January 27, 2016
It is time that scientists in social, natural and formal sciences take a coffee break in their respective field of studies and help humans to understand our dysfunctional monetary system.
I would very much appreciate if anyone could present in terms of mathematical economic models these assumptions and implications here exposed.
We pay the prices of goods and services with money
Money is not a store of value because money has no intrinsic value other than the goods or services that might be bought with it. The value of money is its purchasing power; it is wanted not for permanent use, but for passing on.
Nor is money a standard of deferred payment or a medium of exchange because for each $ that is saved there must be the same $ spent; money expresses itself as a price, the values of goods in the markets are their money prices, and prices change within instants by degree or within a host of other unknowns and imponderables.
Furthermore money does not exist as commodity (capital) for itself, nor it is a unit of account, even though money is used to value goods and services and make calculations. The material of which money is made may have its utility and a value of its own but eventually the intrinsic value and the physical property of money is totally unimportant.
Money exists only as the price of something expressed in a currency – money is a means of payment – it is the desire to own. When focusing on money, we bash into a midway point, a point that is difficult to fully understand and to come by.
Beyond the two-dimensional bookkeeping
Let’s observe within a simplified closed economy two sociable playmates in a store using a governmental currency:
A Buyer and a Seller agree that a pair of red shoes displayed for sale are worth 100$. The Buyer spends 100$ and leaves the shop with the pair of shoes. The Seller is now short of a pair of shoes but has a saving of +100$.
Call it a gain from the point of the view of one holding the money, or a loss from the other’s point of view, if money is someone’s financial asset then it is another’s equal liability. That is how accounting works: there is a debit on one side and a credit on the other side:
+100$ for the Seller, -100$ for the buyer (albeit two columns for each account and only positive numbers are used in double entry book-keeping).
Let’s now consider what would happen when the transaction was non-monetary:
The Buyer has no money and wants the pair of shoes. In agreement with the Seller he works from 8.00 AM to 12:00 AM in the store; e.g. some cleaning job. At the end, the Seller gives the Buyer the pair of shoes.
There’s no outstanding credit or debit to worry about, at 12:00 AM we have:
A clean store for the Seller and a pear of shoes for the Buyer (the production of a pair of shoes is exchanged for four hours labour of housecleaning).
Let’s go back and examine again thoughtfully the first example based on the use of money. +100$ for the Seller, -100$ for the buyer:
The Buyer left the store with the pair of shoes and paid the Seller nothing else but the 100$ bill; inevitably by some means the Buyer’s debt (the four hours housecleaning) to the Seller remains yet outstanding… and unpaid.
The string theory of money
Only a few animal species have been shown to have the ability to recognize themselves in a mirror and not to see a sociable playmate in the mirror’s reflection. In like manner, humans can’t yet recognize what their own country’s currency truly betokens.
Almost all money (coins, bills, tokens) have a debit on one side and a credit on the other side: the debit side is represented with a number, the facial value, the price. On the obverse there is a portrait with an inscription, representing the authority, the credit side, the issuer.
The currency which is used for any financial transaction does not transfer solely the “debit side” of its double entry, it also transmits the “credit side”, the debt due to the issuer. That being the case, strictly, there is no transaction of money.
The day-to-day currency of a country is always stringed to a monetary authority, as an exclusive liability to that authority – within the country’s jurisdiction and within reach of its political and economic enforcement system.
Money is a debit/credit double-entry bookkeeping system – there’s nothing but mirrored numbers – money does not move from one side of the equation to the other. A financial transaction does not pass the possession of money.
Humans in the society, business people and government officials all pay their debts with money. “[…] Credit and credit alone is money… a credit redeems a debt and nothing else does”.¹
The Buyer’s100$ note – as for the example described above – is and remains by its very nature and by definition the liability of both Buyer and Seller (users of the currency) to their monetary authority. Isn’t it? Is there a surplus in sight? Impossible!
When the “private sector” pays its debt, it is the authority’s currency that expires, not the authority itself – governments, any power whatever, are the society.
It is the authority’s supply and exaction of its own currency that ultimately determinates the social value of money. “[…] The money is a tax credit”.²
Do you earn to own or to save?
The public debt does not reflect a sociable playmate or a distinct economic environment of a sovereign state. The public debt measures and puts into numbers the total costs of all monetary savings in the economy that still need to be spent.
The public debt is the mirror image of the total financial assets of both businesses and government expressed in the country’s currency – the total purchase price of all outstanding goods and services of the society as a whole that still need to be paid.
The monetary system is a mathematical notation for representing prices of commodities or services produced at a given time, using writing symbols or objects in a consistent manner. I.e. all money betoken prices – money is a unit of price and prices are units of money.
In economics textbooks it is written that a financial transaction is still a transaction if the goods are exchanged at one time, and the money at another. This is known as a two-part transaction: part one is giving the money, part two is receiving the goods.
However, all commerce is an exchange of equivalent values: an exchange of commodities and services for other commodities and services, nothing else. Money is the price of something expressed in unit of money. Money exists as price.
Credits fund (provide funding for) savings. Economists say: the private sector is one side; the public sector is the other side.
Yet, business and governments are part of society – they are not the accounting identities reflected in arithmetical debits and credits on a balance sheet.
The legitimate business of a monetary authority is to keep money employed – to settle and to allot genuine social and democratic reinvestments for every savings that are not spent. All surpluses and deficits always add up exactly to zero.
To impose austerity on the “private sector” or to withdraw a great part of people’s money from circulation by trying to swap or to balance mirrored numerals makes no sense.
“[…] money can serve no other purpose besides purchasing goods. Money, therefore, necessarily runs after goods, …. It is not for its own sake that men desire money, but for the sake of what they can purchase with it”.³
Money does not change hands as commodities are – the natural number for money is zero – savings are only the debit side of money. In overall accounting, the sum of savings is always equal to zero. It is the price of goods and services (real capital) that define someone’s equity.
Savings ≠ Investment
Debit = Credit
Asset = Liability
Owner’s Equity = Price of the Capital
Creating money is an enactment of setting prices (as for any metric system), an Act of an Sovereign Parliament to plan and to outlay actual expenditures for legitimate public purpose – spending into the consumption economy in real production, common services and capital goods.
¹. A. Mitchell Innes, The Credit Theory of Money, 1914
². Warren Mosler, Talk in Chianciano, Italy, 2014
³. Adam Smith, The Wealth of Nations, 1776