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 don’t 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 don’t 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 Linton’s 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
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

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, <calsch@montana.com>

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