What is money? Seems a daft question, doesn't it? Everybody knows what money is!
Everybody knows what gold is too but in the old American West there was an iron compound known as Fool's Gold whose superficial resemblance to gold could fool those who did not know the real McCoy well enough.
So it is with money. Its definition is not known well or thoroughly enough and as a result we are all, as you will see, being taken for a ride.
I don't think Thomas Paine had our money system in mind when he said the above words but they certainly apply to it.
We have a long habit of not thinking there is anything wrong with "money" as we know it.
There is an almost universal awareness that there is a great deal wrong with our modern economies but those malfunctions that give us a hard time are almost always blamed on something other than money itself.
The fact that the world’s financial mess is getting worse tells us that thus far we have not addressed the right “why” for the situation. If we really knew the basic cause of the problem we are having, we would be able sort it out and make things more orderly, wouldn't we?
On the other hand, if one blames a problem on the wrong cause and tries to handle that wrong cause, we don’t get a resolution of the problem: we just get deeper in a mess.
For example, if the car won’t start because we put the wrong fuel in the tank – kerosene when we should have used gasoline- but we blame the over-full ashtray, emptying the ash tray doesn’t start the car. If we blame the distributor, take it apart, fiddle around with it, replace it and so forth, the car still won’t start. If we strip down the engine, re-bore the pistons, replace the head gasket, tighten the fan belt and give it a good kick, we get over-worked, upset and covered in oil but we still don’t get the car started. And we wind up with a car in ever-worsening condition too.
In the end we conclude the car is no good, or cars in general just can’t be expected to behave and buy a bicycle.
All because we did not identify and handle the true cause of the problem: we’re trying to run it on the wrong fuel!
Maybe we don’t suspect that the fuel is the problem because the guy who sold it to us swore blind it’s really gasoline and it looks a lot like gasoline. But it isn’t gasoline, even though it was advertised as gasoline and we’ve been referring to it as gasoline.
So it is with what we currently refer to as “money.”
Like the much-loved family butler in a whodunit, money tends to be above suspicion. It escapes accusing fingers as people cast about for the dirty dog who put arsenic in the soup of our ailing civilization.
It has that superficial appearance of being right. Yet when we take a long hard look at it, we discover that for a very long time someone has been selling us kerosene masquerading as gasoline.
“Money” as we know and love it turns out not to actually be money at all but something else entirely, a counterfeit.
And the reasons why the economic car coughs and splutters, gives off black smoke and frequently conks out in the middle of the freeway becomes clear.
But how can we spot a counterfeit unless we know precisely what is the real McCoy?
That has been the crux of Man's problems with money. Lack of a clear definition for it - one that all men, not just the “experts” can think with - lack of a clear understanding of how it is supposed to work, has enabled us all to be systematically hoodwinked.
We can easily be duped into accepting fool's gold as gold when we do not know what real gold looks and feels like.
This is so much the case that we are using an utterly daft and completely false "money" system, and it is getting us all into a lot of needless difficulty, yet so foggy is our view of it, we cannot see it.
Right under our noses, hidden in plain view, a small clique of unscrupulous people have been operating a money scam that bleeds us dry, creates all manner of problems for us in the process, sets our children up to inherit even bigger problems in the future and hardly anybody even objects!
The key to fully understanding the fatal flaw in our money system and how to correct it and get our economies working for rather than against our survival, is first to fully understand money.
Fortunately that is not difficult. It has been made to look difficult, so that people in general will be discouraged from it. But it isn’t.
It is worth really looking this over and getting a thorough grasp of it because the more thoroughly we understand money, the harder it will become for shysters to line their pockets at our expense.
MONEY: WHAT DOES THE WORD MEAN?
So universal has confusion as to the word "money" become, the compilers of some dictionaries seem to be affected by it.
I looked up "money" in two dictionaries selected at random and found that the Oxford Reference Dictionary (1986 edition) defines money as: "the current medium of exchange in the form of coins and banknotes." This is clearly a false definition because our current medium of exchange is not confined to coins and banknotes, in fact it is only about 3% coins and banknotes! The rest is electronic money, numbers in computer memories.
The Chambers Dictionary (1993) does little better, defining money as "coin, pieces of stamped metal, used as a trading medium; any currency used in the same way." It defines currency as: "that which circulates, esp. the money of a country." Which kind of goes around in circles and isn't very helpful.
Anyone using either of those dictionaries is going to have a hard time getting a definition - a full statement of the meaning - of the word "money."
Let's take the matter into our own hands and make a start by agreeing that money is "something which is used as a means of exchange." We define "means" as "that by which a result is brought about" (Oxford Reference Dictionary) and "exchange" as "the act or process of giving one thing and receiving another in its place" (Oxford Reference Dictionary).
Money therefore is something used by people so that exchange between people can easily be achieved.
