Simplifying the concept of Money and discerning between "sound" money and otherwise. by Gene DeNardo
(libertarian)
Friday, May 1, 2009
Contrary to popular opinion, the amount of money present in an economy at any time, has little relation to the health of that economy. In the freest of economies, money itself would be of little consequence and of less importance. It would not make the world go around!
The concept of money originates in barter. Barter is a moneyless transaction. This would seem to preclude money, but it is the lack of money in the system of barter that produced the need. In order to facilitate barter, to make it more convenient, money eventually took the place of the good or service on one side of the barter equation.
Sound money has the value of the good it is exchanged for. When precious metals were used as money, they simply possessed the value that the two parties agreed upon within the transaction. They would agree to the value of the good that one party wished to sell and the other party would exchange metal of equal value, usually determined by weight. There is little difference between this exchange and barter other than the metal is more easily exchangeable than the item exchanged for. It eases and facilitates further exchange.
At some point, coins were minted by weight of the metal, which determined value, and this eliminated the need to weigh the metal during each transaction. It also opened the door to fraud and counterfeiting. If a less expensive metal was introduced into the coin, its true value was less than its exchange value. Money was no longer always "sound".
To further facilitate the exchange, metals began to be stored. Metals are heavy and it was more convenient to keep all your gold in one place and to have a "note" issued to represent your bounty. These "notes" are basically a "title of ownership", and when exchanged for a good or service, they represented the ability of the new owner to "reclaim" the gold, if he wishes, by traveling to the storage facility and staking his claim. Another option is to continue to "pass" this note to the next party in the next exchange and so on.
Money remains sound as long as it is the value or it directly represents the value that it claims to be at that particular moment in time. "New" money can only be sound if this is the case.
Credit and debt have little influence on whether money is sound, as long the creditor in the transaction is exchanging real value. The debtor is promising to repay the borrowed money in the future, with actual value. If he doesn't, then he is breaking contract law. If this occurs, the money has not been "lost", it has simply been relocated and its value remains in other's hands. Credit and debt itself does not "create" money, unless one or both of the parties create money.
Anytime a note or money of any type is used in exchange, that is not backed by real value, fraud and theft has occurred. The fraud is evident in the creation of a note representing value it doesn't have, and the theft occurs upon its first use.
The logic is simple: something of value has been exchanged for that which does not possess the value it claims to represent. It is analogous to a barter in which a bushel of apples is exchanged for a bushel in which cotton rag fills the bottom two thirds of the bushel. Deception has occurred and the transaction is fraudulent.
Government money creation falls into the above category. It is impossible for Government to "enter" new money into the economy without involving itself in a transaction in which it "purchases" something of value or acts as a creditor of the new funds. A fraudulent transaction always follows the creation of unbacked money.
Government could legally and justly print money by issuing the bills as promissory notes. However, this would only be justified if the government notes were open to the competitive value of other "sound" money. It is most likely that this would simply evolve into a system of "bonding" in which the notes were exchanged for the dominant sound money.
In other words, if Government issued notes promising to pay in something of known value in the future, such as gold or land, they would be simply issuing a debt note backed by the promise of future real value. They might be exchanged for a good or service needed by the Government, leaving the new owner the option of holding or selling the note. If the issued notes were only backed by the promise of a future value of the note itself, the value would be based on the future strength of the production of the entire nation. They would be considered extremely speculative and their value based much lower than a dominant backed currency. They certainly wouldn't be accepted, as new dollars are now, as equal in value to the current dominant currency.
Notes of "good faith" or promise are not fraudulent by nature. They are fraudulent when force is used to maintain their monopoly of value. When unlawful laws are used to prohibit the use of "sound" money and the force of armaments and threat of imprisonment are used to bolster the value of notes of "good faith", then the "rule of law" has been disregarded. It matters not whether this is done by individual or government, the nature of the act is unchanged.
Money is simply "title" to something of value. If the money represents the actual value, then it is sound. If the money claims to have greater value than it possesses, it is deceptive and its first use is fraudulent.
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Posted By: Jake, the Champion of the Constitution
Date: 2009-05-01 10:56:02
dear gene -
of course this gets a thumbs up from me!! what's great about modern finance is the creation of electronic titles - use the same tech for debit cards to trade metal ownership in vaults, like goldmoney.com.
