The Evolution and Transformation of Money

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The Evolution and Transformation of Money

• Thomas H. Greco, Jr.

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If You Dont Understand This, What Kinds of
Airplanes Can You Build?
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.

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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.

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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.

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Money Plays Its Role Within the Realm of
Reciprocal Exchange
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The Ladder of Economic Civilization

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

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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 mans wants which the produce of his
  own labor can supply..
• Adam Smith, Wealth Of Nations, p. 29

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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

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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.

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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.

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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.

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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.

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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

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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.

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The First Kind of Paper Money
Symbolic Money
Bank
Gold
The first bank notes were symbolic money. They
were warehouse receipts for gold or silver placed
on deposit.
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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

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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.

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Two Distinct Kinds of Paper Money
Bank
Symbolic Money
Credit Money
Mortgage Note
Mortgage note
Gold
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.
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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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How Does Clearing Work?

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

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Money Viewed as a Wave
Ongoing difference between accounts receivable,
A/R, and accounts payable, A/P
Positive (sales)
A/R A/P 0
Negative (purchases)
Time
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Conventional Payment ProcessUsing Bank Credit
Money
Bank
Alpha Company
Bravo Company
Charlie Company
Delta Company
Bank credit used to clear debts among
companies. Interest must be paid on credit
borrowed from a bank.
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Clearing Process Without Bank Credit
Alpha Company
Bravo Company
Charlie Company
Delta Company
Mutual credit used to clear debts among
companies. No interest paid.
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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.

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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.
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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.

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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.

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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.

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The Creation of Bank Debt Money as Deposits
Bank
Account Deposit (liability)
Debt Money
Mortgage Note (asset)
Mortgage note
Banks now issue only debt money, not as notes,
but in the form of bank deposits when a loan
is granted.
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Banks Provide Some Useful Services

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

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Alternatives to Debt Money

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

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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.

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Basis of Issue or Foundation
What makes a currency sound and credible?

• Goods foundation or shop foundation
• Service foundation
• Tax foundation
• Donor pledge foundation

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Examples of Shop Foundation

• Canadian Tire money
• Larkin Merchandise Bonds
• All redeemable coupons

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Examples of Service Foundation

• Railway notes or other notes redeemable for
  services
• Airline frequent flyer miles, if transferable
• Utility vouchers electric, gas, water.

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Examples of Tax Foundation

• Tally sticks
• Argentine provincial bonds, e.g., Patacones,
  LECOP, Petrom
• Municipal tax certificates or tax anticipation
  warrants

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.