I insert the word "easily" because, before money was introduced, people exchanged products - material goods and services rendered - directly, and this direct exchange became less easy as civilization advanced.
One thing that will most definitely halt in its tracks any group effort to move up to a higher level of co-action in production is to dump slows, inefficiencies and barriers in the way of exchange.
Before the invention of money, Joe would agree to give Tom a bushel of wheat and Tom in return would agree to help him round up the sheep, a direct exchange we know as barter.
However, as human societies advanced beyond the very simple, becoming more complex as they evolved an interdependency of specialized tasks and producing a greater variety and sophistication of products, barter became too clumsy.
Exchange remains the fundamental of economic activity but an intermediary step has long since been introduced into the process: money.
Civilization and even our own elaborate barbarism would have been impossible had simple barter remained the only method of exchange and a more flexible and versatile way of distributing the fruits of human endeavour had not been introduced.
For example, imagine taking a taxi ride into town and then offering the taxi driver a chicken or an electric toothbrush in exchange for his service. What would happen if the taxi driver didn't need a chicken or an electric toothbrush? What if the ride were only worth half a chicken or two thirds of an electric toothbrush? How would he give you change? And how could you lug around chickens, electric toothbrushes and whatnot every time you go shopping?
Long before we reached the sophistication of taxis and shopping malls, Man found that something more workable than simple barter was needed.
Someone had the bright idea of introducing a system of tokens that would be used to represent or stand proxy for actual goods and services.
Such tokens could be small, easy to carry around, and conveniently stored. The idea was that tokens could be exchanged back and forth in place of the real things they represent, then exchanged for real things at any time one wants. Problem solved. The English word for such a system of tokens is "money," from the Latin word "moneta", meaning "mint."
But what could be used as one's system of tokens? Well, although some things, as we shall see below, are not really very suitable, Man has quite a broad choice as to what he will adopt for the purpose provided people agree on what they are going to use and keep that agreement going.
People are, by observation, happy to accept tokens instead of real goods and services if there is such a strong agreement and they can have trust and confidence that other people subscribe to the same agreement and will in turn accept those tokens in exchange for their goods or services.
When we look back at history we discover that a variety of items have indeed been used as tokens: leather discs in medieval Europe; dried yak dung in Tibet; in England notched sticks of wood were once successfully used for over seven hundred years; in Germany after World War Two cigarettes and tins of coffee were used for a while as a crude form of money.
Two of the most suitable and hence commonly used systems of tokens have been metal discs with a design stamped into them (coins) and pieces if paper with pictures on them (notes).
In modern times, alongside notes and coins, we now use numbers registered in computer memories with a £ or $ sign in front of them (electronic money).
All these systems of tokens work because there is broad agreement among the participants that they represent real goods and services - and because people have confidence that they will continue to be exchangeable for real goods and services at any time they wish.
Therefore, when the taxi driver accepts the five pound note you offer him for his service rendered, both you and he recognize and accept - without even thinking much about it, so ingrained has the commonly held idea become - that that piece of paper with a complex but recognizable design on it is something that can be exchanged for a certain amount of real goods or services. And you both have confidence that other people will hold the same idea and accept the note in exactly the same way.
Thus we have two things: (a) the object, the token, which acts as a recognizable symbol representing (b) an idea, which is backed by confidence.
The five pound note you offer the taxi driver is just a piece of paper, it is the idea we humans attach to it that gives it its value and its power. Without that idea the taxi driver would just stare at your piece of paper blankly and say: "What's this?"
Our piece of paper may have other uses (lighting cigarettes perhaps?) but if there is no agreement rendering it our means of exchange, its value will then derive only from those other uses.
Our notched sticks might make good firewood. Our gold might still have a value in that it can be made into jewelry. Our yak dung can be used as manure and our silver used to make fancy cutlery but those uses and the value derived therefrom are entirely separate from the importance our material acquires when it is adopted as a means of exchange.
Gold, for instance, is just a metal. We can't eat it but if we adopt gold coin as our means of exchange, we can obtain easy access to food if we possess gold because gold can be made into gold coin. It is this idea that gives gold coin or any other token this immense additional value to us: it is our means of access to the wealth created by the communal effort of a civilization.
We can summarize money by saying that it is a symbol which people are confident they can exchange for goods and services.
WEALTH AND MONEY
It is important we distinguish between wealth and money.
Wealth is cars, houses, food, clothing, telephones, dental treatment, medicine, holidays, restaurant meals and so on. It is actual things or actual services created or provided by people as individual producers or in co-action with others as part of a group.
Money however is just paper, metal discs or electronic numbers: you cannot eat or wear it, nor even make a serviceable shelter out of it but it can be used to acquire the wealth created by others.
HOW DOES SOMETHING QUALIFY AS MONEY?
If we wish to use something as money and we wish it to work properly and well as our means of exchange, then it must satisfy certain conditions.
