The Evolution and Transformation of Money Thomas H. Greco, Jr.

The Evolution and Transformation of Money

Thomas H. Greco, Jr.

If You Don’t Understand This, What Kinds of Airplanes Can You Build?

12/15/2003 Prepared by Thomas H. Greco, Jr. 3

Building a Healthy Economy Requires an Understanding of Money

Money is a human contrivance. That has evolved over centuries. Much of the present misery in the

world derives from a general failure to understand the nature of money, banking, and credit.


Topics of Discussion This presentation will show the progression of

forms that money has taken, and explain their essential nature.

It will dispel the confusion that arises from the failure to distinguish among them.

It will explain how money is now being transformed, and describe the most efficient and equitable exchange mechanisms that are now emerging.


Basic Kinds of Economic Interaction

Gifts -- Transfer of value without any particular expectation of anything in return.

Involuntary Transfers – e.g., theft, robbery, extortion, taxes.

Reciprocal Exchange – equal exchange of value between two parties by voluntary agreement.


Money Plays Its Role Within the Realm of Reciprocal Exchange


The Ladder of Economic Civilization

Stages in the development of the process of reciprocal exchange: Barter trade Commodity money Symbolic money Credit money Clearing


Specialization of Labor Makes Economic Exchange a Fundamental Necessity

When the division of labor has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labor can supply..

– Adam Smith, Wealth Of Nations, p. 29


What Is Required for Efficient, Effective, and Fair Exchange?

Free Markets An Honest Medium of Exchange

or Means of Payment An Objective and Stable Unit of

Measure of Value


Barter Trade Barter is the most primitive form of

reciprocal exchange.

Barter involves only two people; each has something the other wants.

The Barter LimitationIf Jones wants something from Smith, but has nothing that Smith wants, there can be no barter trade.


The First Evolutionary Step

From barter trade to commodity money

Transcending the Barter Limitation Barter depends upon the coincidence of wants

and needs. Money bridges the gap in both space and time

by widening the exchange circle. Money acts as a “place holder” enabling needs

to be met wherever and whenever the needed good or service may be found.


Commodity Money

The most primitive type of money is commodity money.

Some useful commodity that is in general demand is used as an exchange medium and may serve both as a payment medium and a measure of value.


Examples of Commodity Money

Various commodities have historically served as money – Cattle, tobacco, sugar, grains, nails,

shells, hides, metals, etc. But the transaction is still essentially a

barter trade of one good or service for another good.


Metallic Money Metals became the commodities of

choice because they are durable, fungible (divisible), and easily portable.

“In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity.”

– Adam Smith, Wealth of Nations, p. 30


Symbolic Money The simplest form of symbolic money is the

warehouse receipt, or “claim check” for goods on deposit somewhere.

Examples: Grain bank receipts. Vouchers for redemption of various goods

that have been deposited. Currency redeemable for gold or silver.


Bank

Gold

The first bank notes were symbolic money. They were warehouse receipts for gold or silver placed on deposit.

The First Kind of Paper Money

Symbolic Money


The Second Evolutionary Step

From commodity money to credit money

“Some ingenious goldsmith conceived the epoch-making notion of giving notes not only to those who had deposited metal, but to those who came to borrow it, and so founded modern banking.”

Hartley Withers, The Meaning of Money, p. 18


The Emergence of Credit Money

The introduction of the bank note was the first step in the development of the machinery for “manufacturing credit.”

At first, bank notes were redeemable on demand for commodity money (gold or silver), so they were symbolic money, later bank notes were credit money.


BankSymbolic Money

CreditMoney

Mortgage note

GoldMortgage

Note

Banks issued two different kinds of money but they did not distinguish between them, and few people realized it. The same identical bank notes were issued to represent both symbolic money and credit money.

Two Distinct Kinds of Paper Money


Problems With Early Credit Money

Bank notes were often problematic because now there were two different kinds of paper money being issued into circulation, the one a “claim check” for gold on deposit, and the other a credit instrument issued on the basis of a promise to pay and backed by some collateral assets, yet both were redeemable for gold.

There was never enough gold to redeem all the notes, so this became known as the “fractional reserve” banking system.


Redeemability Abandoned

Eventually, the redeemability feature was abandoned and symbolic money disappeared.

Now, virtually all of the money in circulation is credit money.

Most of the money in circulation exists as deposits in bank accounts.

Very little money exists as paper notes or coins.


Money and Banking Have Been Politicized

There is a general, but erroneous, belief that the money power should be centralized and is naturally the province of government.

Governments have generally given the money power over to bankers by establishing central banks, granting legal tender status to their currencies, and forcing people to accept them.


The Power to Issue Money Rightly Belongs to Sovereign Individuals

If money is issued on a sound basis there is no need to force people to accept it.

Forced circulation (legal tender) serves only to concentrate power and expropriate wealth.

Democratic government requires the separation of money and state.


The Third Evolutionary Step

From Credit Money to Clearing

Money is no longer substantial. Money is merely an accounting

system. Money is a way of “keeping score” in

the economic “game” of put and take.


Particle or Wave?Thing or Account Balance?

Light can be described as either a particle or a wave.

Money can likewise be described as either a thing or a fluctuating account balance based on a relationship agreement.


Clearing -- The Ultimate Evolutionary Step

The process called clearing is the simplest and most efficient mechanism for mediating reciprocal exchange.

Clearing is simply the process of accounting that offsets debits against credits, purchases against sales.


The Possibilities of Clearing Have Long Been Recognized

“If there were no money, any system of crediting sellers and debiting buyers would be fully competent to accomplish the work now performed by money.”

— Bilgram & Levy, 1914


How Does Clearing Work?

When you sell something, your account balance is credited (increased); when you buy something, your account balance is debited (decreased).


