Date: 2024-12-21 Page is: DBtxt003.php txt00012838
Money
MOOC Training on Money
Background Material for the Cumbria University MOOC on Money run by Professor Jem Bendell and
Burgess COMMENTARY
Peter Burgess
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The lost science of money
Reflect before moving to the next slide:
How do you feel about the scale of the claims made by some monetary reformers, about the damaging consequences of our modern monetary systems? Does it draw you to study this, or do you feel skeptical and repelled? Notice the feeling and then try feeling the opposite. What might a spirit of learning feel like?
0:03
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Money is important
Think...
“Since the monetary question directory impacts all areas of human activity, in order to make real progress towards justice, a clean environment, a sound energy policy, decent health care and retirement systems, a greater real freedom of choice and action for the citizenry requires the monetary problem to be addressed and solved first.” ~ Stephen Zarlenga
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” ~ John Kenneth Galbraith
The lost science of money
Reflect before moving to the next slide:
How do you feel about the scale of the claims made by some monetary reformers, about the damaging consequences of our modern monetary systems? Does it draw you to study this, or do you feel skeptical and repelled? Notice the feeling and then try feeling the opposite. What might a spirit of learning feel like?
0:03
/ 4:03
Try one of these videos on barter:
Understanding Money, part 1 – the Origin of Money
Gold Standard Institute
Charming homemade animation.
The American Dream
'The Provocateur Network'
To see the contemporary usage of this narrative,
search google news for “Back to Barter”
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Think...
We could debate what has “intrinsic” value, rather than any “value” existing in relation to the wider l living world, but that would be another MOOC other philosophers, from East, West and beyond.
0:28
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Properties of money
Aristotle's (extrapolated) properties:
Valuable
Durable
Divisible
Portable
Reflect before moving to the next slide: What commodities would be suitable as a medium of exchange for modern day barter?
BeerTobacco
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Monetising commodities
Many commodities have Aristotle's properties, more-or-less...
Beer - Tobacco - Honey - Tide detergent - Gold & Silver
HoneyTide
Here are some commodities that have been used as money. Did you think of any of them?
Aristotle's criteria have since been extended slightly. More than simply being divisible, we must be sure that each part is the same value as each other part. So using muesli as money would be problematic because all the nuts float to the top of the bag. If you used crude oil, you would need to specify the grade of it.
Another criteria that applies to any commodity is that it must be easily identifable. For example exchanging physical gold is troublesome if every payee must check that it is not tungsten wrapped in gold.
Something happens when a community agrees to use a commodity as money. As that commodity develops another use, demand for it goes up, the price goes up, and if it is available, supply goes up as well. In other words the market for that commodity is completely transformed and distorted.
Think about the commodities you chose from the last slide. What would happen if they were adopted as the main currency of the land? How much of them would be needed? Would they become unaffordable? How much trouble/expense would it be to store them for long periods? Would there be forgery? Remember even the 'perfect' material, gold, suffers from all of these issues, to some degree.
Whoever controls that commodity is empowered as well, as the authors of the book Money and Sustainability (2012) explain “...whatever the government choose to accept in payment of taxes automatically gives enormous power to those who produce or control that particular item...When governments choose to be paid in gold, gold producers and gold hoarders held the power. ”
Sources:
Beer as money https://www.youtube.com/watch?feature=player_detailpage&v=PdwYjFnFoJU#t=630
Honey as money http://www.luc.edu/faculty/afitch/Sublime%20Lead/CHAP9A.pdf
Tobacco as money https://www.accessgenealogy.com/virginia/tobacco-in-colonial-virginia.htm
Tide as money https://mises.org/blog/tide-money
References
Lietaer et al (2012) Money and Sustainability pp 132 The Institutional Framework of Power
The Myth of Barter
OR...!
“No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.” ~ Caroline Humphrey, 1985.
Barter
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The Myth of Barter
I must confess, we may have been leading you up a blind alley. Taking barter as our starting point has led to a very specific, and widespread understanding of money as a thing of value in itself, or a commodity, but not necessarily the correct, or the only understanding. Cambridge anthropology professor Caroline Humphrey concludes 'No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing. Economist and monetary historian Glyn Davies (2002) concludes 'the overwhelming tangible evidence of actual types of primitive moneys from all over the world and from the archaeological, literary and linguistic evidence of the ancient world, is that barter was not the main factor in the origins and earliest developments of money.” Another Anthropologist David Graeber writes a whole chapter 'The Myth of Barter' in his book 'Debt, the First 5000 years'. Here are a few excepts showing why we need to keep an open mind about history...
“Now, all this hardly means that barter does not exist-or even that it's never practiced by ... 'savages.' It just means that it's almost never employed ... between fellow villagers. Occasionally one can even find some kind of currency beginning to develop: for instance, in POW camps and many prisons, inmates have indeed been known to use cigarettes as a kind of currency, much to the delight and excitement of professional economists. But here too we are talking about people who grew up using money and now have to make do without it-exactly the situation 'imagined' by the economics textbooks.”
“Ordinarily, barter] takes place between ... people who might as well be strangers-that is, who feel no sense of mutual responsibility or trust, or the desire to develop ongoing relations... The English words 'truck and barter,' like their equivalents in French, Spanish, German, Dutch, and Portuguese, literally meant 'to trick, bamboozle, or rip off.'”
“We did not begin with barter, discover money, and then eventually develop credit systems. It happened precisely the other way around. What we now call virtual money came first. Coins came much later, and their use spread only unevenly, never completely replacing credit systems.”
“We will explore more history on the earliest forms of money and the role of coins in the next lesson. The reason we dwell on this mistaken barter theory of money is because it suggests that money in its essence is a commodity with value in itself. But as we shall explore next, this is a limited view which is likely to empower those factions which control the flow of commodities in society. From anthropology we can learn a great deal about other ways to measure value, store value, and account for exchange. From our limited readings of anthropology, concepts of kinship, honour, property, debt and payment become very blurred; its clear though that though we can see many elements of money in other societies, but there is no clear evolution of money, no substantial concept which was covered up by layers of history.”