CONDITION ONE: AGREEMENT AND CONFIDENCE
The first condition for any system of tokens, which we give the label "money," is that there must be broad agreement that that is what we are using, and there must be confidence in it.
Governments can firm up that agreement by enshrining a particular system in law, essentially bolstering the confidence by giving it the full backing of the state and penalizing people for not sticking to the agreement.
CONDITION TWO: STABLE VALUE
The second condition that needs to exist is that exactly how much or many goods and services a token can be exchanged for - its value - must be known, stable and predictable.
This somewhat conflicts with our experience because all we have ever known is money that is not stable in value. There are those who make vast profits from the instability of money and so have a vested interest in the rest of us thinking that "that's just how money is". The fact of the matter is that money performs its function poorly to the degree that it is unstable.
We must be able to know that a token will buy a loaf of bread or four tokens buy a chicken and so forth. If a token will buy a loaf of bread today but a different amount of bread tomorrow, one loaf in Sunderland but only half a loaf in Solihull, our taxi driver will not know how many tokens to charge us for the ride because he does not know how much he will be able to buy with them.
If, too, he knows that the purchasing power of the token is likely to fall at any time, his confidence in it is undermined.
Similarly, when we pay him for the taxi ride, if we do not know how much our £5 note will buy once we have parted with it, we cannot know whether we are being charged fairly for the ride.
We and the taxi driver would be in the position, so to speak, of trying to exchange produce for produce without knowing how much goods each is offering the other.
The system becomes unworkable and confidence in it is eroded – and people become upset - to the degree that the purchasing power of our token becomes unpredictable or variable.
CONDITION THREE: SOMEONE HAS TO CREATE IT.
Clearly, tokens will not spring spontaneously into existence of their own accord: somebody has to produce them and get them into circulation.
That somebody must be clearly identified and charged with the responsibility of producing and getting into circulation our tokens, bound by specific rules as to the discharging of that duty and their actions open to public scrutiny so that everyone can see exactly what they are doing.
Clearly, having lots of different people creating and circulating tokens of different designs and values more or less as they feel like it, would render the means of exchange a very unstable and unpredictable system, undermining the agreement and confidence upon which a workable money system depends.
CONDITION FOUR: A SERVICE TO THE COMMUNITY
Whoever produces tokens and supplies them to our economy, should not have the right to spend or lend the tokens he produces for the acquisition of personal wealth.
He should only create and supply tokens as a service to the economy. While he should, as needed, be suitably paid for that service, the tokens he produces must not be for his own use.
If Joe has the job of producing tokens for the economy - for example silver alloy coins turned out on a machine - and produces, say, ten billion a year, he clearly should not have the right to lend them out at interest or spend them so as to enrich himself - otherwise he is going to wind up owning everything in the economy, without creating any wealth himself!
For the same reason, tokens should be something not just anyone can reproduce or find lying around. For example, acorns or blades of grass would make extremely poor money because anyone can lay hands on them by the million just by picking them up off the ground and spend them without actually having to create anything that adds to the wealth of the community.
Such tokens would soon become worthless because their entry into circulation would not be linked to or governed by the production of wealth.
CONDITION FIVE: ACQUIRING TOKENS
This brings us to a further condition: because the purpose of the tokens is to facilitate the exchange of products for products, the only way one should be able to acquire tokens, as a general rule, is by receiving them in exchange for some goods or some service one has produced.
The possession of tokens enables one to acquire what others have produced, so acquiring them without having produced anything puts one in a position of charity or theft.
This is not a hard and fast rule, naturally, because there are such things as gifts, inheritances and lottery wins but even here the smooth functioning of a money system would break down if the acquisition of money through gifts, inheritances and lottery wins became too prevalent because the larger the number of people able to acquire wealth without producing any, the heavier the burden upon those who do produce all the wealth of the society
In fact, even in such cases there is usually some kind of exchange given in return for money: filial loyalty, kindness or friendship earns a gift or inheritance and participation in a broadly agreed-upon game and the willingness to risk the loss of one's own stake to the benefit of the lucky winner earns the slim chance of a lottery win.
It does not much matter what product or service one gives in exchange for money, only that it is something someone else considers to be of value, wishes to acquire and so will hand over money in order to do so.
CONDITION SIX: MAKE MONEY BY CREATING WEALTH
In a rational - and entirely just - system the way any person or group would acquire money would be by producing something and receiving money in exchange for it.
In other words, the person or group produces wealth and in so doing adds to the general wealth of the community in some way. He takes what he has produced, does not consume it himself and provides it to someone else to consume.
In exchange, he receives money which then enables him to acquire from others what they have produced and which he himself has not produced.
The way an individual or group acquires wealth is by producing something of exchangeable value and the way one becomes rich is by some form of productive enterprise that enriches the human community.
