CHAPTER
2
What
is Money?
CIVILIZATION
began with exchange, and exchange began with barter. Barter means the
exchange of things for things, with each transaction complete in
itself, leaving no claim or obligation by either trader. Obviously,
such transactions require contact of two traders, each of whom has
something the other wants. Such contacts are not easy to make, and an
escape from this limited exchange method had to be found to permit
man to raise his standard of living beyond that of bare necessities.
The
first device resorted to was to adopt, for a criterion of value, some
commodity that was in common use. A list of the commodities adopted
in this way at various times and places would include salt, hides,
grains, cattle, tobacco, metals, and so forth. The trader accepting
these found them useful not only to himself, but on account of their
general acceptance, he was assured that he could use them to secure
desired commodities in exchange. This was the first step in the
process of liberating exchange, a process that would culminate with
money. A refinement in this important first step came about with the
adoption of precious metals such as gold and silver as intermediating
commodities. This manifested a greater emphasis upon usefulness for
exchange rather than for consumption, and marked the final phase of
whole barter, or value-for-value exchange, before the dawn of money.
Because
of the use of precious metals as the last and highest phase of whole
barter exchange, the next step in the direction and harbinger of
money was the introduction of a promise to deliver these metals. The
belief persists to this day that money, to be sound, must promise the
delivery of gold or silver. The essential quality of money, however,
is its promise to deliver value in any commodity at the choice of the
holder. But in spite of the specification of a given commodity
stipulated in the promise, the promise came closer to being money
than anything previous because it involved a time interval between
the first transaction and the final completion of the exchange, when
value has been received on both sides. It introduced also the element
of faith.
The
need for money has always been far in advance of the implements
available for utilizing it. Because the need was and always is so
urgent, the trader has accepted anything that has offered the
prospect of effecting non-direct barter exchange. In doing so, he has
exposed himself to the devices of the charlatan as well as the
sincere reformer. He has had no rationale to guide him. The only
logic he has been able to employ has been to choose the better media
when two or more have been available.
Why
has man consistently endeavored to escape simple barter when, because
of its very simplicity, it has offered security against deception
while monetary systems have invariably betrayed him? Why must man
have money? It is neither a tool of production nor a product. It is
neither food, raiment, housing nor adornment. It has no value, yet it
is indispensable to modern man.
Why
indispensable? Because man's wealth producing potentialities through
specialization of labor cannot be exploited unless the exchange of
goods and services can be split in two parts, with one trader
receiving value and the other receiving only the prospect of value.
Therefore what man has been striving for is the opportunity to
acquire without coincidentally surrendering value. If he must
complete the exchange in one transaction, he is reduced to simple
barter, and simple barter requires him to find someone who has what
he wants and wants what he has. To do this requires so much time and
effort that he loses what he might otherwise gain from the
specialization of labor.
Visualize
two persons facing each other, one holding a value that the other
desires, and the other holding nothing of value. How can they do
business? Obviously the empty handed, would-be trader must have some
means of inducing the possessing trader to transfer the desired
value. If he asks what the possessor would like in exchange and
promises to deliver this desired commodity at a later time, and if
this promise is accepted and the possessor surrenders his value, the
promisor has established credit. But the transaction is not a
monetary transaction, even though the promisee accepts a written
evidence of the promise. Here, then, we should pause to comprehend
that money and credit are not synonymous. The promisor has not gained
the freedom of money, because he must now seek and find and deliver
the specific commodity pledged. The barter transaction has been only
partly split, by the introduction of the time interval. To invoke the
facility of monetary exchange, the would-be trader must deliver
requisitionary power upon some unidentified trader or traders who can
and will surrender an equivalent value at the holder's option.
The
utilization of money as the medium of exchange does not mean
departure from barter. It is but a method of splitting barter
completely in two halves. The acceptor of money gives value therefore
but receives only a promise of value, which, when conveyed to a
subsequent seller, requisitions his half of the split-barter
transaction. Introducing a time element into barter and giving the
acceptor the power to requisition his half from any trader and in any
commodity, at any time, is what expedites and multiplies exchange,
thus releasing more and greater variety of production and hence
raising living standards.
While
money is the liberator of exchange, it is also the vehicle of human
trust and confidence. Its substance is the pledge that he who takes
will also give. This pledge of faith is the basis of the power to
issue money. In simple terms, it means that he who would issue money
to cover his purchases must be prepared to redeem his pledge by
selling. In other words, persons who enter a monetary exchange agree
to give and take things in trade, at the market price, on the tender
of the monetary instrument from any quarter. Thus every trader relies
upon the pledge of the issuer that he will honor his issue on demand.
