The Evolution and Transformation of Money

1. The Evolution and Transformation of Money Thomas H. Greco, Jr.

2. If You Don’t Understand This, What Kinds of Airplanes Can You Build?

3. Building a Healthy Economy Requires an Understanding of the Principles of Money • Money is a human contrivance. • That has evolved over centuries. • Much of the present misery in the world derives from a general failure to understand the nature of money, banking, and credit. Prepared by Thomas H. Greco, Jr.

4. Topics of Discussion • This presentation will show the progression of forms that money has taken, and explain their essential nature. • It will dispel the confusion that arises from the failure to distinguish among them. • It will explain how money is now being transformed, and • Describe the most efficient and equitable exchange mechanisms that are now emerging. Prepared by Thomas H. Greco, Jr.

5. Basic Kinds of Economic Interaction • Gifts -- Transfer of value without any particular expectation of anything in return. • Involuntary Transfers – e.g., theft, robbery, extortion, taxes. • Reciprocal Exchange – equal exchange of value between two parties by voluntary agreement. Prepared by Thomas H. Greco, Jr.

6. Money Plays Its Role Within the Realm of Reciprocal Exchange The other traditional roles of money (measure of value, savings medium) should be considered separately and achieved by other means. Prepared by Thomas H. Greco, Jr.

7. The Ladder of Economic Civilization • Stages in the development of the process of reciprocal exchange: • Barter trade • Commodity money • Symbolic money • Credit money • Clearing Prepared by Thomas H. Greco, Jr.

8. Specialization of Labor Makes Economic Exchange a Fundamental Necessity • When the division of labor has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labor can supply.. – Adam Smith, Wealth Of Nations, p. 29 Prepared by Thomas H. Greco, Jr.

9. What Is Required for Efficient, Effective, and Fair Exchange? • Free Markets • An Honest Medium of Exchange or Means of Payment • An Objective and Stable Unit of Measure of Value Prepared by Thomas H. Greco, Jr.

10. Barter Trade • Barter is the most primitive form of reciprocal exchange.Barter involves only two people; each has something the other wants. • The Barter LimitationIf Jones wants something from Smith, but has nothing that Smith wants, there can be no barter trade. Prepared by Thomas H. Greco, Jr.

11. The First Evolutionary StepFrom barter trade to commodity money • Transcending the Barter Limitation • Barter depends upon the coincidence of wants and needs. • Money bridges the gap in both space and time by widening the exchange circle. • Money acts as a “place holder” enabling needs to be met wherever and whenever the needed good or service may be found. Prepared by Thomas H. Greco, Jr.

12. Commodity Money • The most primitive type of money is commodity money.Some useful commodity that is in general demand is used as an exchange medium and may serve both as a means of payment and a measure of value. Prepared by Thomas H. Greco, Jr.

13. Examples of Commodity Money • Various commodities have historically served as money – • Cattle, tobacco, sugar, grains, nails, shells, hides, metals, etc. • But the transaction is still essentially a barter trade of one good or service for another good. Prepared by Thomas H. Greco, Jr.

14. Metallic Money • Metals became the commodities of choice because they are durable, fungible (divisible), and easily portable. “In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity.” – Adam Smith, Wealth of Nations, p. 30 Prepared by Thomas H. Greco, Jr.

15. Symbolic Money • The simplest form of symbolic money is the warehouse receipt, or “claim check” for goods on deposit somewhere. • Examples: • Grain bank receipts. • Vouchers for redemption of various goods that have been deposited. • Currencies redeemable for gold or silver. Prepared by Thomas H. Greco, Jr.

16. The First Kind of Paper Money Symbolic Money Bank Gold The first bank notes were symbolic money. They were warehouse receipts for gold or silver placed on deposit. Prepared by Thomas H. Greco, Jr.

17. The Second Evolutionary StepFrom commodity money to credit money • “Some ingenious goldsmith conceived the epoch-making notion of giving notes not only to those who had deposited metal, but to those who came to borrow it, and so founded modern banking.” • Hartley Withers, The Meaning of Money, p. 18 Prepared by Thomas H. Greco, Jr.

18. The Embodiment of Credit in Bank Notes • At first, bank notes were redeemable on demand for commodity money (gold or silver), so they were symbolic money; later bank notes were credit money. The paper money so largely in use in all civilized countries as a common medium of exchange is in reality a coinage of credit or trust. – Henry George, 1894 Prepared by Thomas H. Greco, Jr.