To the degree the human economy falls away from that ideal, it becomes less just: those who create wealth discover that those who produce nothing have a bigger and bigger slice of the pie and experience this unfairness as a burden. When carried to the extreme we have a slave society in which those who create the wealth (the slaves) have none if it and those who produce nothing take all of it (the slave masters, aristocrats, international financiers, call them what you will).
How can one contribute greater wealth to the human community in order to become more wealthy in exchange?
Sometimes it is done simply by working harder and more efficiently as an individual, or by working harder and more efficiently as a group, or by good leadership and organization, by spotting a need and satisfying it, by inventing some product that adds something new and valuable to the wealth of the community or by technological advance that enables more to be produced for less effort, new resources to be utilised, wealth to be transported or communicated (distributed) more swiftly and so on.
Almost everyone in the society is engaged in just this activity, from us drivers to bell boys, accountants to artists, dentists to disc jockeys: producing something that did not exist until the moment he produced it, which is freely desired, valued or needed by others, and so contributing to the overall wealth of the human community - and receiving money in exchange for it.
This applies to any producer: the doctor, the accountant, soccer player, radio disc jockey, plumber, bus driver, checkout clerk, cinema usherette, nurse, priest, artist, road sweeper, business manager, entrepreneur, prime minister and so on, almost ad infinitum.
In a less than perfect world there are those who produce wealth and do not receive money for it: the charity worker and housewife being prime examples.
On the other, darker, side of the coin there are those who produce things that are not wealth, however much they pretend to be - and in fact by damaging the well-being of people, detract from overall wealth - and receive money for it: drug dealers and medical charlatans being cases in point.
And there are those who simply acquire money without producing anything at all, for instance thieves and currency speculators. To the degree that these latter categories are permitted to grow in number and impact, the smooth working of the money system, not to mention justice (to which a correct money system is harmoniously attuned) will be impaired. We are living through just such an example of this at this writing.
All honest people acquire money by producing something (goods or services) in exchange for it and all other ways of acquiring money can be regarded as charity (fine, in the case of genuine need because it aligns with the community's role in protecting and supporting its disadvantaged members and an increase of kindness and humanitarian activity increases the overall wealth of the community) and theft (not fine under any circumstances).
I should point out, in case there is any misunderstanding, that receipt of money through methods such as pensions is neither charity nor theft. A person's pension is earned by a lifetime of producing goods and services - work, raising children, paying taxes and so on.
It can be seen from this ideal money system that, so long as it remains the property and domain of honest men, money will facilitate and reward the supply by humans to humans of what is needed and wanted by humans and it naturally propels economic activity towards the maximum use of material and intellectual resources for the creation and distribution of abundance.
This is not to say that correct money will of itself and quite mechanically bring about a just and egalitarian society. It is not a cure-all for the world's ills.
Common sense, human decency, honour, good justice, honesty, ingenuity, sound organisation, eternal vigilance on the part of men of good will and plain hard work are what produce a decent civilisation and a correct money system must be allied to them. Each, in other words, facilitates and bolsters the other.
CONDITION SEVEN: THERE MUST BE ENOUGH OF IT
Tokens must always be in sufficient supply for them to be able to do their job. But what constitutes "sufficient?"
There is a balance which must be struck here. Our tokens, our pounds, dollars, yen or euros, must be abundant enough to be usable as a means of exchange and just scarce enough that people are encouraged to produce wealth in order to acquire them - the whole purpose of money being to facilitate exchange, which includes stimulating or encouraging the products of goods and services to be exchanged.
This means that whoever has the responsibility of supplying our economy with money must be able to produce more money easily enough so as to respond quickly to an increased need for it. Increased need occurs as the quantity and variety of goods and services being produced and offered up for exchange increases - in other words as the economy expands.
People have to be able to get their hands on the tokens that are being used as their means of exchange and pass them around in a volume that matches the amount of exchange of goods and services they wish to carry out.
As an extreme example, imagine that the entire UK's money stock consisted of only one hundred one pound coins: the coins would be far too scarce and far too difficult to obtain and would fall in volume too woefully short of the day to day traffic of goods and services to be able to perform their function. And if these coins were the only form of money in use, exchange, that is economic activity, would grind to a halt
No matter how technologically clever we may be, no matter the miraculous range and volume of wealth we are able to create, all that ingenuity would become merely unrealised potential in the absence of a functioning money system.
Once a system of tokens has become established and we come to depend upon it, a failure to ensure that sufficient tokens circulate cripples trade and renders the consumer unable to buy goods even though he wants them and the producer unable to sell goods even though he can produce them and the consumer wants them.
A reduction of the amount of money circulating is called deflation and if the money supply deflates below a level where it can support the amount of exchange of goods and services that people are trying to carry out, we have what is called recession - a slow-down or restriction of economic activity due to a relative scarcity of money. Where that money scarcity becomes pronounced or chronic we have a severe economic slow-down known as depression
A slow-down is experienced by industry as a "fall in demand."
