where does money come from? most people tend, to assume, that some law of nature, guarantees an unchanging supply of it.
and when someone suggests that perhaps, there should be more or less money, many react as though he were proposing to meddle with nature, or profane the sacred.
money is a manufactured, item. the amount of money available to the economy, is determined by the manufacturers.
this amount influences business activity, incomes, prices, and economic growth.
the interest rates of money, are the very prices bankers charge for the use of their product, money.
the federal reserve system, is the control, organization, guiding the money manufacturing process. the system was created by congress, and is a creature of that body.
many believe that “money”, comes into being, first, and is then deposited in banks. the bank must then take a certain portion of this money and send it to a central bank where it is kept, in compliance with the reserve requirement.
the truth is however that the private banks, collectively, have deposited not a penny, of their own funds, or their depositors’ funds, with the central bank.
by and large, all their deposits — reserves — at the central bank are created by the central bank. and credited directly to their various accounts.
the power to create money is given to the federal reserve, by congress. this is the case. the federal reserve system is an agency of congress, authorized to create money.
there is no mystery about this. most of the u.s. money, in existence — currency, coin, and demand deposits — belongs to citizens of the united states.
they cannot, exchange their dollars for gold, or anything else. they can exchange them only, for other dollars. these dollars are, obligations of the u.s. government.
from a much more basic point of view, the dollar is backed by the credit of the u.s. government, and accordingly, by the credit, and assets of all its citizens.
the ‘dollar’, is good for the payment of taxes. the dollar, can be exchanged for “many types of commodities”, including gold, as well, as for housing, professional services, and labor.
since the purpose of money, is to make it easier for a nation to produce real goods and services, the money system should be controlled in ways which serve these purposes, best.
for example, it is very important, to have the right amount of money available at all times. too little money and too much money are both bad.
it is the people, acting through their government, who make the important decisions about money, from what they will use. to who will create it.
the citizens of a country, would indeed be foolish, to select a monetary system, which leaves the amount of money to accidental discovery of gold — or serving only banking, interests.
Economists divide the economy into two sectors, public and private… they say:
The government deficit equals the non-government surplus.
For example, if the government (Public Sector) spends 100, then the private sector’s saving (businesses and households) equals 100.
We wouldn’t have any government money if the government didn’t spend into the economy – and if we didn’t have fiscal deficits, we wouldn’t have any government money.
The treasury balance decreases when the government debits its account and credits the accounts of the private sector – e.g., the payment of pensions to households or that for public works to firms.
Yet, government and businesses are part of – the same – society; they are not “two” separate bodies, or two different identity. We all, households and companies, are part of the government just as of the non-government.
We are the government and the government is us. Though, we might take into account the possibility that we all have so far universally failed the mirror test…
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…
This is also true with money – we all bash into a midway point, a point that is difficult to fully understand and to come by.
(financial double-entry bookkeeping)
We have the national debt (deficit) on one side – and the corresponding financial asset (surplus) on the other side… But, the deficits and surpluses are two faces of the same coin! They are not “two” separate pieces.
In the real world these “red” versus “black” numbers are not “two” distinct physical objects.
The whole national debt is just a collection of government-issued financial assets; “red” versus “black” numbers – savings account operated by the government, circulating in the society.
The public debt just measures and puts into numbers the total value (prices/costs) of all monetary tokens (savings/expenditures) that still circulate in the society as a whole (government/households).
Money exists only as the “price” of “something” produced at a given “time”; and it is always expressed in its “government’s currency”.
Don’t confuse national wealth (real assets), with financial numbers on a balance sheet. What matters is not if the glass is half empty or half full; what matters is what it is inside the glass.
“[…] 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”. Adam Smith, The Wealth of Nations, 1776
It is necessary to have a clear understanding how money is created (and how it is managed by its “authority”), if one does not want to find oneself in a “problem entanglement” in which “equal” things are perceived and compared as different with each other, whereby in reality they are the same.
The smart animal perceives the reflected image as itself, rather than of another animal.
What matters in our world, is a healthy environment, strong civil and private institutions, well educated people, a fair distribution of wealth and income across society.
Money does not change hands as commodities are – the natural number for money is zero.
Zero can’t be a debt.
Government debt = community money
Money is a unit of price. Prices are units of money.
Once one clearly recognizes the difference between real productive capital (non-financial assets) and money, it is only a small step to a clearer understanding of real world economic imperatives.
savings ≠ investment debit = credit asset = liability owner’s equity = price of capital goods
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 pricesofcommodities 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
“Father Gold, Mother Money”
by Alberto Veronese, November 2012
Any dictionary defines BARTER as: (n) an equal exchange, (v) exchange goods without involving money. (e.g.) We had no money so we had to live by barter.