This diversion into barter has been useful, but to really understand the substance of money we need another approach.
Further reading
References
Davies, G. (2002) A History of Money. A History of Money. Cardiff: University of Wales Press.pp24
Graeber, D (2011) Debt: The first 5000 years, Melville House Publishing.
Humphrey, C (1985) Barter and Economic Disintegration, Man New Series Vol. 20, No. 1 (Mar., 1985), pp. 48-72 [p. 48]
http://katehon.com/article/money-and-myth-barter
The barter origin of money?
SLIDE 7
Functions of money
Medium of exchange
Store of Value
Measure of value
Reflect before moving to the next slide: If a measure of length has to be long, and a measure of weight has to be heavy, does a measure of value have to be valuable?
Before we go any further, we need to touch on the classical functions of money, which are often referenced on the occasions when economists discuss money. Most commonly three functions are identified, but after a period of hyperinflation, many more uses can be found for great numbers of small pieces of paper!
A good medium of exchange enables us to 'split the barter'. That means it enables me to sell something to you today and buy something else from someone else tomorrow. Austrian economist, Silvio Gesell said in 1916 that money should be a medium of exchange and nothing else. “it should be secure, accelerate and cheapen the exchange of goods.
A good store of value is something that can be exchanged for as much in the future as it is now, or more. Even though we don't know what the future holds.
A good measure of value doesn't have to have value in itself, but it provides a way to compare the price of one thing against another, consistently over time.
Different monies perform each of the three functions more or less well. In the past and in the popular imagination, these multiple functions are performed mostly by one thing in each country, such as the Pound in UK. But we will see in later lessons why that doesn't have to be the case.
Critics might say that our modern money does none of these functions very well. As a medium of exchange it is subject to fees, delays, surveillance and security checks; as a store, and measure, of value it should be consistent but inflation decreases its value by a few percent every year.
In fact some of these functions work against the other functions. You would want a store of value to increase over time, a measure of value to stay the same, and a medium of exchange, for reasons which will be explained, to decrease over time.
In Money and Sustainability, the Missing Link, we read, “Because these are three functions of money they characterise what money does. This is different to a definition of what money is. With such a widely accepted functional definition, there is actually little real inquiry into the nature of money.” So lets dig a little deeper…
References
Silvio Gesell (1916) The Natural Economic Order, Part 4: Free-Money or Money as it Should Be.
Lietaer, Arnsperger, Goerner, Brunnhuber (2012) Money and Sustainability, Chapter IV pp12, Club of Rome.
SLIDE 9
So what actually IS money?
Reflect before moving to the next slide:
Put aside the properties and the functions of money.
Ask yourself, what IS money?
Write down your own original definition in one sentence, now, before moving on.
Search online for a definition that agrees with you. Only after, advance to the next slide
In this lesson we will use the terms currency and money interchangeably. Experts amongst you may already be concerned with that and later in the course we will look more closely at different views about what is contemporary money and currency. To begin with, however, let’s reflect on what a non-legalistic understanding of money might involve.
Though we all intuitively understand money, when we try to define it, it starts to slip through our fingers.
We know that in history money has taken different forms: it has been 'backed', or sometimes 'minted' into precious coins, yet now the “stuff” of money is paper and digits and plastic.
But there is more to it than the form. The Greeks used to distinguish between the form, or shape of something and the substance, or what 'stands under' it,
To grasp the substance, we need to do more than describe money's properties or functions.
Have a go now, and see if you can come up with a definition of your own:
“Money is…......”
Then, once you have that definition, search for it on-line, using inverted commas, to see if that definition or a similar one is used elsewhere and by whom.
SLIDE 10
Money is....
Think...
Ideas from the 1800s:
“...the god of commodities” - Karl Marx
“...a documentary promise ratified and guaranteed by the nation to give or find a certain quantity of labour in demand” - John Ruskin
Reflect before moving to the next slide:
Are these views mutually exclusive?
Or could they both be right?
Can something be both a commodity and a promise of labour?
Here are a couple of definitions of money. Which one is closest to yours?
The 19th Century political economist Karl Marx saw that people experienced money as a special kind of commodity, that could be exchanged for anything. That's why he called money 'the god of commodities‘ – it was better to have money than any other single commodity, as it bought you access to any commodity. This is a view that we might reach from the myth of barter, and it leads to money having value-in-itself.
Despite this view, Marx believed that things should be valued for the work that goes into making or providing them. His contemporary John Ruskin had a similar view, but that led him to argue strongly that money should have no value in itself, but be a promise guaranteed by the government that you could get something produced by someone. In this view, the value of money is not in the money itself but from some kind of social belief or contract, inscribed somewhere, perhaps on paper.
The difference between these is key. The two approaches are called the commodity theory of money and the credit theory of money. You may also hear of metalists, who focus on precious metals as money, or Chartalists, who focus on money as credit systems enabled by the power of the state, through legal tender laws, government taxes and spending. We will explore these further in a moment, but a key distinction to make is between commodity and credit concepts of money.
References:
Marx: “A Contribution to the Critique of Political Economy” 1859
Ruskin, J. (1852) cited in Dodd, N (2014) The Social Life of Money, Princeton University Press.
The Bank of England Quarterly Bulletin 2014 Q1
SLIDE 11
Basis of money
“Why should I accept your money? On what basis does it have value?”
Offers present value - as a value-in-itself which can be exchanged for like value - commodity money
Offers future value - as a promise of future value – credit money
Offers past value - as proof of past value created – acknowledgment money
What is it that makes money valuable? If money is defined as a “claim on goods and services” as it often is, then what is the basis of that claim? Why should I give you my stuff in exchange for money? One answer is, or course, “Because I believe that other people will accept it from me, in turn”. This is of course a recursive answer, which does not address the basis of the claim and few people would argue that is the only way in which a currency like US has value. Most people would prefer a stronger basis for the value of their money.