Usually however it is not a fall in the desire of human beings for goods and services that has occurred. Money is the means by which people express their demand or desire for goods and services and when money becomes scarce, then to that degree people's ability to express demand has become constricted.
In a severe depression, for example, people stop buying food but nobody can claim they no longer wish to buy it. All that has occurred is that many people are no longer able to lay their hands on enough tokens with which to express their demand for food.
Historically, where severe money shortage has plunged the economy into depression we have witnessed the tragedy of homeless people starving next to homes from which they were evicted and which now stand empty and fields full of crops that are being allowed to rot because they cannot be sold!
The food is still there, the farms are still there and the farmers want to sell the food to people who want to buy it. The homes are still there and landlords want to rent them to people who want to live in them but the producer cannot sell and the consumer cannot buy because one thing is missing: the tokens they need to carry out the exchange.
LOOK AT IT THIS WAY.....
Imagine, for the sake of illustration and quite arbitrarily, that a loaf of bread represents one unit of production, a chicken five units, a car ten thousand units and that by this system of reckoning the entire economy's production of goods and services adds up to a total of 10 billion units of production.
Imagine too that we are using a system of tokens as our means of exchange where a single token is assigned the value of one unit of production: that is one token can be exchanged for a loaf of bread, two tokens will buy two loaves, four tokens will buy a chicken and ten thousand tokens will buy a car and so on.
If our imaginary economy has 10 billion tokens circulating in it, there will be enough tokens for all ten billion units of production to be bought and sold.
Suppose that one day the number of circulating tokens is reduced from ten billion to eight billion. There are now two billion units of production that cannot be sold no matter how much producers want to sell them and consumers want to buy them.
The economy's producers will experience greater difficulty in selling their products and some are going to be unable to sell all the goods they produce or the services they provide.
There will be a restriction of two billion units-worth of economic activity. There will then occur intensified competition amongst producers to capture tokens that are too scarce to go around. If the unsold goods are to be sold and remuneration obtained for them, then many producers will find it necessary to drop their prices in response to the reduced spending power of the consumer.
Previously there were ten billion tokens available with which to bid for ten billion units of production. Now only eight billion tokens have to do the same job: that is, on average, 0.8 tokens per unit of production, or one token buys 1.25 units of production. The purchasing power (value) of our token has risen because tokens have become more scarce!
That the "token in your pocket" will now buy more sounds great on the face of it but of course we have, on average, fewer "tokens in our pocket" to spend!
In such a situation, those rich enough to amass savings or those such as money lenders to whom other people owe money will benefit because the purchasing power of saved money or returned loans (which have to be returned come what may) has increased.
Although deflation of the money supply brings hardship to both producer and consumer, and in so doing undermines the trust, confidence and stability of value upon which a money system depends if it is to work properly, it can be a boon to those who lend money and those who possess large amounts of surplus money.
Increasing the volume of tokens in circulation is called inflating the money supply. Increasing the money supply to match an increase in the volume of production and the traffic of goods and services being exchanged is vitally necessary so as to ensure that money does not once again become relatively scarce.
For example, if the total number of units of production in the imaginary economy mentioned above increases to fifteen billion for some reason but the number of tokens remains at ten billion, five billion units of production cannot be exchanged and there is now only one token available to bid for every 1.5 units of production. If however the number of tokens is also increased to 15 billion, the purchasing power of the token remains stable at one unit of production.
However, if the number of tokens circulated is in excess of the level of production, we have another problem: too much money chasing too few goods.
For example, if the economy produces 10 billion units and the amount of money increases to 20 billion tokens, there are now two tokens available to bid for every unit of production: two tokens to buy a loaf of bread where one token would buy a loaf of bread previously. The purchasing power of our token has, in other words, halved.
For the producer, that means every token he receives for the product he sells is worth less, his profits are worth less, the wages he distributes are worth less.
For example, an annual income from sales of, say, ten thousand tokens now has less value in terms of what it will buy, than previously.
To restore the purchasing power of his income to its previous level, the producer must increase his prices and, as there are now twice as many tokens circulating there is "room" for him so to do. There is an upward pressure on prices. The consumer finds that, say, an income of 400 tokens per week will now buy half what it did previously and so to restore his spending power to its previous level and avoid becoming poorer, he will wish to increase his income to 800 tokens per week. Alongside the decline in purchasing power of the token, the upward pressure on prices and an erosion of the purchasing power of people's savings, there will tend to be an upward pressure on wages.
Here again the fundamental condition of a stable, predictable value for our token is violated; the result: confusion, distress, the undermining of confidence and a hindering rather than a facilitating of exchange.
The entire function and purpose of money is to facilitate and support smooth exchange.
That is its only valid purpose.