"Money is simply "title" to something of value. If the money represents the actual value, then it is sound. If the money claims to have greater value than it possesses, it is deceptive and its first use is fraudulent."
Obviously the last sentence is true for sound money, an ounce of gold is an ounce of gold. However, I would phrase the 2nd sentence like this "Money represents a judgment of value, which is subjective to the choices of each individual." A man never chooses between “gold” and “iron” in general, but always only between a definite quantity of gold and a definite quantity of iron.
Just my opinion! What do you think? I am rereading Human Action, this is the section your article reminded me of.
"They ask, for instance: Why is the value of “gold” higher than that of “iron”? Thus they never find solutions, but antinomies and paradoxes only. The bestknown instance is the value-paradox which frustrated even the work of the classical economists. Praxeology asks: What happens in acting? What does it mean to say that in individual then and there, today and here, at any time and at any place, acts? What results if he chooses one thing and rejects another? The act of choosing is always a decision among various opportunities open to the choosing individual. Man never chooses between virtue and vice, but only between two modes of action which we call from an adopted point of view virtuous or vicious. A man never chooses between “gold” and “iron” in general, but always only between a definite quantity of gold and a definite quantity of iron. Every single action is strictly limited in its immediate consequences. If we want to reach correct conclusions, we must first of all look at these limitations.
yes I definately agree with you. What I was referring to is that the "judgement of value" has been revoked, or at least we must go to extraordinary lengths to accept an "alternative" value. We are "forced" to accept whatever value the "dominant" money has or doesn't have, the power of all of us to value money has been taken away and put in the hands of those who create money with little value.
I agree that the value of money is subjective. I barter on www.tradeaway.com and I've found, people place a value on their service or used properties that they feel is appropriate. A person that needs this item or service is more likely to give it a higher value, thus, they feel like they are getting a deal!
Posted By: Walt Thiessen
Date: 2009-05-01 13:36:23
Actually, no, the rest of the article clarifies nothing on your initial point regarding the quantity of money. In fact, the word "inflation" is not used at all in your article. As far as I can see, none of the rest of the article explained, expounded, or clarified the claim in the article's first sentence.
"more money in the economy is neither better nor worse."
...refers only to the "amount" of money present in the economy at any particular time, which in itself is neither inflationary or deflationary.
"Sound money has the value of the good it is exchanged for."
...equitable exchange, during inflation the good is "valued" more than the money.
"Credit and debt have little influence on whether money is sound, as long the creditor in the transaction is exchanging real value."
....reserve banking does not exchange "real value" or you could say it exchanges it twice, once as storage for the depositor and once as credit. nothing "real" in our world can be two places at once. if credit was solely based on "loaning" real value, my guess is it wouldn't usually be inflationary. maybe even deflationary?
"It is impossible for Government to "enter" new money into the economy without involving itself in a transaction in which it "purchases" something of value or acts as a creditor of the new funds. A fraudulent transaction always follows the creation of unbacked money."
To me, this is the root cause of inflation and I am refering to the process as fraud.
"If the issued notes were only backed by the promise of a future value of the note itself, the value would be based on the future strength of the production of the entire nation. They would be considered extremely speculative and their value based much lower than a dominant backed currency. They certainly wouldn't be accepted, as new dollars are now, as equal in value to the current dominant currency."
....if all money were competitive, instead of government controlled, new government money, based solely on faith, would find its value, which would be lower than a competitive backed currency [whether gov or otherwise]. it also would be very "speculative", which it is, although we are forced to accept it as not, due to no alternative.
"Money is simply "title" to something of value. If the money represents the actual value, then it is sound. If the money claims to have greater value than it possesses, it is deceptive and its first use is fraudulent."
....can a "title" to a house be inflationary or deflationary? if money were accurate title, wouldn't it follow that inflation and deflation would have to find their causes elsewhere?
Posted By: Walt Thiessen
Date: 2009-05-02 13:43:20
"more money in the economy is neither better nor worse."
...refers only to the "amount" of money present in the economy at any particular time, which in itself is neither inflationary or deflationary.
"More" is a relative comparator, meaning that its presence in your concept alters the amount of money present in your economic state, which makes it inherently inflationary.
Okay, I see how you are looking at it, there isn't any time reference. I will clarify that in a way that doesn't hint at adding or subtracting. The concept, as you know from the rest of the article, is that the "amount" itself is irrelevant, it is the relationship.
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