Archive for May 2nd, 2017

Money is Credit

May 2, 2017

A commentator suggested I read Mosler Economics. I found this page which explains his theory on money.

To understand his theory, you must first understand the “status quo”, what climate scientists might call the “consensus”. That is, money is some good that is universally accepted as valuable and thus can be used to buy or sell any other good. This theory teaches us that money is found in gold and silver and sometimes copper, that obviously more gold means more money, as well as more silver and more copper.

Where Mosler diverges, however, is in this observation that when it came to coins in the ancient world, they behaved more like tokens rather than quantities of precious metals. The variety of weights and even the composition of the coins meant that if you expected a certain unit of money to equal a certain amount of some metal, you would be disappointed.

This is not to say that when a coin became worth less than the metal in it people would not melt them and sell them for a tidy profit. This can and does happen, and most places have strict laws against this sort of behavior.

What Mosler explains is a fundamental flaw in the story of how money came to be. The story is that say you have a baker and a butcher and the baker wants some meat but the butcher does not want bread. Under a barter system, the baker has to learn to live without meat, because there is no way he can convince the butcher to give him meat.

Now, this argument to me seems absurd because it is. All the baker has to do is make an agreement with the butcher that he will give him or whoever he says bread at some future date, and the butcher will happily sell him the meat. The butcher might sell his credit to someone else, and thus, money is born. Anyone that can make any promise for anything people might want now have the power to mint money.

Governments get involved because these sorts of contracts can get confusing. So they issue tokens, usually tied to taxes, and the people who provide economic goods are happy to trade for these tokens and trade with each other for those tokens. The tokens, then, are money. And what are the tokens? Credit. That is, the bearer of the token has either obtained it by providing something of value to the government or to someone else. They have already performed some deed or delivered some good.

This idea turns money on its head. Gone are the old ideas that money represents some physical substance like gold or silver.

Now, granted, this doesn’t erase the possibility of inflation and deflation and all the other bits that go along with money, but it should make you feel a lot more comfortable if congress were to issue “IOUs” as money rather than borrowing them from the Federal Reserve, which prints the money under congressional approval.

I’ll continue next post with a radical idea I’ve had for money.

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