19. Two Distinct Kinds of Paper Money Symbolic Money Bank Credit Money Mortgage Note Mortgage note Gold Banks issued two different kinds of money but they did not distinguish between them, and few people realized it. The same identical bank notes were issued to represent both symbolic money and credit money. Prepared by Thomas H. Greco, Jr.

20. Problems With Early Credit Money • Bank notes were often problematic because now there were two different kinds of paper money being issued into circulation, the one a “claim check” for gold on deposit, and the other a credit instrument issued on the basis of a promise to pay and backed by some collateral assets, yet both were redeemable for gold. • This became known as “fractional reserve” banking because there was never enough gold to redeem all the notes. Prepared by Thomas H. Greco, Jr.

21. Redeemability Abandoned • Eventually, the redeemability feature was abandoned and symbolic money disappeared. • Now, virtually all of the money in circulation is credit money. • Most of the money in circulation exists as deposits in bank accounts. • Very little money exists as paper notes or coins. Prepared by Thomas H. Greco, Jr.

22. Money and Banking Have Been Politicized • There is a general, but erroneous, belief that the money power should be centralized and is naturally the province of government. • Governments have generally given the money power over to bankers by • establishing central banks, • granting legal tender status to their currencies, and • forcingpeople to accept them. Prepared by Thomas H. Greco, Jr.

23. The Power to Issue Money Rightly Belongs to Sovereign Individuals • If money is issued on a sound basis there is no need to force people to accept it. • Forced circulation (legal tender) serves only to concentrate power and expropriate wealth. • Democratic government requires the separation of money and state. Prepared by Thomas H. Greco, Jr.

24. The Third Evolutionary Step From Credit Money to Clearing • Money is no longer substantial. • Money is merely an accounting system. • Money is a way of “keeping score” in the economic “game” of put and take. Prepared by Thomas H. Greco, Jr.

25. Clearing -- The Ultimate Evolutionary Step • The process called clearing is the simplest and most efficient mechanism for mediating reciprocal exchange. • Clearing is simply the process of accounting that offsets debits against credits, purchases against sales. Prepared by Thomas H. Greco, Jr.

26. The Possibilities of Clearing Have Long Been Recognized • “If there were no money, any system of crediting sellers and debiting buyers would be fully competent to accomplish the work now performed by money.” — Bilgram & Levy, 1914 Prepared by Thomas H. Greco, Jr.

27. Particle or Wave?Thing or Account Balance? • Light can be described as either a particle or a wave. • Money can likewise be described as either: • athingor • a fluctuating account balance based on a relationship agreement. Prepared by Thomas H. Greco, Jr.

28. How Does Clearing Work? • When you sell something, your account balance is credited (increased); • When you buy something, your account balance is debited (decreased).

29. Money Viewed as a “Wave” Time Ongoing difference between accounts receivable, A/R, and accounts payable, A/P Positive (sales) A/R – A/P 0 Negative (purchases) Prepared by Thomas H. Greco, Jr.

30. Conventional Payment ProcessUsing Bank Credit Money Bank $ $ Interest $ Alpha Company Bravo Company $ $ Charlie Company Delta Company $ Bank credit used to clear debts among companies. Interest must be paid on credit borrowed from a bank. Prepared by Thomas H. Greco, Jr.

31. Clearing Process Without Bank Credit Alpha’s i.o.u. Alpha Company Bravo Company Alpha’s i.o.u. Alpha’s i.o.u. Charlie Company Delta Company Alpha’s i.o.u. Mutual credit used to clear debts among companies. No interest paid. Prepared by Thomas H. Greco, Jr.

32. Clearing Compared to Currency • Remember, a currency is typically a third party debt, an i.o.u., that a seller accepts as payment from a buyer. • That may be a Federal Reserve note or a bank deposit, or a private debt. • The supply of such third party instruments is usually limited artificially. • Interest must generally be paid for their use. Prepared by Thomas H. Greco, Jr.

33. Clearing Compared to Currency • Clearing eliminates the need to use any third party debt as payment. • Goods and services pay directly for other goods and services. • The supply of internal credits is limited only by the available goods and services being traded. • Credit allocation among members is always sufficient; determined by the participants themselves according to their own contract, rules, and evaluations. • There is no need to pay interest to anyone. Prepared by Thomas H. Greco, Jr.

