Money

V. J. Ralph

[Reprinted from the Australasian Georgist Quarterly, September, 1984]

Value is the core of economic science noted in every exchange by measurement in price. What is recorded and the method of recording is monetary theory, a subject much misunderstood and very controversial. The emphasis has been on what money does, not what it is. The study of economics is incomplete without understanding the laws, which in the relationship of trade, established natural money. Barter is impracticable beyond a primitive economy but it is an imaginary tool within which to observe the laws and relationships involved in the more complex method of the practical reality of all men trading in a method of half or demi-trades.

Money exists in the relationship of men collectively trading and is the physical record of this relationship. This is one of obligation and entitlement recognised commercially between debtors and creditors and recorded in accountancy as debit and credit.

With delay in the exchange, a barter may be separated into its two halves or demi-trades identified as the initial demi-trade and the final demi-trade. In the initial demi-trade the person giving value has an entitlement and the other an obligation which will be respectively satisfied and discharged 4n the final demi-trade. If the parties, ~ending completion of the final demi-trade, saw fit to evidence their relationship created in the initial demi-trade, by a note or token of acknowledgment from the person obligated and given to the person entitled and if by agreement it was acceptable to others, it would be money. It is evidence of the entitlement as well as the supporting obligation.

The evidenced entitlement might be passed to others entering the circle of trade until finally the person obligated satisfies the entitlement, receiving back his own note for cancellation. This is a sequence where the obligation is stationary and the entitlement is transferred but there is another sequence where the entitlement is stationary and the obligation is transferred. Entitlement is evidenced and transferred to enable a series of demi-trades between the initial and final. These are intermediate demi-trades which, in the commercial world, commanding measures of value, interlocking in numerous circles of trade, relentlessly seek the satisfaction of the obligation which created them. In balance they expand and contract in accordance with the volume of trade and require the service of a banker to keep the records. In banking where the transfer of obligation is readily recorded, the obligation may move as readily as the entitlement. By fraud or irresponsibility, obligation avoided or unduly delayed destroys the entitlement which it otherwise supports, reducing proportionately the total of all entitlements in the monetary system.

In an imaginary situation of primitive trading, where only a few persons are involved, honesty and memory would enable a series of trades to take place without a note or token of evidence. It should be seen from this that it is not the note or token that is the money but the entitlement itself supported by its obligation. From this the simplest of concepts, the ultimate appers practicable where computers replace human memory in the so-called cashless society. It is interesting to note that it is not called the "money-less" society. The word "cash" depicts coins and notes which are the token extension of the book-keeping system.

Commodity money, such as gold, is circulated as both evidence of obligation and entitlement. The evidence of entitlement was no better than paper money but the obligation involved in parting with it to command something of equal value was a discipline that made the system work without the certification of obligation by bankers. The gold traded or circulated in the obligation circle as a dominant trade to that of the servant where goods and services themselves exchanged.

The smallest circle of trade is where A, B and C trade aligning themselves so that each gives to another the valuable desired by the recipient. In the demi-trades of, A to B, B to C, and C to A, the fourth demi-trade is not lost as there are in effect two separate barters which have been simplified. A and B exchanged so that B had the desired valuable but A received something he did not want. He traded with C to achieve the desired end. Any number of persons may be included to expand the example but always there is the underlying principle established in a simple barter. The entitlement-obligation relationship of men in trade is the natural law upon which monetary theory must rest.

In the above example of three, or expanded to any number, an example of commodity money is seen. At the final demi-trade a valuable such as rum or tobacco is consumed. Coined precious metal circulated until manipulation confiscated it to the benefit of the State.

Credit money, as already explained, is the logical extension of a monetary system and is demonstrated again in the circle of trade between A, B and C or as extended to any number. In the initial demi-trade (A to B), A was entitled. The entitlement, whether evidenced or not, drew the valuable from C who became entitled to receive from B. In the final demi-trade, B discharged his obligation created in the initial demi-trade (i.e. A to B). In the alternate obligation circle, B, having the obligation, discharged it to C, who in turn discharged to A. This is not the basis of circulating money which is the evidence of entitlement.

Minting or printing as a cause of the physical existence of money must not be confused with the cause of the evidence for which such physical evidence is produced. Like anything produced its real value is that of human service involved, which in the case of printed money is fractional and unrelated to the value it commands. The value commanded is supported by corresponding obligation and the strength of the obligation is the ultimate strength of a monetary system.