We see three possible answers, or bases for the value of money.
Because your money has the same value or greater than my stuff, and right now, your money is more useful to me than my stuff, so we can do a direct swap, value for value, just like in the barter economies we just considered. If that seems obvious let me present you with an alternative view.
I will accept your money because I know that someone else will give me something valuable for it later. Not that I trust I can buy something with the money, but that your money comes with a guarantee from the issuer to redeem the money for something of ‘real’ value. The money isn't valuable in itself, but it represents a promise of future value, like a cheque, or IOU. This is called credit money. And if the redemption can happen in the future, could it have been in the past also? Therefore, a third option is:
I will accept your money because I know that it represents ownership of value created in the past; while I hold that money, that means I paid for whatever value was created. We, your tutors, are calling this “acknowledgment money”. If this sounds strange, might it be because in our society acknowledgments are worth less than promises?
This is a new approach to understanding money that we are calling the Value Sequence Theory of Money.
We will now explore each of these in more detail.
Source:
Simmel, Georg (2011 [1907]) The Philosophy of Money (Routledge Classics Edition),
Bendell, Slater, Ruddick (2015) Reimagining Money to Broaden the Future of Development Finance http://www.unrisd.org/80256B3C005BCCF9/%28httpAuxPages%29/99FCA15CA
SLIDE 12
Money as Commodity
Intrinsic value
Specie Money, meaning payment 'in kind'
'Sound' money, 'Honest' money
Austrian School
In a sense money is always a commodity in that it can be owned and that it is 'worth' something. But we mean something different when we talk about Commodity money as a type of money. We mean that the money has value-in-itself; it would have value even if it wasn't money.
Perhaps it is edible, or it glows seductively against your lover's neck; it might make your cruise missiles more reliable or your mobile phone batteries last longer.
Gold, the ultimate commodity money has been used often in history for settling debts between monetary regimes who may not have a use or trust for each other’s internal currency. The great thing about commodity money is that it works even without a government, and anthropologist David Graeber (2012) finds it especially effective in periods of war.
The school of thought that favours this kind of 'value-in-itself' money is called the Austrian School, after some of their major intellectuals such as Ludwig Von Mises (1912) who argued for forms of money free of state control. Today you may hear them arguing for a gold standard, and assuming 'myth of barter' versions of the origins of money. Some also assume there was an old era of sound banking when people knew that money was gold and silver. It is a view with limited, or even no evidence in history, as we will explore in lesson 2.
In the mid-west of the USA there is a movement around Old-school Republican Ron Paul, which is promoting the use of silver as money. They call it 'honest' money, 'sound' money, because the value is in the coin, rather than relying on a dubious government to give it value. With the emergence of Bitcoin, we see commodity money discourse being applied to this entirely virtual currency, and arguments about freedom from government currency that resonate with the Austrian School tradition.
Using a commodity as a means of payment is cumbersome. In practice, most so-called commodity monies are really circulating promises or receipts for a commodity, because using a commodity is cumbersome. First the commodity must be acquired, checked for quality, securely stored with a trusted party until needed for settlement, and then securely transported to the payee. Having someone store the commodity and issue receipts is very convenient, but if there if for any reason a receipt should ever not be redeemed, or be feared not to be redeemed, then the underlying commodity, sitting in a vault is serving little function! The party holding that commodity must be absolutely trusted to safeguard it, and ensure that commodity is stored for every claim issued.
If the quantity of money in circulation is limited by the need to have stored value somewhere, that constrains issuers from profiting by issuing too much money. It can also constrict the economy from expanding however, should the economy need more money. Commodity money is expensive. To get $1m more in circulation, you need to put $1m worth of stuff in storage.
For trade between economies, where trust may not have been build, or where the opportunity to reciprocate is not apparent, a commodity is the perfect form of payment to settle a debt.
Sources:
Von Mises (1912) The Theory of Money and Credit
SLIDE 13
Honey Money – thought experiment
Honey
Imagine the currency collapsed and your local town quickly adopted honey as the local currency. After a year of using honey money, what would you see?
a) People carrying pots of honey everywhere?
b) No visible change at all?
c) Economic depression?
d) Panic over news of escape of genetically modified killer bees?
SLIDE 14
Honey Money – thought experiment
Honey
It’s unlikely people carry will pots, instead using paper & electronic honey-IOUs. Swift action would mean sufficient IOUs for all trade. Profits from honey would stop colony collapse but encourage engineering bees that make more honey.
a) People carrying pots of honey everywhere
b) No visible change at all?
c) Economic depression
d) Panic over news of escape of genetically modified killer bees?
SLIDE 15
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Money as Credit/Debt
Social agreement
Trust in issuer
Promissory notes
Cheques
Credit Theory of Money
Another form of money, often overlooked, is money as a promise of future value. It can take the form of a cheque, IOU, promissory note or indeed, any agreement concerning future value exchange. This kind of money only works within a context of trust (or force, of course).
In a credit economy, many debts never need to be settled, because they can cancel each other out, saving a lot of effort. For instance I owe Jane one, but Jane owes you one, and you owe me one, so nothing needs to be exchanged.
People holding large quantities of such currencies are wealthy because not because the promises are wealth, but because they have a large but unrealised claim on the community's wealth.
A huge advantage of credit money is that the quantity is elastic not fixed. If you say it is backed by trust, then an issuer can have as much money as there is trust – regardless of how much can be delivered. If the economy needs more money, the issuer is doing a service to the economy.
But there is a flip side to that. If the economy changes direction or if trust in the issuer should be lost, then a lot of outstanding promises are suddenly called upon. The people holding those promises can lose everything as the promises become worthless.
This also happens in a gradual way, just as share prices go up and down with the confidence of the market in the company, so the price of credit goes up and down with the confidence in the market.
One of the functions of banks is to reinforce my promise-to-pay with their institutional promise to pay. So I give my credit to the bank in form of a contract, and the bank underwrites my credit with its own name. In banking language this is called 'making a loan' although nothing is really loaned, as we will explore later in this lesson..
