Let’s start with the basic question: just what IS money, anyway?
Try this thought experiment. If you’re ambitious, you can get some people together and actually do it.
Hugs Cost a Dollar
OK, imagine (or do) a small group, say ten people, standing in a circle. Albert has a dollar bill (or note of any currency). Hugs today cost a dollar (or whatever). Betty, next to Albert, gives him a hug, and he gives her the dollar. Then Charlie, the next one, gives Betty a hug and Betty gives him the dollar. All the way around the circle until Zenobia, the last one, gets a hug from and gives Albert the dollar.
Now, how do you explain the mystery? Everybody got a hug, everybody spent a dollar, yet there was only one dollar and the original owner has it back!
Now try a variation. Instead of having a dollar, Maluf, outside the circle, has a blackboard. Across the top of the blackboard, he lists everyone’s name. At the beginning he marks +1 under Albert’s name. When Betty gives Albert the hug, he erases that and puts a +1 under Betty’s name, and so on. You can see that this is essentially the same as handing a dollar bill around.
This leads us to the first lie about money:
Lie #1: Money is a Thing
The controllers of money go to great lengths to make people believe that money is a thing. That’s why they have coins that look like gold and silver, with pretty pictures on them, and engraved notes that look so official. Our language reinforces this attitude. We “have” money, we “gain” or “lose” money, we “save” or “spend” it.
Even when people use cards or electronic transfers they refer back to the notes and coins.
The creators of digital currencies, such as Bitcoin, unfortunately did not take advantage of the opportunity to educate people about money, instead promulgating the same old lies. They even chose the name “Bitcoin,” as if it somewhere, somehow, referred back to coins. They called the software for accessing it “Bitcoin Wallets.” Most of the websites about bitcoin and other ecurrencies say something like, “You need a wallet to store your bitcoins in.” This is completely untrue. The “wallet” is not a container and “bitcoins” are not stored in it.
So if money is not a thing what is it?
OK, ready? Money is a record. That’s why we call paper money “notes.” (U.S.A.: “bills.”) What is a note? A record. Something you write so it won’t be forgotten. In the U.S., when you want to pay in a restaurant, you ask for the “bill.”
What is money a record of? For this, you need to understand what a “dyad” is. A dyad is two concepts which are opposed but interdependent. One implies the other. Hot and cold, for example. Hot implies cold and cold implies hot. If there were only one temperature, you would not need the ideas “hot” and “cold.”
Man and woman, master and servant, rich and poor…
So what’s the dyad of money? Debit and credit (from Latin). Debit means you owe, credit means another owes to you.
Wherever there is a credit, there has to be a corresponding debit, and vice versa.
So who has the credit, and who has the debit? This leads us to the next Lie About Money:
Lie #2: There is Only One Kind of Money.
So how many kinds of money are there? Two: private money and public money.
Private money means a debtor-creditor relationship between 2 persons, or entities like a business or corporation. Go to your bank and deposit one hundred dollars. Now you have a credit with respect to the bank of $100 and the bank has the same debit with respect to you.
Now go to a store and pick up a loaf of bread, priced at, say, two dollars. Take the bread to the cashier. Having taken possession of the bread, you are now in a debtor-creditor relation to the store. You have a debit of (you owe it) two dollars, it has a credit of (it is owed) two dollars. You put your card in the machine, or swipe it. Your bank takes two dollars off its debit to you and adds two dollars to its debit to the store. The store now has a two dollar credit with respect to the bank and you own the bread, free and clear.
OK, but what if you paid with dollar bills? Now you are using public money.
Obviously, if you have a dollar bill, you have a credit of one dollar. But where’s the debit? You are owed a dollar, but who owes the dollar? Take a minute to think about this before you read on. The beauty, the brilliant concept of public money is…
Everybody! That is, the entire community of people who accept dollars as negotiable currency, owes you the dollar. When you hand your two dollars over to the store, you transfer that credit to it.
Remembering the “Hugs” experiment above, you will see that the notes and coins are just a convenient way to keep track of all those credits and debits. You could do away with them if there was an enormous flock of angels spying on everyone, writing down all transactions, and keeping a record of who had what credits and debits, just as God is supposed to keep a record of all your merits and sins.
In fact that’s just what digital currencies do: the blockchain is a record of all the transactions ever made with Bitcoin or whichever currency. It is a public money that doesn’t require physical notes and coins.
Governments prefer the use of private money because it’s more difficult to cheat on taxes, as there’s always a record, a “paper trail.” And, of course, they foster the illusion that public money is the same as private money.
“Money supply” is something of a myth, connected with the idea that money is a thing. If money is just records, what does “supply” mean?
And what about all the hooraw over governments and banks “creating” money?
