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?
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Building a Healthy Economy Requires an
Understanding of the Principles 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
The other traditional roles of money (measure of
value, savings medium) should be considered
separately and achieved by other means.
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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 means of payment 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.
• Currencies 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 Embodiment of Credit in Bank Notes

• 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.
• The paper money so largely in use in all
  civilized countries as a common medium of
  exchange is in reality a coinage of credit or
  trust.
• Henry George, 1894

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Two Distinct Kinds of Paper Money
Symbolic Money
Bank
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.
• This became known as fractional reserve banking
  because there was never enough gold to redeem all
  the notes.

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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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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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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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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)
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Conventional Payment ProcessUsing Bank Credit
Money
Bank

Interest

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
Alphas i.o.u.
Alpha Company
Bravo Company
Alphas i.o.u.
Alphas i.o.u.
Charlie Company
Delta Company
Alphas i.o.u.
Mutual credit used to clear debts among
companies. No interest paid.
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Clearing Compared to Currency

• Remember, a currency is typically a third party
  debt, an i.o.u., that a seller accepts as payment
  from a buyer.
• That may be a Federal Reserve note or a bank
  deposit, or a private debt.
• The supply of such third party instruments is
  usually limited artificially.
• Interest must generally be paid for their use.

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Clearing Compared to Currency

• Clearing eliminates the need to use any third
  party debt as payment.
• Goods and services pay directly for other goods
  and services.
• The supply of internal credits is limited only by
  the available goods and services being traded.
• Credit allocation among members is always
  sufficient determined by the participants
  themselves according to their own contract,
  rules, and evaluations.
• There is no need to pay interest to anyone.

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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, and still thrives after 70
years. 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 making loans based on the
  creditworthiness of the customer and the value
  of their collateral assets.
• This process is often 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 process 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.

Debt
Time
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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.
• Intermediation between savers and investors.

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Alternatives to Debt Money

• Mutual credit clearing associations and private
  complementary currencies can
• reduce the need for conventional, bank-created,
  debt-money, and
• free civilization from the devastation of the
  growth imperative.

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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, i.e.,
  productive businesses and individuals.
• Any entity that has the power to collect
  revenues, e.g., 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
  results 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 or
  sold 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

• Adequate supply
• Low cost
• Democratically allocated
• Give 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.
• Help to stabilize the global economy

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Guidelines to Assure Fairness and Success

• A clear agreement (contract) between the issuers
  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

• Read, Money Understanding and Creating
  Alternatives to Legal Tender, by Thomas H. Greco,
  Jr.
• Read the books of E. C. Riegel.
• Consult the works of the German school of free
  money Ulrich von Beckerath, Heinrich
  Rittershausen, Walter Zander.
• Explore the website www.ReinventingMoney.com
• Join one of the many complementary currency
  e-mail lists.