Where the value of money fluctuates and is not stable and prices are consequently pushed upwards or downwards, then here is irrefutable evidence of a failure to ensure a correct volume of supply of money to the economy: whoever is charged with that duty is quite simply getting his sums wrong and in so doing perpetrating a great disservice to the community.
CALCULATING THE VOLUME OF MONEY SUPPLY
In order for the money-supply authority, whoever that may be in the society, to be able to calculate how much new money to introduce into the economy, the value of money, the purchasing power of the individual token, must be stable.
If it is not stable, if it fluctuates from day to day, if it represents one unit of production on Monday but two units of production on Thursday and one and a half units by Saturday, it becomes impossible for that authority to accurately calculate the quantity of money the economy requires.
Therefore if four tokens buy a chicken and four loaves of bread today, they must buy a chicken and four loaves of bread tomorrow and the next day. This then pinpoints the principle by which one can calculate the economy's money requirements and the anchor by which the economy can be kept stable: the purchasing power of the token in relation to comparable goods and services must be kept as stable as possible.
Too much money in circulation pushes its purchasing power downwards, too little money in circulation pushes its purchasing power upwards.
If the overall purchasing power of money begins to rise, if there is a constriction of the ability of industry to sell and of the consumer to buy and prices are pushed downwards, then we know that money has become too scarce. Too little money has been supplied to the economy to smoothly facilitate the existing level of production and exchange within it: an increase in the supply of money to the economy is required.
If the overall purchasing power of money decreases, pushing up prices and wages, then we know that the economy has been oversupplied with money and some way to increase production must be found or money removed from circulation.
Sound management of the economy's money supply therefore demands increasing or decreasing the money supply towards the goal of keeping the purchasing power of money constant.
That stability of money's purchasing power becomes the barometer by which one can measure relative success or failure in the task of money supply.
WHOSE JOB IS MONEY SUPPLY?
Before we assign the job, we must establish the basic principles against which such an assignment will be made. Those principles, in summary, are:
Money is supplied as a service to and support of the activities of the economy and for on other purpose or agenda.
Whoever creates and supplies money to the economy should not have the right to spend or lend the money he has created for personal advantage or gain.
In order to calculate the economy's money requirement the economy must be monitored so as to assess, with a view to correcting, any rise or fall in money's purchasing power. The aim of money supply must be to correct fluctuations in value and attain the maximum stability of value possible.
The body which calculates the economy's money requirement and the body which actually creates and issues money in accordance with those calculations need not be one and the same. In fact it they should be two distinct bodies.
It is essential that money supply calculation be impartial and in accordance with a consistent formula. Its sole purpose should be to ensure the correct level of supply and so whoever is responsible for the task must be aloof from and protected from any political or other extraneous influences. That protection must be uncompromisingly enshrined in law.
The amount of money created and supplied to the economy must be solely in accordance with those calculations. No government should have the power to create and issue money in accordance with any other criteria whatsoever.
It is self-evident that whoever has the power to decide how much or how little money will be supplied to the economy has the power to regulate the fortunes of all the people in that economy. He has in fact absolute dominion over those people. Clearly such power cannot be delivered into private hands. Government is the logical echelon where such power must, in our modern world, reside but for our own freedom and safety it is essential that such government be democratic and itself bound by law.
Calculation of money supply must be legally aloof from and immune to political pressure, in accordance with a consistent formula and utterly open to popular scrutiny.
The creation of new money or the removal of money from circulation must in turn be bound by those calculations and itself open to public scrutiny.
However, those calculations only govern how much new money is to be calculated or by how much the volume of circulating money exceeds the economy's requirements.
In the case of spending new money into circulation, how government will spend the money must be bound by the mandate government has received from the people.
In the case of a surplus of circulating money, whether government's method of dealing with the problem will be to increase production (and how) or remove excess money from circulation (and how) or some combination of the two, will again be bound by the mandate government has received from the people.
These conditions absolutely must be in place and there is no room for compromise: that way, we will have, and with vigilance retain in perpetuity, absolute power over ourselves.
It is clear then, given the inherent power of money and its indispensability to civilisation, that open democracy is not an optional luxury but vital to the health and safety, the peace and prosperity of our societies. Democracy and accountable, open government is an absolute must, so far as ordinary people are concerned, of civilised life in a society which uses money.
Anything less than full democracy not only places all of us in real danger from he who would control the business of money, but it opens the door to the corruption and debilitation of money and thus the eventual debilitation of production and exchange.
An unswerving allegiance to democratic principles is not so much an idealistic position as an entirely pragmatic one: it is a matter of personal survival.
GETTING NEW MONEY INTO CIRCULATION
How can such a government get the new money it creates on our behalf into circulation? Simple: by spending it on public works and providing services to the people.