An issue around credit is the problem of interest. The party extending the credit typically demands more back than was extended. Interest has been a contentious issue for thousands of years, in many cultures with different religions, as we discuss in the next lesson. Interest had been justified as a way to cover the risk of default. But usually interest is much higher than that, and creates a power disparity between those with the ability to extend credit, and those who need or want the ability to spend now and pay later, as we discuss in lesson 3.
The Credit Theory of Money was well explained by Alfred Mitchell-Innes in the early 20th Century, using examples like Tally Sticks, which we discuss in the next lesson. Some economists see little difference between credit money concepts and “chartalist” or “neo-chartalist” views that equate money with the state. They are, however, quite different, as credit money can exist without state involvement, and modern state-supported monetary systems are arguably not credit-like, as we will examine later in this lesson.
Sources:
Mitchell-Innes, A What is Money? (1913)
Mitchell-Innes, A (1914) The Credit Theory of Money
SLIDE 16
Mutual Credit
A transaction ledger between Alice, Bob and Carol
Which implies that members have the following balances, which MUST total 0…
Date Payer Payee Amount
Mon Alice Bob 10
Tue Bob Carol 20
Wed Carol Alice 10
Name Balance
Alice 0
Bob -10
Carol 10
TOTAL 0
For a friendlier explanation, watch this...
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Given the role of the state in issuing our currency, or at least apparently issuing it, why do we make the distinction that credit money need not involve the state? Our reason is that many private networks of companies and individuals use credit systems, and not all are use a national currency as a unit of account.
One credit model is sometimes called 'mutual credit', or 'collaborative credit' by one of your tutors. Instead of having cash which embodies value and which passes from person to person, a mutual credit system has accounts and payments between accounts. As this simple ledger shows, since no 'money' enters the system and none 'leaves', then the total balance of all accounts is zero. The system is just recording how much all its members owe each other. What makes the credit 'mutual' is that members agree that the value of each member's credit is the same and therefore that all credit cancels out all debit. It also means that if a member 'defaults' which means stopping trading without returning to zero, then the inflationary losses, or gains, are spread across the whole system.
Mutual credit book-keeping is different to conventional accounting. Instead of having accounts with balances which are changed as stuff goes in and out, a mutual credit approach would use only a single ledger of transactions between specific accounts.
The implicit assumption in mutual credit is that, since, in order to be stable, all accounts close at zero, the purpose of the system is to do accounting for exchange. Knowing this, all accounts with positive balances are looking to spend, and all accounts with negative balances are looking to earn. Since the sum of all positive balance balances equals the sum of all negative balances we can be sure that, in the long run, supply always equals demand.
However if accounts start piling up huge deficits or surpluses that can mean other accounts may have trouble returning to zero.
Typically there is no interest in mutual or collaborative credit systems as the “currency” is designed purely for enabling exchange.
Because of this tendency towards balance, mutual credit systems have some devoted fans, and such systems can work at scale. They do not feature in mainstream economics discourse, but we will revisit them in lesson 4.
Some prefer to describe mutual credit as “moneyless” exchange systems, to emphasise that the currency is not a fixed object of value, but a unit in a system. However, we consider them to be a form of money, as we view money as a social technology for enabling exchange. By a social “technology” we mean a set of agreements, assumptions, beliefs, norms and habits as much as sets of physical objects.
What do you think is a better form of money, or a better way of looking at money? Take a moment before the next slide.
Sources:
Bendell (2014) How collaborative credit can heal – rather than just disrupt – capitalism, in The Guardian. July 3. http://www.theguardian.com/media-network/media-network-blog/2014/jul/03/collaborative-credit-heal-capitalism
Bendell, J and T Greco (2013) Currencies of Transition, in McIntosh et al (2013) The Necessary Transition, Greenleaf.
SLIDE 17
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Commodity vs. Credit
“Through all the discussions of the nature of money there runs the question as to whether money, in order to carry out its services of measurement, exchange and representation of values, is or ought to be a value itself; or whether it is enough if money is simply a token and symbol without intrinsic value, like an accounting sum which stands for a value without being one.” - Georg Simmel (1907)
Some of the differences:
Store of value vs medium of exchange
Elasticity
Trust & Fraud
Cost of issuing
Vulnerability to market speculation / manipulation
Issuing Power
The difference between commodity and credit money is critical to a proper understanding of monetary science. Georg Simmel, the 19th Century sociologist devotes 70 pages to “The value of money as a substance”. It begins very lucidly:
“Through all the discussions of the nature of money there runs the question as to whether money, in order to carry out its services of measurement, exchange and representation of values, is or ought to be a value itself; or whether it is enough if money is simply a token and symbol without intrinsic value, like an accounting sum which stands for a value without being one.”
There are number of differences I would like to draw out here, because they are part of the lexicography of the following lessons.
Commodities make a much better store of value than credit because commodities are intrinsically valuable. Credit makes a much better medium of exchange because it is easy to create and destroy as much as necessary, even for free
Sometimes the economy needs to grow, and maybe sometimes to shrink. More or less money is needed. With commodity money creating money means setting aside more of that commodity, which can be expensive, disruptive, or even impossible. However if creating money is as easy as extending credit then the quantity of money can easily be adjusted. This is called elasticity. Usually interest rates are used for this. (Higher interest rates means a smaller money supply as the cost of borrowing increases)
Credit money requires trust in the issuer and if issuers can't be trusted we might be better off using currency backed by a commodity. But notice the term “backed” - as backing is just a promise. The same institutions who manage credit have historically been those who keep the gold safe, and they understand how to make money whatever the monetary weather. We will be covering some of them in the next lesson. If social and economic justice is the goal, minting precious metals into coinage would be a secondary measure to ensuring that democracy, law and order are functioning properly
Commodity money is much more expensive than credit money to issue. For a monetary volume $1trillion, that would mean setting aside $1 trillion of assets in commodity money. Credit money could be free, yet currently the mainstream forms we use require payment of interest at point of issuance. Yet if the state issued the credit then the interest belongs, in principle, to the people, making it less of a challenge. Another cost issue associated with commodity money is the social and environmental cost. For instance, gold mining can cause toxic pollution problems, soil loss, deforestation, and ongoing conflict with forest dwelling peoples, for instance in the Amazon today. Child labour in small non industrial gold mines is also widely reported.