A
society accustomed to trade on the basis of its faith in its money is
vulnerable to deception as it never was on the whole barter system.
It is imperative, therefore, that man master money, so that he can
assure the fidelity of the promise implicit in what he accepts as
money, and can not only exclude from the issue power all unworthy of
it, but can admit to it all of those who are worthy of it—including
those now excluded under the existing political monetary system.
If
money is to fulfill its function as the liberator of exchange, it
must be protected from pollution by false issuers, and it must also
be free to draw its supply from all worthy sources. The broader its
base, the higher can be its apex and the greater its service to
mankind.
MONEY
THE ORGANIZER
For
economic and social advancement, men must specialize their labor and
facilitate their exchanges. To reap the fruits of this operation,
they must organize in cooperative groups even though widely
dispersed. Money fulfills this function through its circulation. The
whole cooperative scheme is made up of monetary circles, tying
together men who mostly are strangers to one another but who have a
common interest in the cooperative circle. Money organizes these
circles of cooperators on a democratic basis, for each in turn is
able to choose his supplier. While each has contact with and
knowledge of only the ones immediately to the right and left of him,
i.e. the ones to whom he sold and from whom he bought, the circle
formed by the money that passed through his hands may involve scores
or hundreds of others, all of whom are essential to the successful
operation of his exchange.
Let
us take a hypothetical example. An Ohio clothing merchant borrows a
sum of money from a bank which he sends to a New York clothing
manufacturer, who sends it to an Australian wool grower, who sends it
to a supplier in England, who sends it to his supplier in Argentina,
who sends it to a French supplier, who sends it to a Swedish
supplier, who sends it to a supplier in the East Indies, who sends it
to a Cuban supplier, and so forth until it gets back to the merchant
in Ohio who started the circle. Such a circle is very unlikely,
because it is confined to wholesale traders without the money getting
into the hands of employees through payrolls at some point. This was
avoided in the example because the ramifications would have been too
complex to follow.
The
point intended to be conveyed by the example is that the Ohio
merchant started and finished a monetary circle that went around the
world and effected exchanges among traders who were strangers to each
other, except that each knew his supplier and his customer. Of such
circles the economic and social fabric is woven. Visualize the
intricate interlacing of economic interest and activity if some or
all of the factors in the circle borrowed money from their banks and
started new monetary circles of their own, and contemplate how
essential to the economy it is that this power to issue be widely
held.
We
are apt to think that money circulates indefinitely, but this is a
mistake. Money has a life span that lasts from issue to redemption.
This does not imply that individual issues are identified. It means
that an equivalent amount is normally retired by the issuer through
payment of his bank "loan," and thus the money is retired.
Nor is there a definite life span. Some monetary circles are longer
than others. The length is determined by when in the circle a buyer
is found for the goods or services offered by the issuer. Also, an
issuer can balance his account by retiring money from circles other
than the one that he initiated. He discharges his obligation to the
economy by retiring from any quarter whatsoever an equal amount of
money as compared to his own issue.
Money
is the organizer of true cooperators, i.e. those who meet
competition, and the eliminator of those who do not. Thus it raises
standards of living and culture ever to higher levels. It is the
greatest civilizing agent available to man, and his greatest
liberator. An eloquent statement of the social order, as developed
through the use of money in exchange, is given by Spencer Heath:
“The
social organization raises the individual member from the state of
being as a creature, dependent on and arbitrarily enslaved to
environment, into freedom and abundance, dependent on but not
enslaved by the society of which he is a functioning part. Without
the services of his fellow social units, his whole life is ruled by
the exigencies of environment and circumstance. His life is
determined without regard to his choice or will, and he must obey,
under penalty of his death and the extinction of his race. But when
he enters into the social relationship of serving many persons and
being by many served, the productivity, the creativeness of this
golden rule of exchange lifts him out of an almost completely
necessitous state and into a relative abundance that relieves him
from the compulsions of an un-socialized environment and endows him
with wide alternatives and options for the exercise of his
spontaneous will. And when he has entered, his acts of service and
exchange are by voluntary contracts under consent of his own will in
accord with that of his fellow man—the 'social will'—as its
unforced expressions arise in the forums of exchange. Out of the
fruitfulness of the services performed and exchanged, this as yet too
limited mutual freedom and accord of individual wills, the energies
of men are emancipated to activities not prescribed by necessities
from without but by preference and choice—by realizations of the
intrinsic and spontaneous will. For this gift of freedom to its
members, the society is requited with all spontaneous researches,
discoveries, and recreations and the practice and enjoyment of the
esthetic and creative arts.” *
*
Citadel, Market and Altar, The Heather Foundation, 1957, page 196
(from the book
draft
prior to publication).