Specifically what government will spend new money on will depend upon its priorities, philosophy and social orientation and that in turn will, in a democracy, depend upon the mandate it has received from the people.
The essential principle is that new money is spent into circulation and never loaned. It is provided as a service to and support of the production and exchange - the economy - of the citizenry.
It becomes, as Abraham Lincoln pointed out, government's greatest creative opportunity. Once spent, for example on hiring men and machines to build a highway, provide a rail system, a space programme, environmental project, grants or subsidies to industries, state pensions or simply a reduction in existing tax levels, new money will circulate in the economy. No-one in government will personally amass wealth from the process of creating new money but the people will get a much-needed new road, hospital, pension or boost to employment and money will circulate. The above-mentioned condition that no-one should personally amass wealth from his right to create money will not be violated.
It should be stressed that we refer here to new money, created and circulated so as to increase money supply in line with economic growth. This is an additional revenue for government quite separate from whatever it raises in taxes.
But what of a situation in which a reduction of money supply is required so as to eliminate an excess of money? How could government remove money from circulation? Well it may not need to at all because the formula for dealing with inflation becomes: increase production, reduce government spending.
Smart government will be able to find ways to increase production so as to absorb the excess money. Indeed, smart government, by accurate calculation of money requirements and wise policies which avoid in some way suppressing the economy's overall levels of production, can avoid ever having to deflate the money supply.
However, if such a need does arise, government could, for example, simply levy a tax temporarily and expunge the money it so collects. If its calculations in that regard are reasonably astute and it confines itself only to removing excess money, then such a tax would not be experienced by the people as a burden or imposition that suppresses prosperity levels.
Whatever happens, the astuteness of whoever calculates money requirements and the wisdom of government in running the economy will be glaringly evident.
There will, if a correct money system is in use, be a marked absence of confusion and complexity that makes it difficult for the people to see what is being done and easy for government to blame its own ineptitude on "factors beyond its control."
SEPARATE FUNCTIONS
I should stress here that calculating money supply and then spending money so calculated into the economy are two separate functions and should be kept completely separate.
On the one hand one has an agency whose job it is to monitor the economy and any changes in the purchasing power of money and which then instructs government as to how much new money to create and spend into the economy. It must by law be safeguarded from any influence or interference from government or indeed any person or organisation. Its success or failure in doing its job is measured only by the stability or otherwise of the currency.It may not instruct government on how to spend the money, only how much money it must create.
On the other hand one has government which must be bound by law to obey the aforementioned agency’s instructions on quantity of money supply but be bound only by its mandate, constitutional duties and the promises made to the electorate as to how it spends the money.
SO WHAT ARE OUR TRUE ECONOMIC LIMITATIONS?
The limitations upon what any person, group or nation can produce are its resources, know-how, man-power, ambition, willingness, energy and desire. And even those are not absolute because human ingenuity and inventiveness, Man's considerable ability to solve problems, consistently pushes the ceiling higher.
We should beware of compromising with our goals and dreams with considerations of "it can't be done" because, in the end, it probably can.
If the demand or desire for something exists, if the technological means, the human and material resources and the willingness to do it exist, then there is no reason for it not to be done.
In such circumstances it makes no sense for "lack of money" to prevent it being done. Money's purpose is to facilitate that production, to enable that demand and those resources to come together through the interaction of human exchange. If things are not getting done simply because there is "not enough money" then there is a need to create more money, or even to introduce a properly functioning money system.
New money must in such a situation be introduced until all those desired and physically possible things are encouraged and can get done.
It is an utter failure and dereliction of duty on the part of government to permit problems of money scarcity to constrict production one iota below the level of what is desired and possible.
Yet in our modern world people are without work even while a growing backlog of undone tasks accumulates; they eat dreadfully poor quality food even while it is entirely possible to produce wholesome food; road and rail systems crumble even though they could be far better built; nations import goods they could quite easily make themselves; consumer items are built to last two years where they could be built to last twenty; we use "dirty" fuel and power sources while the extant know-how for better sources is neglected and environmental dangers accumulate even though we have the technological means to solve or avoid all of them.
Boy do we suffer from a scarcity of money!
A BIG HOLE WHERE THE FOUNDATIONS SHOULD BE
In the above sections we have considered in abstraction the meaning and basics of money supply. We have, in fact, established something of an ideal scene for money: what it is and how it is supposed to be used.
Things get very interesting when we compare that ideal scene with the contemporary economy, because we discover that almost every single one of the common sense fundamentals we have discussed is missing.
We can summarize the existing system as follows: in the modern economy almost all our money is created and gotten into circulation by private-profit banks as interest-bearing loans.
How does this system compare with the criteria for a correctly functioning means of exchange
Stable Value: in the modern economic system money does not have stable value. It continually declines in value. In fact the peculiarities of debt-money mean that it combines the worst attributes of over- and under-supply that one would find in a true money system: money manages to be both perpetually scarce and decline in spending power!