Commodities are always subject to market speculation. This can be incidental, or it can be financial bullying or warfare. Big speculators can crash small countries using commodity money, ruining their ability to import. Credit can also trade on markets as a commodity, but it is easier to protect a credit currency because ultimately it is about trust between the issuer and the holder, not about 3rd parties.
With a commodity, the issuing power is in the hands of the rich because the rich can control the quantity of commodity / currency in circulation and hence the availability of money and the price. With credit money, it is possible to put the issuing power in different hands. Peer to peer credit is also possible, as in the case of mutual or collaborative credit.
So these two approaches produce different financial instruments suitable for different purposes and which can serve different interests. There is no law that says we have to choose one or the other – they are not incompatible.
Sources:
Simmel, Georg (2011 [1907]) The Philosophy of Money (Routledge Classics Edition), trans. David Frisby and Tom Bottomore.
SLIDE 18
Money as acknowlegement
Not only can money be of value-in-itself or a promise of future value but it can be a proof of past value created – acknowledgment money.
The Boya Boya?
http://www.maiamaia.org/learn-more/77-overview.html
Bitcoin (via proof-of-work)
Circulates indefinitely
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Which of the following do you most celebrate in a person?
How much they have accumulated, i.e. their net worth)
How much they have created? i.e. work done
How much they have given i.e. generosity
So money can have intrinsic value, or it can be a promise of value in the future, when it is redeemed. There is another possibility though, that money represents value already created.
For example, the Boya Boya currency in Australia, is a certificate issued in acknowledgment of carbon emission reductions. You could imagine similar certificates being issued for any socially valuable work.
People accepting payment in acknowledgment currencies are honouring the act of value creation that the certificate denominates. People holding large quantities of such currencies are wealthy because of how much value creation they have paid for.
Think about it. I could plant a tree and earn a certificate indicating the community's gratitude. You could provide me a meal in exchange for that certificate. Who, then, is the community grateful to? Since I have been 'paid' with a meal, does not the kudos for planting the tree now reside with you, the holder of the certificate?
This acknowledgment model is very rare in societies where people feel social safety nets are inadequate and so everyone wants a guarantee that their money will save them. Instead, we acknowledge and appreciate not the people giving the most to society but the people who have the largest unspent claims on our future work and resources.
Acknowledgments cannot be redeemed for anything, but circulate forever. Every time valuable work is done more of them come into existence. There's no problem with people accumulating them but some kind of inflation or retiring of the certificates may be designed in to help stabilise prices.
The terminology in Bitcoin, of “proof of work” refers to the work done by a computer to crack a cryptographic code, before it is then allowed to add the latest block of worldwide Bitcoin transactions to the blockchain, and receive 25 Bitcoin as reward. Therefore it is an acknowledgment currency, but not for all computers that maintain the network, only those that crack the code first by trying many combinations. It is fairly unique in the history of currencies for an acknowledgment currency to command such market value, and we look more at Bitcoin in lesson 4.
References
Boya Boya http://www.maiamaia.org/learn-more.html
SLIDE 19
Fiat money
Here is a rather clear statement from the English, some years ago, about the power of the state in saying what shall and shall not be money.
The sovereign, or those licensed by him, has the authority to create the money of his dominions and it is treason for any other to do so... When the sovereign declares a piece of money to a penny, groat, or shilling, that makes it so...This is a power that the state reserves for its own safety and welfare. - 'Mixt Monies of Ireland' landmark ruling in English law, 1600AD
Chartalism and neo-Chartalism
State Theory of Money
Modern Monetary Theory
The rock band KLF burned one million pounds of their own money. In this chat show they received a somewhat hostile reception.
What is the effect on a fiat economy when fiat notes are destroyed?
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Here is a rather clear statement from the English, some years ago, about the power of the state in saying what shall and shall not be money.
So far in this lesson we considered the essence of money in a political vacuum. None of the three types of money we have described are recognisable as the national currency we keep in a bank and spend at the shops.
That official money, such as pounds, euros or dollars, is not a commodity money unless you think it is possible to create value from nothing or have an imaginative view of what intrinsic value of an object can mean. It could be credit money, if you regard your pounds or dollars as a tax credit from the government – that is, a means of offsetting a future tax bill. When the money has value simply because the issuer says it has value, this is called fiat money, from latin, meaning 'let it be'.
Fiat money appears to fit into our category of acknowledgment money, issued in acknowledgment of whatever work the government commissions, and circulating forever, with no intrinsic value.
The idea that money is fiat money dominates mainstream monetary thinking today, including the assumption that money is an instrument of the state and only the state. Those who believe they are governed by consent or that personal freedoms are problematic, argue that the power of seignorage (the right to issue money out of nothing) rightly belongs with the institution that manages society and allocates resources for the collective benefit. Some go further and assert that sovereignty, the power of absolute self determination, must include the power to issue money.
Schools of thought in economics which take this state-centric approach are Chartalism, the State Theory of Money and Modern Monetary Theory. Chartalists often focused on arguing against commodity money theorists, such as the Metallists who prefer precious metals or the Austrian School, who tend to prefer a free market of privately issued currencies (Wray 2000). The famous British Economist John Maynard Keynes (1930) thought the battle won years ago when he concluded that “all the civilised money is, beyond the possibility of dispute, Chartalist.” In recent years so called neo-Chartalists, who espouse Modern Monetary Theory, have found that governments may not actually have had such power after all, and focus on critiquing the current mainstream monetary systems for giving private banks, not governments, the pleasure of issuing the vast majority of our money supply at interest. It is a critique we will explore in a moment.
