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What is Money?

by on November 10, 2009

To know what we are talking about here, a definition of money must be established. This is relevant, because a clear definition of money is not often given. Economic textbooks often present hotly disputed opinions as facts.

Wikipedia, which generally should be taken with a big grain of salt, gives a reasonable one:

“Money is anything that is generally accepted as payment for goods and services and repayment of debts.”

It is similar to Lietaer’s: “Money is an agreement within a community to use something as a medium of exchange.”

An optimal fusion would be something like this:

“Money is anything that is generally accepted by agreement as a medium of exchange.”

Wikipedia then goes on, which is traditional, to discuss the three functions of money. But this is where it starts to get fishy.

The Three functions of Money

Money is often thought to have three functions: Medium of Exchange, Unit of Account and Store of Value.

These are indeed all three closely linked to money, but we can establish right away that we have defined money as a medium of exchange.

The unit of account function, for instance, is basically an index, by which you can measure the monetary value of everything else. This in itself is not something that needs to be directly associated with the medium of exchange.

Before the implementation of the Euro, all national units were weighed in a ECU index. There was no medium of exchange directly associated with this index, but there was the account unit function. You could establish a Deutsch Mark was maybe 0.50 ECU and a Dutch Guilder 0.45 ECU. Would we call the ECU money? No.

Many regional currencies all over the world simply borrow the account unit function from their more widely accepted ‘national’ counterparts. They say: one Berkshare is one Dollar, or one Chiemgauer is one Euro.

Wikipedia correctly mentions that many consider the means of exchange to be contradictory to the store of value function. Most economists probably don’t agree, but I am absolutely positive that an efficient medium of exchange is a bad store of value. And that its use as such seriously hinders money in its capacity as a means of exchange.

The reason money currently is systematically scarce is to a large extent because interest makes it more efficient as a store of value.

Using the medium of exchange as a store of value is a bad service to the community using the money.

For this reason Silvio Gesell introduced demurrage. By having the holders of the money pay anything between 6 to 20% per year, circulation is vastly increased.

Such percentages may sound like a lot, but because the money circulates far quicker, maybe up to a 100 times a year, in relation to the total activity financed by the money, the cost is really low. Far lower than with interest bearing systems. Not even enough by a long shot to finance the money supplying organization with.

Gesell destroyed the store of value function totally in his money, clearly showing the true primary nature of money as a means of exchange.

So how about the savers?

Normally they are hailed as the backbone of any productive society, in this model they are savaged as abusers?

The system creates behaviour. We need to clearly distinguish the different aspects of money and never lose sight of its main function.

It is normal to want to be able to spend wealth not now, but later in life. That is the basic function of ‘saving’. There are many ways to achieve that. The money can be invested in projects going on everywhere in the vicinity. You can pay up front for goods and services obtained later, so that future income is available then for other ventures. You can buy durable goods that can easily be liquidated back into money, you could even use Gold for that, these days. But many commodities will do.

We can easily conceive of ‘currencies’ that concentrate on the store of value function. These ‘currencies’ won’t circulate much, although probably many would accept them, therefore they won’t finance much economic activity, but they will allow ‘saving’ if that is what people want.

But please do not put real money in a sock or hide it in a bank account where your bank will use it (and maybe lose it) in some silly fanancial game like Forex or other bizarre hoaxes. Or invest it in Monsanto, weapon suppliers, tazer producers or all those other highly lucrative industries. That money is no longer available to the community where you live to finance necessary trades.

The system should reward behavior consistent with these values.

8 Comments
  1. I am sharing an important response to a post by John Turmel that I think anyone wishing to solve the money problem should read and understand fully.

    On Aug 7, 2012, at 10:52 AM, John Turmel wrote (responding to Marc Gauvin):

    MG: Your model is based on the standard e^at differential equation of which the Laplace transform is F(s) = 1/ s-a and therefore the system is unstable ( when s = a and a>0 i.e. there exists at least one pole in the positive s-plane. The Z-tranform defines stability when the poles of H(z) are within the boundaries of the unit circle of the z plane, Z-transform H(z) is to discrete-time LTI functions as Laplace F(s) transforms are to continuous exponential functions.

    Jct: So Tustin’s statement is now wrong and economists’ Z Transforms are just as good as Laplace? Better?

    MG: It is not a question of better or worse and as far as I know, economists don’t use Z transforms but engineers do all the time. The issue is which model one begins with. Your model assumes that all interest is continuous and compound while ours models the exact real “Common Lending Practices”, we have to do so otherwise we couldn’t say “Common Lending Practices” as a title of our analysis. And as I said before, we model both simple and compound cases. It is simply a question of professional rigour nothing else. (see http://www.bibocurrency.org/English/Formal%20Stability%20Analysis%20and%20experiment%20%28final%29%20rev%203.4.pdf)

    MG: But that is not the important part it is just the starting point to indicate that indeed ALL and ANY interest bearing loans are inherently unstable. But following that and based on the correct definition of stability and the math of measure we (www.bibocurrency.org) indisputably prove mathematically and logically that not only is interest unstable but that the whole model of what money is and does is itself false and that that false belief is required in order to even conceive of charging interest etc.. It is not a question of debt and how to pay it, the real crisis afflicting us is that the very definition of money and model of its behaviour is an ontological absurdity.

    The only logical function of money is as a unit of measure of value period, all other functions are irrational constructs. As a unit of measure, there is no question of issuing money and of circulating money and everyone has immediate and INDEPENDENT access to all and any liquidity required to transact any goods and services anywhere. This is what is rigorously specified in the Passive BIBO Currency spec.

    Mutual credit without interest is Passive BIBO Currency but by listening to almost all mutual credit practitioners they rationalise mutual credit using the erred circulation model of money from which they construct more erred arbitrary notions such as “local” and “community”, depending on the community you choose, “local” can be anywhere. They unwittingly continue to sell the false money model that is the seed bed for the resurrection of the current system in the future as both share the same basic false beliefs of money.

    They are not aware that money cannot be anything else but a unit of measure and to imbue it with control properties is to mutilate its value as a measure. Control of the economy is simply out of the limited functional scope of money design, while economic control has an unbounded scope thus rendering the prospect of its control a fool’s exercise.

    We cannot and should not control the economy all we can do is to let everyone optimise their capacity to adapt best. Therein lies the true injustice of the current false paradigm, by fools trying to control what cannot be controlled options are arbitrarily limited and thus so is everyone’s survival.

    That is why Passive BIBO Currency is THE universal spec (http://www.bibocurrency.org/English/standard.htm) for the badly needed entry into the list of SI base and derived units (International System of Units). Again, it is the math that decides, we mere mortals either choose to recognise the math or not, the latter is to err.

    Marc

    • Here is the full logical argument that proves money is not a thing that circulates. http://www.bibocurrency.org/English/SimplePassiveBIBOLiquidityMessageV2.0.htm

  2. Very good, Anthony, that you address the topic of CURRENCIES! For most people don’t seem to distinguish between money in their pockets and currencies in the pockets of central bankers.

    I put the distinction up on my German blog about national debts: http://www.nationalschulden.eu.

    Glad to see the automatically generated posts linking to your blog! The wisdom of WordPress will help us to beat “them”!
    🙂

    Sabine
    Organiser, Forum for Stable Currencies

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