Money as debt or as a map

1100 words

There is much talk of Money, its creation, its quantity, and the abstruse workings of central banks. Few if any delve into the nature of money. We understand it as fish understand water. Yet until the Spanish arrived, the notion itself was absent from the Americas.

The universal complaint is that current money is a debt-based system, when it should properly be a mirror or map of the wealth a nation generates. Yet the map is not the territory.

The default for many is gold, with historically silver and copper ranking second and third. Historically, an abundance of gold has proven a poor measure of economic health. Moreover, compared with salt, from which the word salary is derived, it is useless.

Gold is also not fungible. That is, it is like a ten-thousand dollar banknote. Too precious for most transactions.

Gold came to be replaced, by stealth, with paper promises. These were a form of debt. Or of credit.

Eventually tho those with understanding recognised that the value of gold was psychological, that is, arbitrary.

Fifty years ago gold was replaced in monetary manipulation by oil. The tale is well known.

Before then, with Lincoln’s dollar, and, decades later, the Bradbury pound, the shift had been demonstrated of seeing money as a map of wealth. These experiments were suppressed, in the case of Lincoln by assassination. John F Kennedy suffered the same fate when he ventured onto a similar move.

So much for the background.

Money is needed for smooth transactions and the ability to compare one transaction with another. Otherwise we are reliant on barter, which is imprecise and haphazard. This said, monetary transactions are less easily comparable than is commonly assumed.

The central challenge is how to ensure that the quantity of money in circulation is not too little but also not too much. Too much leads to bubbles and inflation. Too little strangles enterprise.

An essential feature of money is that it must circulate. The speed and scope of circulation can only be guessed, not known. Digital money enables these to be known, but at the cost of surveillance and compromise of the individual’s ability to spend freely and anonymously.

Circulation also means that money must be universally and unequally distributed. Hence no-one can have all the money in the world. It is a society’s lifeblood, which must reach every corner.

These features make money quite different to pieces of gold, which can rest dormant or hidden for centuries and neither lose nor gain weight. You do not have to spend gold, but eventually you do have to spend money.

Failing the pressure of life and living, money is made to circulate by taxation. Typically, the actual taxation is excessive and poorly targeted, but this does not detract from the principle. At a minimum, taxation resembles a compulsory insurance policy which protects against lawlessness such as theft.

Money derives its legitimacy from the power of a permanent state. This contrasts with the psychological, social or traditional legitimacy of a barter intermediary such as a precious metal.

Historically, there was a transition from one to the other, but this does not disqualify the distinction. The transition began when copper or silver coins were issued with the image of a ruler, replacing lumps of copper or silver.

To recapitulate: there are two, very divergent, views of money. One is that it is debt-based. The other is that it is a map of wealth generated.

The debt-based view argues that taxation is essential to money. Money created must be destroyed when its transactional task has been completed. (If new to these topics, read my other pieces on the nature of money.) On this view, the state issues credit notes to its workforce. It demands that, after a time delay, all citizens render tax in the form of those credit notes. During the delay, the state’s workforce trades for essentials with the other citizenry, who thereby obtain credit notes to later pay their taxes.

Recently, the idea of money as debt-based has come in almost universally for harsh rejection. This condemnation fails to investigate thoroughly and as a result omits to spell out substantial grounds for rejecting part, but only a small part, of the debt narrative.

The key factor is the role of interest.

In an economy based on ready money (cash), the justification for demanding and paying interest is that a reward must be given to compensate for risk and the temporary unavailability to the lender of whatever has been lent. This is not in dispute.

The problem arises when it is not cash which is lent, but an entry on a ledger. That is, when the money lent is fiat money, which is money conjured up out of thin air against collateral. Only banks are permitted this magic. The banks do not have coins to lend. The permission comes from a central bank standing in for the state.

I have argued elsewhere that any demand for interest payment on this invented money must be forbidden. It must count as usury. The easy alternative is to charge commission, deducted immediately from the sum paid out.

The hidden problem here, the objection, is that even when the borrower has repaid the capital, plus the interest on the capital, the grand total of money in the economy has increased by the amount of the interest. But it is not the prerogative of a bank to assume the function of the state by surreptiously increasing the sum total of money. Fiat money must be neutral, fully destroyed after it has done its task of enabling transactions.

The conundrum here is that money inevitably assumes two roles, which come to clash with each other. One role is as a medium of immediate transaction, replacing the imprecision and arbitrary nature of barter. But money also comes to be a tool for measuring wealth. A speculation is made about what the transaction value of an item (a house, for example) WOULD be if it were to be put on the market. There may be no question of the family home, needed for its residents and descendants, ever being placed on the market. The speculation is typically triggered by the contemplation of a mortgage.

The scope and number of items which could conceivably be sold knows no bounds. Moreover, this speculative exercise may even be projected into the future with imagined cash flow discounted to the present. This is the crazy world we have entered.