Sources:
Keynes, JM (1930) A Treatise on Money.
Wray, R (2000) The Neo-Chartalist Approach to Money, Working Paper No. 10, Jul 2000. http://www.cfeps.org/pubs/wp/wp10.html
For MMT start with wikipedia: http://en.wikipedia.org/wiki/Modern_Monetary_Theory
Bank underground blog (2015) Monies – Joining Economic and Legal Perspectives http://bankunderground.co.uk/2015/08/21/monies-joining-economic-and-legal-perspectives/
SLIDE 20
A thing or a social construction?
Money is “an agreement within a community to use something as a medium of exchange” ~ Lietaer
Money is essentially a process, not a thing, and that process includes our everyday stories of money. Arguably, unit of account and store of value are sub-functions of the exchange function of money.
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Bernard Lietaer
Socrates
Georg Simmel
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We've been focused so far on the idea that money has a substance, an essence to uncover beneath layers of political and erroneous language. But the notion of fiat money questions that. Fiat currency and maybe even credit money is difficult to argue as having any intrinsic value at all. It is clear that the value arises from a social system of assumptions, beliefs, norms, and rules that utilises different physical things, whether paper, coin, plastic or computer chip, at different times. Another way of saying this is that money is a socially constructed. We define it collectively, and we may experience it slightly differently. There is no real money to discover a perfect definition for, as it is invented by us. It appears people are always seeking to “thingify” social constructions, which are complex processes, into something more simple. For instance, Aristotle, in his actual writings, didn't define money as precious metal at all. In fact he said the opposite: “Money exists not by nature but by law.”
Bernard Lietaer, who had a hand in designing the current international system of floating exchange rates, and then the Euro, before dropping out of that system and writing several books on complementary currencies, has an almost circular definition of money. It is, he says, “an agreement within a community to use something as a medium of exchange” (Lietaer, et al, 2012). For him, the substance of the money is irrelevant, it is simply its general acceptance in exchange that makes some thing, or some system, money. Arguably, unit of account and store of value are sub functions of that exchange function of money – as units are used to enable valuation for exchange, and one stores value to enable inevitable exchange at a later date. Simmel made the same argument at the turn of the last century, when he argued that money is a process not a thing. That process includes our everyday assumptions and stories about money. It is also why celebrity historian Niall Ferguson (2008) defines money as “trust inscribed” and that it doesn't matter what it is inscribed on.
So we should be wary when people try to tell us what money IS. As a social construction, we decide what money is in the way we talk about it, earn it, spend it.... However, our exploration of the concepts about money will give you a better insight into the assumptions that shape people's view of what is important about money, monetary policy and currency innovation.
Sources:
Lietaer, Arnsperger, Goerner, Brunnhuber (2012) Money and Sustainability, published by the Club of Rome, EU Chapter.
Ferguson, N (2008) The Ascent of Money, Penguin Press.
SLIDE 20
Typologies of money
?
In these slides, when we say “tutors” we mean the authors of the lessons, professor Jem Bendell and Matthew Slater, and not the tutors on the forum and webinar, who will have their own arguments to add later.
We, your tutors, have yet to discover a typology of money that is coherent, comprehensive and useful. We are finding that the commodity, credit, and acknowledgment money categories that we have described here are helpful to people working on money from the perspective of social change. Yet sometimes those words mean very different things in other contexts, making them sometimes hard to explain and apply.
For example the suggestion that fiat money is an acknowledgment is quite subtle, and the fact that all our modern currencies are traded on markets as commodities, even though they have no metal specie value makes no sense until we grasp that the typology concerns only the basis of issuance of each currency, not how they are then traded.
So we would like to offer another framework we are working on for understanding money - what we call the traits of a money.
SLIDE 21
The Eight Traits of Money
Backing / intrinsic value
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When the value of the money is in the token itself, we say the token has intrinsic value it is what the token would be worth if it was demonetised. With fiat money, the intrinsic value might be measured in kilojoules of warmth from a momentary flame.
That means the value of a specie currency is unlikely ever to fall below the value of its commodity; the connection to a real good helps to anchor and stabilise the value, assuming the commodity has a stable value!
One step removed from intrinsic value is when a currency is backed. It is guaranteed to be exchangeable for a fixed quantity of a specific commodity. This one dollar silver certificate assures the bearer that there is one dollar of silver 'on deposit in the treasury... payer to the bearer on demand'. This isn't valid currency now.
Because few people really understand money the expression 'backed' is often used metaphorically by people who assume that any currency must be backed by something. So you might hear:
financial journalist, activist and self-publicist Max Kaiser talk about Bitcoin being 'backed' by cryptography
Fiat money is 'backed' by the ability of the government to collect taxes
That the US dollar is 'backed' by the willingness of the military industrial complex to shed blood for oil.
Removing or reducing of “backing” usually means that fraud has taken place, and currency bearers need to be deterred from trying to redeem lest the vault be revealed as empty. You might notice this happening in Lesson 2.
References:
Bitcoin backed by cryptography
22 reasons why Bitcoin has intrinsic value
Dollar backed by oil
Fiat money is backed by men with guns (Nobel economist Paul Krugman)
SLIDE 22
The Eight Traits of Money
Backing / intrinsic value
Nominal / face value
This gold coin from the US Mint is legal tender to the value of $50 while the specie value is over $1000 dollars.
While unlikely to be spent (Gresham's law in extremis) such items have been used at face value to avoid taxes.
Very often in history, money has been made of base metals, precious metals, or alloys, and stamped with a value higher, or much higher than the metal value. These coins have had two values, the metal, or specie value, and the nominal value.
Nominal value is the value of a coin or note as defined by the law, and usually, imprinted on the money itself. The nominal value should always be higher than the intrinsic value otherwise someone is likely to melt the coins down and sell them as commodities, thus removing them from the money supply. This has happened a few times!