Lie #3: Only Government Authorized Banks Can “Create” Money.
You’ve probably heard that banks have the right to “create” money. What does that mean? Suppose a bank approves you for a loan of one thousand dollars. The bank will simply open an account for you and make a record of a debit towards you of that amount. Voila! One thousand dollars “created.”
This is a pompous and socially sanctioned ritual, but in essence it is no different from what you probably did as a child, that is write an “I.O.U.” (I owe you). If you write on any scrap of paper that you promise to pay ten dollars (and mean it) that is in fact, money! The paper isn’t even necessary. As long as John and Mary agree that he owes her ten dollars, that is money. The paper is just a record, so it won’t be forgotten, of a “promise to pay,” which is the essence of money.
The bank’s private money is negotiable. Walmart is unlikely to accept John’s “I.O.U.” to Mary as payment for a pair of shoes, but it will accept the bank’s “I.O.U.” The bank will also freely exchange private money from itself or other banks for public money.
Money is simply a debtor/creditor relationship. Gold and silver coins, if they are honest, are not in fact money by this definition, but a barter system in which one commodity is regulated by a government and generally accepted for exchange. If you beat the markings from a gold coin it still has the same value.
Notes that directly represent gold or something else of value are transitional. If there is a direct one to one relation – if for each note the exact equivalent of gold or whatever is actually sitting in a vault somewhere – then they are effectively barter, and just a way of not having to carry the gold around.
In the U.S.A. before 1933 a dollar represented a specific quantity of gold, and the government would, if demanded, exchange gold for dollars. Even though the government did not keep the full equivalent of gold (40% by law) the system was still in practice barter as long as the users had full confidence that they could exchange dollars for gold.
After 1933, the dollar still represented gold, but citizens could not exchange them for gold, so in practice the dollar worked as public money. Foreign governments could exchange their dollars for gold. For them, owning dollars was the same as owning gold, so it was still barter.
In 1973, the U.S. government abandoned the practice of valuing the dollar in gold. They allowed the dollar to “float,” so it became fully public money, like all the currencies in the world (the Swiss Franc hung on until 2000.)
U.S.A. currency used to, and U.K. currency still does (2019), say on it “I promise to pay the bearer (face value of the note).” U.S.A. currency now says, “This note is legal tender…”
British pounds originally represented a pound’s weight of silver. You could go to the Bank of England and exchange them for silver or gold. No longer. Now it’s “promise to pay” means only new banknotes.
Lie #4: Different currencies are qualitatively different.
“A Yen, a Mark, a Buck, or a Pound… Money makes the world go ’round.” – song from the musical “Cabaret”
In 2002 the Euro replaced a number of currencies. No more marks, francs, guilders… All those currencies up in smoke, just memories now, perhaps nostalgic. Does it matter? Each country is proud of its currency.
Traveling in India I could live like a king with my dollars and euros. Hotel rooms, restaurant meals, and transport were one tenth the price I would pay at home. Why? Exchange rates. The people in India earned and spent rupees so it was the same for them as it would be for me in my country. But no international traveler would carry Indian rupees.
Money is just numbers, it’s just arithmetic. A pound is not qualitatively different from a dollar or a euro or a yuan. It’s all just credits and debits.
So why will everyone everywhere accept U.S. dollars? Because they know that everyone will accept them.
Lie #5: Time is Money.
If you are a wage slave, receiving the same amount of money for each unit of time you work, then perhaps in a limited sense time is money, for you. Certainly it is convenient, for those who make profits from hiring workers, to have the workers believe that “time is money.” Otherwise the workers might quit and start up their own businesses.
Anyone who has operated a business knows there is no direct relationship. Sometimes you break even, sometimes you lose, and sometimes (if the business succeeds) you make a lot in a short time.
That ignoramus Karl Marx (how were so many taken in by his blathering?) thought that the value of commodities was proportional to the amount of labor time needed to make them. The price of anything (including labor) results from a compromise between how much the buyer is willing to pay and how much the seller is willing to accept. In other words, value is subjective. Why can you often get discounts when a street market is closing, or from large stores after Christmas? The sellers want to get rid of their stock, so they will accept less. How much would you pay for water if you were dying in the desert? Why do labor unions go on strike?
Conclusion:
Barter, private money, and public money do blur some around the edges, and one can easily transform into another. Barter does not require faith, since commodities have generally accepted values. Currencies come and go, but gold has always and everywhere kept its value (though it does fluctuate).
The value of private money depends on the faith the holder of the note has in the issuer. Before governments by law guaranteed bank deposits, bank failures (loss of faith) could ruin their depositors.
The value of public money depends on magic: like Ouroborous swallowing its own tail, everybody accepts its value because “everybody knows” it has that value.