SYSTEM
AND UNIT
The
word "money" has two meanings: the concept and the
instrument that manifests the concept. The monetary concept is a
bookkeeping concept and system of split-barter trading in which
money springs from a debit and is returned by an offsetting credit.
The debits represent money issued and the credits money accepted. The
monetary instrument may specify the transferee, as with a check, or
it may take the form of currency (bills and coins), which specifies
no transferee and is valid in the hands of any holder.
The
moving instruments evidencing the bookkeeping process need have no
intrinsic value. They are floating ledger items that, on reaching the
authorizing bank which acts as central bookkeeper and clearing house
for the system, cause the transfer of their sum from the account of
the transferer to the transferee. The system is thus a reflection of
and dependent upon the private book records of traders. When a trader
sends through the monetary system a money manifest, he figuratively
tears a page from his ledger to permit the entry to pass through the
system.
The
bank has no power to issue money in any form. It merely authorizes
traders to do so by incurring debits on the books of the system. The
only way that such an issue of money can be effected is for the
issuer to write an order on the authorizing bank. Thus the check
becomes the initial form of money. If it is desired that the credit
be transferred to a specific person, the check so states. If it is
intended to convey the credit to unidentified persons, it orders the
bank to supply currency. Thus we see that checks are the initiating
form of money, and that currency is but a transformation. It should
be noted also that the currency is as much the issue of the check
writer who requisitioned it as was his check. In effect, he merely
ordered the bank to certify his credit by issuing instruments in the
name of the bank, who in exchange for assuming the liability acquired
a credit from the check writer's account. To think of currency as
money and checks as "substitute money" is profoundly
mistaken.
The
authorizing bank has power neither to issue nor to loan money, though
it seems at a cursory glance to exert both these powers. It loans
neither its capital, its surplus or its depositors' funds. It merely
authorizes the borrower, so-called, to increase the money supply, and
its deposits show an immediate in crease in the sum of the so-called
loan. The currency that the bank gives out may bear a bank's name or
that of the Government, but it is nevertheless the issue of the
writer of the check that requisitioned it.
Money,
as we have seen, has no value, and this is not any less true of
currency. Money merely permits value in the abstract, dissociated
from any specific commodity, to be
exchanged
for an equivalent value in any commodity at any time or place, at the
behest of the holder. While metallic coins are useful as currency for
small transactions or making change, the fact that they may have
intrinsic value does not, therefore, make them superior to paper as
money. Indeed, the reverse is true. For to the extent of their
intrinsic value, they are not money at all, but instruments of whole
barter. They are only monetary (split barter) instruments for the
balance of their face sum. A commodity can never act as money, for
the very purpose of money is to obviate the necessity of transfer of
value from the buyer to the seller and, thusly, to escape the
limitation of whole barter and gain the freedom and facility of split
barter.
As
money is the mathematics of value, so a sum of money is expressed in
terms of an abstract unit of value. Such a value unit might be
arrived at initially by equating it with the value of any commodity
or group of commodities [at] a given point in time. Whatever value
might be selected in this way then becomes the unit, or the figure 1.
To establish it as the monetary unit, however, there must be actual
exchanges, whereunder buyers issue and sellers accept the issue on
the basis selected. Such actual exchanges establish the power of the
unit, and the acceptors, i.e. the sellers, then have a fixed power
established in their minds and undertake to get in exchange for the
units as much or greater value than they gave. Thus a monetary unit
is established by the precedent of actual exchanges and in no other
way. No law or authority can give a fixed power to a monetary unit.
It must be fixed in actual competitive trade.
At
the inception of a new monetary unit, it would be theoretically
correct to launch it at par with some item or items of commodity
value. Since we already have operating monetary units in existence,
however, it would only be necessary in practice to base a new unit
upon some such existing unit or fraction or multiple. For if we made
up a market basket of some or all commodities that are now passing in
exchange and tabulated, say, their dollar prices, we would find that
one dollar represented some fraction of the whole. In other words,
all existing monetary units are already based upon a market basket,
and a new monetary unit would be based upon a market basket by
accepting an existing unit as the criterion for the new. That is how
the American dollar was established, by introducing it at par with
the Spanish dollar then current in the States. Thereafter, it
followed its own course. The Spanish dollar has long since passed
out, but it provided the springboard for what has proven to be the
most stable unit in the world.
Bearing
in mind that value can only be determined by competition, we might
now define money as follows:
Money
is an obligation expressed in terms of a value unit and issued by a
buyer in exchange for value from a seller. It is transferable and
acceptable to other sellers for equivalent value, and is ultimately
redeemed for equivalent value by the issuer.
No comments:
Post a Comment