At other times authorities have increased their spending power by re-minting coins of the same nominal value but with less precious metal and more nickel, zinc, or copper. This works within the territory where the law is enforceable, but those coins of course have less foreign exchange value.
When coins of the same nominal value have differing metal content, it has been observed that the coins with less intrinsic value are circulated, while the coins with most metal are held back as savings. This is commonly expressed as Gresham's Law – Bad money drives out good money (from circulation).
Note that, formulated that way, the more nominal coins are 'bad' and the more specie coins are 'good'. Some would argue the opposite, that money which circulates is 'good', and money which is subject to hoarding because it has value-in-itself is 'bad' because it deprives the economy of liquidity.
Sources:
Gresham's Law https://en.wikipedia.org/wiki/Gresham%27s_law
SLIDE 24
The Eight Traits of Money
Backing / intrinsic value
Nominal / face value
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This American Open Currency Standard (AOCS) silver medallion is currently accepted by members at around twice the specie value. Read more...
Usually it requires the law to force the value creators to accept currency at a value higher that its intrinsic worth, but in USA a movement of silver aficionados are doing so voluntarily. They are minting and selling silver 'medallions' which they collectively agree to accept at a higher nominal value than the metal value.
When silver was $5 per ounce the coins were minted with a $10 face value. When silver rose to $20 and at one point to $40 they ran into difficulties and stopped printing the face value!
The AOCS also functions as a lobby group and has been vocal in its criticism of the US money system, calling for a return to all money having a precious metal component, because that would prevent the authorities from awarding themselves dollar-spending power out of nothing.
SLIDE 25
The Eight Traits of Money
Backing / intrinsic value
Nominal / face value
Incentives / Compulsion
Sometimes a currency is not well designed or faces competition, or conditions which mean it isn't much used, in which case incentives may be put in place, by the issuers, to help, trick, or force the currency into greater circulation.
For example many local currencies which are convertible to national currencies, are issued at a 5% discount and redeemed with a similar penalty.
Tax is the way that a government creates a demand for its currency. Everyone must pay tax, and tax must be paid in 'legal tender' money, so everyone needs to get hold of legal tender, regardless of how self sufficient they would like to be. Otherwise they will receive threatening messages in legalese and ultimately men with badges and batons will break into their house and take their property, with gaol the ultimate sanction for tax evasion.
Let's have a closer look at Legal Tender as a key incentive, before moving on to the next trait of money.
SLIDE 26
Incentives - Legal tender laws
“A medium of payment recognized by a legal system to be valid for meeting a financial obligation.” - Wikipedia
“Legally required commercial exchange medium for money-debt payment.” - thelawdictionary.org
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judge
Any person can print some pieces of paper or stamp a nominal value on a coin, but why should the population accept such an obvious fraud as money?
The Venetian Marco Polo wrote fascinating accounts of the 13th century emperor Kubilai Khan. In one account, he describes how Khan forced his currency upon traders. “With these pieces of paper” wrote Marco Polo, Khubilai Khan “causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends. And nobody, however important he may think himself, dares to refuse them on pain of death.”
The English did the same in the laws from 1600 that we quoted earlier. This approach has evolved somewhat to now be known as is 'legal tender' laws. In most countries the legal tender laws specify that if the currency is presented for payment of debts, then it must be accepted by the creditor or the debt will not be recognised by a court of law. This creates an incentive for people to trade in legal tender currencies, and also forces you to accept them. Fortunately we aren't put to death for saying no, but it could get costly if the courts never demanded we were paid. In addition, if we didnt accept legal tender, then we would have a problem when our tax bill arrived, as we discussed in the last slide.
We should note here that the Chartalist and Neo-Chartalist view that the beauty of money issued by the state is that it would never go broke is predicated on this use of state force to uphold the value of one currency.
It's clear from decades of experiments with complementary currencies, which we will explore in lesson 4, that state-sponsored currencies are powerful monopolies, leaving very little economic room for other currencies to circulate. In principle, a government could schedule more currencies as legal tender, and there are economic reasons for doing so, as we will discover in lessons 3 and 4. But for now, on to the next trait.
Sources:
Marco Polo and Rustichello of Pisa, “Book Second, Part I, Chapter XXIV: How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money over All His Country,” in The Book of Ser Marco Polo: The Venetian Concerning Kingdoms and Marvels of the East, translated and edited by Colonel Sir Henry Yule, Volume 1 (London: John Murray, 1903)
SLIDE 27
The Eight Traits of Money
Backing / intrinsic value
Nominal / face value
Incentives
Payment tech
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Payment technologies are how people experience the money. The easiest payment technology to use is probably still cash. But for modern legal tender currencies there are a great many ways to pay. A vast banking sector takes a large cut from every transaction for ensuring that no digits go astray as the terabytes of transactions whiz around the globe. But also systems like Paypal, cheques, the credit card are all separate systems for use in different situations.
But not all currencies are compatible with all payment technologies. For example gold coins work much better in hand-to-hand transactions.
Lack of payment technologies are a serious barrier to using a currency, but payment technologies, if they are to be ubiquitous and secure, can be expensive.
World of Warcraft gold can subsist with just the in-game widget. But Bitcoin and the other cryptocurrencies have had to build a payments infrastructure from scratch involving software and hardware.
The original bitcoin client was a little program that ran on a PC and you had to copy and paste the (rather large) code of the destination wallet. Bitcoin became very much more usable when addresses became QR codes readable with a phone camera.
The banking and payments industry continues to compete and innovate hard to make payments ever faster, more convenient, more centralised, and with more metadata for analysing buyer behaviour. This is driven by competition not only to serve the consumer, but to provide metadata to advertisers and government agencies. Another reason is that easier payments actually encourage spending, and faster circulating money is of course good for the GDP.
All this 'fintech' innovation is happening under the banner 'future of money' which is curious because money itself is not being questioned at all.
SLIDE 28
The Eight Traits of Money
Backing / intrinsic value
Nominal / face value
Incentives
Payment tech
Trust in the issuer
Reassuring to see the gold is in the vault, but who's gold is it?