Money should not be created for personal gain. Banks create and lend money. The privilege of being able to create out of nothing and lend money that must be repaid to them establishes private banking corporations as the owners of almost all the money in circulation. By charging interest on money loaned into circulation, banks are afforded a unique privilege of making private profit from the issuance of the means of exchange.
The way to acquire money is through exchange for producing something that contributes real wealth to the human community: Banks create money but do not create wealth. Through interest on the lending of money they create out of nothing banks acquire money, and thus the means to acquire and accumulate the wealth created by others, without themselves contributing any real wealth in return.
The system of producing debt and calling it money has spawned an entire elite of people who buy and sell debt and manipulate the value of money (and so have a vested interest in the instability of money) in order to make more money.
Banks, international "investors", currency speculators and dealers in various forms of IOU (bonds, shares and so on) produce no wealth yet accumulate the wealth created by honest producers. That they have posh suits and swanky offices does not change the fact that they consume wealth and do not produce any. We can all spot, and with justice roundly condemn, a dole scrounger, yet here is a section of the community which constitutes a far heavier parasitic burden carried by the rest of us.
Money has to be in sufficient supply to facilitate smooth exchange: Debt-money economies experience a continual insufficiency of spending power, which makes it difficult for industry to sell all it produces and for the consumer to express the fullness of demand.
The economy's requirement for money should be calculated so as to ensure sufficient supply: Debt economies experience continual and often extreme difficulties establishing sufficient supply. No calculation of the economy's money requirement occurs and no principle for so calculating it exists.
So far as almost all the money circulated is concerned, the principle of supplying the economy with money as a support of the economy is absent. Supply is temporary in that it is on loan and it occurs not as a support of the community but, through interest charges, as a way of making money out of the community's need for money.
Rising prices, which in a debt economy are a consequence of an over-supply of debt are erroneously interpreted as an indicator of inflation (which is an over-supply of money) and dealt with by raising interest rates, that is by regulating the rate at which people are penalised for doing what in a debt economy they must do: borrowing money into circulation.
Government should spend money into circulation in accordance with its democratic mandate: This does not happen. Money is supplied to the community in accordance with the banks' policies on lending. Banks have the power to decide to whom they will lend and thereby control how money is used. The purpose of their lending is their own gain, not the execution of a democratic mandate or the overall health of the community. As governments themselves are heavily dependent upon borrowing money they place themselves in a position junior to the lenders of money.
Our Economic limitations should be what we have the material and human resources and desire to produce. In the debt economy perpetual money scarcity continually places a limitation upon what we are able to produce that is well below what we have the material and human resources and desire to produce.
Money is a system of tokens which we use to represent goods and services. In the debt-economy money represents a debt.
We also try to use it to represent goods and services, so we require it to do two completely different things at the same time: to stand proxy for goods and services and return to the banking sector in repayment of debt. Money which is returned to the banking sector to repay debt cannot be used to represent goods and services. It is the banking sector which has the prior claim to it and so its representation of debt is its senior function.
SUMMARY
An essentially simple but extremely clever means of facilitating exchange has been rather ingeniously perverted into something that does not work as money but works very well indeed as a means of enabling a few shifty people to operate a get-rich-quick scam, while fooling everybody else into thinking they are pillars of the community.
Using debt as one's means of exchange is disastrously inefficient, ultimately destructive of the civilisation itself and quite simply is not very clever.
Even using biscuits or bicycle clips as money would make more sense and do less damage. We fail to fully appreciate just how needlessly shambolic is our economy because we have lived with it for generations and so have no better model, no ideal scene to compare it with.
Our expectations have become so low that shambles is the norm and slightly less shambles looks like an economic miracle. Yet if we view our fantastic scientific and technological advance and the tools this provides us for the creation of unprecedented material abundance, the world's precipitous plunge into material poverty is a strange, inexcusable contradiction.
The money system that we have been trying to use for the past three hundred years was never intended to help humankind realise the full potential of swiftly advancing know-how and thus, universally, flourish and prosper. It was introduced for the express purpose of enabling a small number of people, who themselves contribute nothing of value to humanity's group endeavour, to milk everyone else of the wealth they have created. In that sense it works very well.
The reason they got away with it was that nobody among the policy-makers of nations fully understood money.
The reason "we" persist with such a system even though it doesn't work is that the small minority who do gain from it are determined that we shall do so.
The long habit of not seeing the system as wrong has been nurtured by an economic orthodoxy in which the exact method of money creation, the precise nature of what we call money, searching analyses of the effects upon the economy of the utter stupidity of creating money as interest-bearing debt and even a correct definition of the word money itself, are omitted from our education, from text-books and even from the media.
And no ideal scene for our civilization is ever delineated, lest our expectations become too high.
How much longer are we going to put up with it?
Kieron McFadden
