull has written along with third way economics. The Mondragon cooperative has shown us one way as well as Louis Kelso with his ESOP models. Turnbull has an on line book which is located here: http://cog.kent.edu/lib/TurnbullBook/TurnbullBook.htm http://cog.kent.edu/lib/TurnbullBook/TurnbullBook.htm

Social security as provided by the government is a state sanctioned ponzi scheme where the money is transferred with all excess being spent even while it is claimed to be still available. There is a lot more could be said about security, but this topic is outside the scope of my short treatise.  I believe state sanctioned transfer payments will continue to be necessary in the future, but there is no point in the illusion that you have some fund created in your name that is locked up and untouchable.

Thomas Greco has this to add on security by investment in future output that resembles third way economics. (Part refers to application in a LETS system)

The medium of exchange should not be used for long-term saving. (Greco)

The store of value function is one side of the capital formation process, investment in productive assets (tools) being the other. A "new economy" must provide for this. A "saver" basically allocates his/her current surplus to someone else (an entrepreneur) who spends it on capital goods and agrees to return value to him/her at a later time. The increased and/or improved production benefits the entire community. How those benefits are shared/distributed is the crux of the problem. The saver should, at the very least, receive his/her original value (savings) back. There are myriad ways to compensate him/her for saving (through payment of some amount of interest on a debt type investment, which I would like to see phased out, or dividends on an equity type investment, which I would like to see emphasized). There are also punishments that can be applied for failure to save (demurrage charges).

Saving should be done either directly by spending that medium (call it "credits") on storable commodities, tools, equipment, etc., or, preferably, by allocating credits to an entrepreneur who will employ them for productive purposes. In a mutual credit system, there can be the understanding that surplus credits above a certain amount must be invested. that might be done by the member personally, or by some financial intermediary of his/her choice. Surplus credits left in one's current account might be subject to some demurrage charge (I have some misgivings about that), or they might be automatically moved to a designated investment account. That could be part of the original membership agreement.

End of security addendum, >

I have a links page that is pretty extensive as to most of the significant sites around the web. It is found here: http://people.montana.com/~calsch/Links.html http://people.montana.com/~calsch/Links.html