Time

A/R – A/P 0

Ongoing difference between accounts receivable, A/R, and accounts payable, A/P

Positive

(sales)

Negative

(purchases)

Money Viewed as a “Wave”


Alpha Company

Bravo Company

Charlie Company

Delta Company

Bank

Conventional Payment ProcessUsing Bank Credit Money

Bank credit used to clear debts among companies.

Interest must be paid on credit borrowed from a bank.


Alpha Company

Bravo Company

Charlie Company

Delta Company

Clearing Process Without Bank Credit

Mutual credit used to clear debts among companies.

No interest paid.


Benefits of Clearing

Participants save on interest costs. Never any shortage of internal credit. Credit allocation among members is

determined by the participants themselves according to their own contract, rules, and evaluations.


A Successful Credit Clearing Association

The WIR business circle cooperative (Wirtschaftsring) was founded in Switzerland in 1934 as an answer to the money scarcity of the Great Depression.

Membership, at first completely open, was later restricted in order to build solidarity among the “entrepreneurial middle-class.”

A balance between ideology, adaptability, and good business sense has enabled its long-term success.


What Do Banks Do?

Clearing is what banks already do, but it is not widely recognized as such.

Banks still prefer to act as if money is a thing which they can “lend” out at interest.


What Else Do Banks Do? Banks also authorize some of their

customers to spend money into circulation.

They do this by evaluating the creditworthiness of the customer and the value of any collateral, and granting them a “loan.”

This process is called “monetization,” which converts the value of illiquid assets into liquid or spendable form.


The Debt Money System

Banks call this practice, “making a loan,” even though nothing is loaned.

Banks charge interest on these “loans.” That turns “credit money” into “interest-

bearing debt money,” Which results in a growth imperative that

destabilizes the entire economy.


Bank

DebtMoney

Mortgage note

MortgageNote

(asset)

Banks now issue only debt money, not as notes, but in the form of bank “deposits” when a “loan” is granted.

AccountDeposit

(liability)

The Creation of Bank Debt Money as Deposits


Banks Provide Some Useful Services

Banks provide: Clearing services. Assessment of asset values. Risk assessment services. Mediating savings and investments


Alternatives to Debt Money

Mutual credit clearing associations and private currencies can reduce the need for conventional, bank-created, debt-money.


Who Is Qualified to Issue Currency?

Any entity that produces goods or services and offers them for sale in the market – productive businesses and individuals, or their associations.

Any entity that has the power to collect revenues – local or regional governments and their authorities.

Non-profit organizations that receive pledges of financial or in-kind contributions.


Basis of Issue or Foundation

Goods foundation or “shop” foundation

Service foundation Tax foundation Donor pledge foundation

What makes a currency sound and credible?


Examples of Shop Foundation Canadian Tire money Larkin “Merchandise Bonds” All redeemable coupons


Examples of Service Foundation

Railway notes or other notes redeemable for services

Airline frequent flyer miles, if transferable

Utility vouchers – electric, gas, water.

Examples of Tax Foundation

Tally sticks Argentine provincial “bonds”, e.g.,

Patacones, LECOP, Petrom Municipal “tax certificates” or “tax

anticipation warrants”


What All This Means Sound and credible exchange media can

emerge from a variety of sources. There is no need for the exchange process to be

limited by centralized power, i.e., governments or banks.

Competition among currencies and exchange options will result in a stronger, less costly business environment, and healthier communities.


Opportunities for Business

Companies of all kinds, either individually or in association, can economize on their needs for conventional working capital by using their own currencies to pay suppliers and employees.


Opportunities for Governments Municipalities and provincial governments can

fund a large proportion of their current operations by using their own currencies to pay part of what they owe to local suppliers and employees.

Infrastructure development can, to some degree, be financed by making payment in municipal currency.


Opportunities for Non-profit Organizations

Donations received in the form of pledges of goods and services or discounts can be monetized into the form of community currency and used to pay employees and suppliers.

No need to market or handle in-kind donations.

Currency may also be issued on the basis of services sold to the public.


Private Complementary Currencies

Have Many Direct Benefits

Private, interest-free currencies can be spent into circulation as a substitute for bank financing, promoting the health of the local economy because they recirculate locally.


Summary of Advantages

Abundant supply Low cost Democratically allocated Gives local suppliers preference Reduced risk of default because –

A promise to deliver goods or services is less speculative than a promise to pay official money.


Guidelines to Assure Fairness and Success

A clear agreement (contract) between the issuer and the users of the currency.

Currency issued on a sound foundation or basis. Amount issued must be in proper proportion to

the foundation upon which it is issued. Administration must be fully accountable to the

users. Full and timely disclosure of all information

needed to assess the credibility and value of the currency in circulation.

No forced circulation (no legal tender status).


Future Prospects Non-bank clearing will proliferate in

the form of private clearing services and mutual credit associations comprised of businesses and municipal governments.

Private currencies issued by businesses and lower levels of government will become common.

Internet payment systems using non-bank credits will proliferate.


Shake-out and Standardization In the early stages, things will seem chaotic,

many errors will be made, and there will be some failures.

But as learning progresses, there will be a shake-out process in which standards are developed and the best protocols come to be recognized and generally adopted.

Surviving systems will form federations to extend members’ trading opportunities and strengthen their market position.


To Learn More and Keep Up-to-date on Developments

Explore the websites: ReinventingMoney.com

circ2.home.mindspring.com Read, Money: Understanding and Creating

Alternatives to Legal Tender, by Thomas H. Greco, Jr.

Join one of the many complementary currency e-mail lists.

The Evolution and Transformation of Money Thomas H. Greco, Jr.

Documents

Transcript of The Evolution and Transformation of Money Thomas H. Greco, Jr.