Whether a money is stamped with a nominal value, whether it is redeemable for something, acknowledging something valuable, or even if the money is precious metal, trust in the issuer is critical for the well-being of the economy. Issuing a currency usually carries different kinds of benefits depending on the type of currency, but responsibilities also:
to manage the quantity of money in the economy because that affects how fast the economy goes. Too much money leads to inflation and too little to stagnation.
the money should be first spent into the right projects, those consistent with the aims of the economic policy. Sometimes the issuer is also first spender.
the money should be of good quality, which might mean guaranteed gold content in the coins or that credit risks have been properly assessed.
In a free market, anyone would be able to issue anything for use as a currency, and trusted issuers' money would be the most used. That is what the Austrian School economists get excited about. At some times in history each bank has issued its own notes according to its own appetite for risk. Over-extended banks would sometimes collapse which is bad for depositors but in theory it would set an example to the other banks and confidence could remain generally high.
This theory was abandoned when banks were required to join the central bank. Banks and depositors were now protected from runs on individual banks but now there is 'systemic' risks of the whole system collapsing at once!
Public relations is also important. In 2008 amidst rumours that perhaps UK had sold all its gold, the Queen was shown on TV inspecting racks of gold in underground vaults. The press release didn't say whether any of this gold belonged to Britain!
Trust in the issuer also relies on a trust in the general order of society, if the money is ubiquitous in that society. When Georg Simmel (1907) described money requiring “an element of socio-psychological quasi-religious faith” based upon “confidence in the socio-political organization and order” he was emphasising not only a trust in the issuer of money, but a general faith that current social norms are appropriate and sustainable. If most British people wanted to abolish the monarchy, the queen touring the vaults might have a different effect to the one being sought.
Simmel, G (1907) The Philosophy of Money.
SLIDE 29
The Eight Traits of Money
Backing / intrinsic value
Nominal / face value
Incentives
Payment tech
Trust in the issuer
Cultural prevalence
The British Queen touring the Bank of England vaults made an interesting story, and reflects the importance of the stories of money that we practice everyday. As sociologist Simmel noted, and Professor Nigel Dodd (2014) explores in depth, money is a social institution, involving various social processes of discourse, habit and belief. Therefore the Cultural Prevalence of money is key to its value in an economy.
A national money supply has extremely high cultural prevalence, as people accept it mostly without thinking. We accept certain levels of inflation as normal. We accept that suddenly a new payment technology is offered for the national currency, whether by plastic, online, or mobile payment. The prevalence of national money is also why we have an immediate sense of pricing of goods and services and what is an expensive, fair or cheap price.
Cultural prevalence is usually achieved through legal tender law, but in extreme cases such as the Zimbabwe hyperinflation, even law was not strong enough and the US dollar prevailed.
Currencies that are not state sponsored face greater difficulties in achieving cultural prevalence. In lesson 4 we will look at alternative and complementary currencies. Local currencies that are bought by national currency, focus on using and stimulating place-based pride to generate cultural prevalence in a specific town or region. This leads to a strong focus on the designs and images on the physical notes.
Cryptographic currencies like Bitcoin tend not to focus on local areas, and the cultural prevalence develops within communities that promote the idea that the currency expresses a political view or self-image of being technologically advanced and free thinking (Dodd, 2014).
Source:
Dodd, N (2014) The Social Life of Money, Princeton University Press.
SLIDE 30
The Eight Traits of Money
Backing / intrinsic value
Nominal / face value
Incentives
Payment tech
Trust in the issuer
Cultural prevalence
Unit of value
Think... what is the advantage of having a unit of value like the dollar?
What are the disadvantages?
What would be the alternatives?
If you have time, watch Robert Kennedy in the 1960s talking about GDP, while in your mind replacing the word 'GDP' with 'money'.
The significance of these traits, and the way we outline their significance, can of course be argued over. Our list is not conclusive but an educational framework that we hope allows for accessible exploration of the nature of money. The seventh trait we want to describe for you is ‘Unit of Value.’
Anything that can be priced in a currency, or money, can be compared in value to everything else that can be priced in that currency. Money then, helps us to exchange between all the goods in the marketplace by helping us to agree on how much of one thing is worth in terms of another.
In weights and measures, the unit of measurement is arbitrary: measuring in centimetres or inches doesn’t affect the actual, objective length of anything. But because value is not objective, the choice of the unit of account can have various distorting effects on prices and on the market; the choice of the unit of value is therefore is therefore very political.
If a commodity is the unit of value, that means the commodity has a constant price. Being on a gold standard means that the price of gold is fixed, or more accurately, the value of your currency is pegged to the value of gold, and all other goods and services fluctuate against the gold price. This creates a strong incentive to manipulate markets by manipulating the gold price!
This can be mitigated by using a ‘basket of goods’ instead of a single commodity, but even then services would fluctuate against goods.
If hours of labour is the unit that implies every person’s time has equal value.
Modern money is a purely abstract unit of value, not pegged to anything. Its purchasing power goes up when the money is in demand, and goes down when the money is plentiful. This is exactly how commodities are priced in a free market and it is one reason why modern money is considered a commodity, despite having no intrinsic value and being created from nothing.
We should beware trying to price the whole world with a single unit of value. Charles Eisenstein warns about this in a recent blog “The oceans are not worth $24trillion.” What he saying about pricing the natural world also applies to pricing experiences, relationships, integrity, and life itself. Some things just shouldn’t be compared in value to other things.
Think... what is the advantage of having a unit of value like the dollar? What are the disadvantages? What would be the alternatives?
If you have time, view this video of Robert Kennedy talking about GDP, while in your mind replacing the word GDP with money: https://www.youtube.com/watch?v=t6U2irFSYHo
https://www.youtube.com/watch?v=t6U2irFSYHo
Eisenstein, Charles (2015) The Oceans are not worth $24 trillion; http://www.thenewandancientstory.net/home/the-oceans-are-not-worth-24-trillion