Well, indeed, in order for the barter to occur, NO money is needed at all. All it needs is two people (TWO ENTITIES), or two groups of people, who barter their goods with each other because they want to.
On the other hand, when money is involved, the equal exchange can not be said barter; In fact, goods or services are exchanged by their money value (i.e. price), where someone ‘sells’ or ‘buys’ goods – for money or with money.
It easy to understand that, for a monetary transaction to occur (i. e. involving money) a third distinctive entity (an authority or assembly) is needed; A THIRD ENTITY which creates, owns and controls the money supply.
NONE of the TWO ENTITIES (which barter with each other) can issue/own the money for themselves; because if so, the resulting exchange would be again nothing else than a barter.
From the dawn of modern history to the present the ‘creation of money’ was an means to move resources from the citizens to the THIRD ENTITY – money must have emerged as a ruling instrument for deferred payments;
In exchange for protection people would assent to give up a part of their resources and obtain developmental projects and services of ‘public-interest’ and the benefits of political order.
In ancient time taxes were paid with work or with a variety of objects. The presumed yield of the fields at harvest was calculated in advance. Whippings inflicted by tax collectors upon the disobedient peasants were frequent.
Throughout civilizations taxes* and obligations were being supervised by functionaries; codes, laws and notices regulated the life of the citizens, and shaped rules for contracts, commerce and private property.
Thereon, money was ‘administered’ to the people and then used as a levy raised by the authority to support the needs of the state. A ‘tax credit’
– fundamentally to assure the interests of the upper cast.
Even today the Internal Revenue Service pays attention to taxing barter activity – you name the swap, the IRS wants to tax it. That means each side must report to the IRS the fair market value (in money) of the item or services received.
Back in time the city-state became an answer to human necessities. Inside the city-state, all in all, people were interdependent from each other, tightly tied to their hierarchies; political and economic life was dominated by war.
The privilege of striking money was of great importance, especially in time of war – ‘Moneta’ has its full power as a ‘monere’ ** – it improves the productivity, the efficiency of labor and settles remunerations and tax collection notices all at once.
The weight or composition of money could differ for many reasons and was not a matter of importance – i.e. large numbers of slaves were used to work the mines – what was important was the name or distinguishing mark of the issuer.
The rise of ‘more democratic’ states, new technologies and new ‘monetary tools’ further the public purpose and benefit (succeeded only after civil strife and violent conflicts) the citizens of the county as a whole.
Today money is not intrinsically limited; the ISSUER cannot run out of its money. The ‘authority’ creates, ’owns’ and issues the currency – and ‘continues’ the ability to decide what is money and what is not.
And as said before, because it is the owner of the currency, any exchange it does with money it results to be a BARTER; it is an ‘equal engagement’ between the authority and the public sector.
It’s a BOND that explicitly expresses the willingness of the authority to build on the work (the labor) of the people, who then confidently and with commitment renew their bond with the authority.
The ‘equal exchange’ of money for goods and labor requires true co-operation as it is needed to keep the economy working – “Let the King serve the people!”
Any national currency that is ‘fiat’ can be redeemed in the form of ‘tax credit’
There are three major offices, which are:
1. ensure fair access to scarce resources,
2. create jobs with adequate pay,
3. allow young and old people to live with dignity.
A healthy ‘modern’ economy provides the facilities and services that a effective, democratic society must have – money is a means toward these ends – we the people ought to pursue this idea and goal ourselves.
The ‘GOVERNMENT’ is committed to create and provide the right monetary system for the benefit of the country, and allow citizens to set in motion a sustainable development of their available public and private resources.
* Tax, taxo, taxāre; (Latin); (v.) to estimate, value. Labour in ancient Egyptian is a synonym for taxes.
** Moneta (Latin); (n, v.) money, coinage. Moneo, monēre (Latin); (v.) to warn, remind; ad-monēre (n.) warning. The roman goddess Juno Moneta’s name (Greek goddess Mnemosyne) derives likely from the Greek “moneres” meaning alone, unique (an epithet that every mother has).
J. M. Keynes 1939 (pre-war) radio address on the beginning of The Grand Experiment…
Related Content:
The Economic Consequences of the Peace
“[…] We have been moved already beyond endurance, and need rest. Never in the lifetime of men now living has the universal element in the soul of man burnt so dimly.”
John Maynard Keynes, Nov 1919. http://www.gutenberg.org/files/15776/15776-h/15776-h.htm
John Maynard Keynes Explains Cure to High Unemployment in His Own Voice. (1939)
OpenCulture, Jun 21, 2012
Not Gold But Money 