34. A Successful Credit Clearing Association The WIR business circle cooperative (Wirtschaftsring) was founded in Switzerland in 1934 as an answer to the money scarcity of the Great Depression, and still thrives after 70 years. Membership, at first completely open, was later restricted in order to build solidarity among the “entrepreneurial middle-class.” A balance between ideology, adaptability, and good business sense has enabled its long-term success. Prepared by Thomas H. Greco, Jr.

35. What Do Banks Do? • Clearing is what banks already do, but it is not widely recognized as such. • Banks still prefer to act as if money is a thing which they can “lend” out at interest. Prepared by Thomas H. Greco, Jr.

36. What Else Do Banks Do? • Banks also authorize some of their customers to spend money into circulation. • They do this by making “loans” based on the “creditworthiness” of the customer and the value of their collateral assets. • This process is often called “monetization,” which converts the value of illiquid assets into liquid or spendable form. Prepared by Thomas H. Greco, Jr.

37. The Debt Money System • Banks call this process “making a loan,” even though nothing is loaned. • Banks charge interest on these “loans.” • That turns “credit money” into “interest-bearing debt money,” • Which results in a growth imperative that destabilizes the entire economy. Debt Time

38. The Creation of Bank Debt Money as Deposits Bank Account Deposit (liability) Debt Money Mortgage Note (asset) Mortgage note Banks now issue only debt money, not as notes, but in the form of bank “deposits” when a “loan” is granted. Prepared by Thomas H. Greco, Jr.

39. Banks Provide Some Useful Services Banks provide: • Clearing services. • Assessment of asset values. • Risk assessment services. • Intermediation between savers and investors. Prepared by Thomas H. Greco, Jr.

40. Alternatives to Debt Money • Mutual credit clearing associations and private complementary currencies can • reduce the need for conventional, bank-created, debt-money, and • free civilization from the devastation of the growth imperative. Prepared by Thomas H. Greco, Jr.

41. Who Is Qualified to Issue Currency? • Any entity that produces goods or services and offers them for sale in the market, i.e.,productive businesses and individuals. • Any entity that has the power to collect revenues, e.g.,local orregional governments and their authorities. • Non-profit organizations that receive pledges of financial or in-kind contributions. Prepared by Thomas H. Greco, Jr.

42. Basis of Issue or Foundation What makes a currency sound and credible? • Goods foundation or “shop” foundation • Service foundation • Tax foundation • Donor pledge foundation Prepared by Thomas H. Greco, Jr.

43. Examples of Shop Foundation • Canadian Tire money • Larkin “Merchandise Bonds” • All redeemable coupons Prepared by Thomas H. Greco, Jr.

44. Examples of Service Foundation • Railway notes or other notes redeemable for services • Airline frequent flyer miles, if transferable • Utility vouchers – electric, gas, water. Prepared by Thomas H. Greco, Jr.

45. Examples of Tax Foundation • Tally sticks • Argentine provincial “bonds”, e.g.,Patacones, LECOP, Petrom • Municipal “tax certificates” or “tax anticipation warrants”

46. What All This Means • Sound and credible exchange media can emerge from a variety of sources. • There is no need for the exchange process to be limited by centralized power, i.e., governments or banks. • Competition among currencies and exchange options results in a stronger, less costly business environment, and healthier communities. Prepared by Thomas H. Greco, Jr.

47. Opportunities for Business • Companies of all kinds, either individually or in association, can economize on their needs for conventional working capital by using their own currencies to pay suppliers and employees. Prepared by Thomas H. Greco, Jr.

48. Opportunities for Governments • Municipalities and provincial governments can fund a large proportion of their current operations by using their own currencies to pay part of what they owe to local suppliers and employees. • Infrastructure development can, to some degree, be financed by making payment in municipal currency. Prepared by Thomas H. Greco, Jr.

49. Private Complementary Currencies Have Many Direct Benefits Private, interest-free currencies can be spent or sold into circulation as a substitute for bank financing, promoting the health of the local economy because they recirculate locally. Prepared by Thomas H. Greco, Jr.

50. Summary of Advantages • Adequate supply • Low cost • Democratically allocated • Give local suppliers preference • Reduced risk of default because – A promise to deliver goods or services is less speculative than a promise to pay official money. • Help to stabilize the global economy Prepared by Thomas H. Greco, Jr.