Today there seem to be few people, let alone economists, who actually seem to grasp the basic ideas of monetary theory upon which they build their roads to whatever fantasy land their prejudices predispose them to believe in. Economists pronounce, politicians spout and pundits pund but, how many of them really grasp, and apply, a basic understanding of what money is; how many have a clue how far everyone has strayed from reality?
Come Virginia, let us begin at the beginning; what is the difference between coinage historically (which is not like coinage in the modern world) and paper “monies“, and just what money really is.
I will be analyzing monetary theory without being bound by any politically oriented school of “economics“, instead I will attempt to put money in the same light that Newton put moving objects; money follows laws that do not respect any political need or opinion and I hope to merely describe what it is and what it is not irrespective of what anyone wants it to be.
Let’s start with coinage, a concept that still holds its place at the head of the parade despite vanishing as a concept by the 1970’s.
Historically, coins were what people now mostly think “money” should be, a portable piece of actual wealth, something “worth” just what its face declares. Don’t forget though that all value is relative, if no-one wants gold, it is “worth” little, if they crave it, it is worth a lot.
Cash monies on the gold standard promised payment in hard coin with value of its own.
At first glance this seems a good system, though it does carry hidden “costs.” If the gold or silver or copper in a coin is “worth” exactly its face value the person or group who minted that coin will lose the amount of “value” (manpower and resources) represented by the minting of the coin from bullion. No matter how cheaply a chunk of bullion quality metal is turned into coinage that amount of value will be lost to the minter if they receive the “face” value in goods or services in return for their shiny, new coins.
This does not change with banknotes; printing costs plus the cost of the raw materials simply replaces the minting costs; remember, the raw material of a coin is the value of the coin.
For a long time banknotes represented actual bullion in a vault, or somewhere in the control of the issuer of the note, while coins represented actual wealth themselves. But, the ability of coiners to debase the metals they used producing coins “worth” less than their face value, and the fact that not all promissory notes represented an honest promise of actual coinage made the system far from perfect.
Enter “fiat” money. Bitterly fought, this is what “money” is supposed to be, though the transition is far from over globally and nationally.
A “currency” based on the exchange of gold and silver etc. is not in fact a real monetary system, it is barely one step up from barter. In barter or specie based economies not only must a person, or society, have the wealth and productivity to fill their own basic needs, they need to accumulate extra goods (coinage) simply to be able to participate in the system that provides those basic needs and services. Then they must accumulate even more if they wish to enjoy a level of “comfort” far below what is consonant with their current efforts to add productivity and wealth to their communities.
Barter ecomonies belong to an uncivilized past. Coinage was a simple, brute force answer to the problem of trusting someone when you have no way of enforcing that trust. Cash on the barrelhead as they said. Hopefully we have grown a bit beyond that, at least in the Western (civilized, modern) world.
Here is the bombshell Virginia, it is so simple that the “intelligentsia” just can’t get it: In a civilized society the function of money is to serve as counters in the games of economics, nothing more, nothing less. Money is not a commodity as it has no value of its own. Money is supposed to represent the wealth and productivity of the issuer only, not to be “worth” anything at all on its own!
Ideally, if a government wanted a bridge built and had the spare raw materials and manpower to build it, all the gov needs to do is print the right amount of money, and pay for a new road.
They do not make anything appear by doing so, they do not cause “inflation”, they just tossed counters in the game that were needed to let the players turn raw materials and idle bodies into a bridge thus creating wealth, not diminishing it! Or not creating as such, but acknowledging, since keeping the money level in balance with the national productivity is the whole goal.
Ideally, within a nation, it should be practical to pay each citizen with new, non-inflated money in tune with any growth in GDP, just like dividends to stockholders in a corporation. Infrastructure improvements (bridges, roads, universities and research facilities, etc.) would only be “unaffordable” if they used so many resources or manpower that they caused a significant rise in prices and wages in the private sector; wouldn’t that be so terrible, we couldn’t build a road one year because there was no unemployment and people were selling what they made as fast as they could make it!
Practically, especially with the current rats nest of insanity that we call economics worldwide, that kind of system would be almost impossible to implement; more the shame on us for letting things get so messed up.
Simply put, we should not be borrowing the money the government has the sole right to print/mint and regulate!!! The amount of dollars in circulation is supposed to be enough, theoretically, to buy all the goods and services produced this year, instead we treat money as though it is coinage and create a pre-broken system that invites inflation, deflation and puts everyone at the mercy of molehill booms and mountains busts.