The Evolution and Transformation of Money

Thomas H. Greco, Jr.

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.
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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.
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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.
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The Ladder of Economic Civilization

Stages in the development of the process of reciprocal exchange:
Barter trade Commodity money Symbolic money Credit money Credit Clearing

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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 mans wants which the produce of his own labor can supply..
Adam Smith, Wealth Of Nations, p. 29

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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

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Barter Trade
Barter is the most primitive form of reciprocal exchange. Barter involves only two people; each has something the other wants.
The Barter Limitation If Jones wants something from Smith, but has nothing that Smith wants, there can be no barter trade.

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The First Evolutionary Step

From 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.
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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.

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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.

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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

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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.

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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.
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The Second Evolutionary Step

From 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

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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
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Two Distinct Kinds of Paper Money

Symbolic Money

Bank
Mortgage Note

Credit Money

Gold

Mortgage note 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.

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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.

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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.
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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 forcing people to accept them.
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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.
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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.

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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.

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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

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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:
a thing or a fluctuating account balance based on a relationship agreement.

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How Does Clearing Work?

When you sell something, your account balance is credited (increased); When you buy something, your account balance is debited (decreased).

Money Viewed as a Wave or Account Balance

Ongoing difference between accounts receivable, A/R, and accounts payable, A/P
Positive
(sales)

A/R A/P

Negative
(purchases)

Time

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Conventional Payment Process Using Bank Credit Money

$
Bravo Company

Bank

$ Interest
Alpha Company

$
Charlie Company

$
Delta Company

Bank credit used to clear debts among companies. Interest must be paid on credit borrowed from a bank.
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Alpha owes Bravo $100, Bravo owes Charlie $100, Charlie owes Delta $100, and Delta owes Alpha $100. Typically, one or more of these debtors will borrow from the bank in order to pay what they owe to each other. In the simplest scenario, Alpha borrows $100 from the bank to pay Bravo, who then uses it to pay Charlie, who then uses it to pay Delta, who then uses it to pay Alpha. Alpha can now repay the bank, but, in addition to the $100 principal, it must also pay the bank interest. Where does the interest amount come from? In sum, each company used the banks liability (bank notes) to pay the others what was owed.

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Clearing Process Without Bank Credit

Bravo Company

Alphas i.o.u.

Alpha Company

Alphas i.o.u.
Charlie Company

Alphas i.o.u.
Delta Company

Alphas i.o.u. Mutual credit used to clear debts among companies. No interest paid.
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It is not necessary to rent a banks liability to clear debts owed to one another. In a clearing circle, each companys debt (account payable) is offset by the amount owed to it (account receivable). There is no need to use money as a payment medium. Under the politico-financial scheme of things the business man must go to the banker and pay a lending fee for what is merely a clearance service. The government even subjects itself to this tributetaking device by "borrowing" from banks whereas it could create deposits just as well by non-interest bearing currency or other notes. E. C. Riegel
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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 artificially limited. Interest must generally be paid for their use.

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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.
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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.
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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.

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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.
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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

The Creation of Bank Debt Money as Deposits

Bank
Account Deposit (liability) Mortgage Note (asset)

Debt Money Mortgage note

Banks now issue only debt money, not as notes, but in the form of bank deposits when a loan is granted.
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Banks Provide Some Useful Services

Banks provide: Clearing services. Assessment of asset values. Risk assessment services. Intermediation between savers and investors.

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Alternatives to Debt Money

Mutual credit clearing associations and private complementary currencies can
Reduce the need for conventional, bankcreated, debt-money, Make the exchange process less costly and more equitable, and Free civilization from the devastation of the growth imperative.
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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 or regional governments and their authorities. Non-profit organizations that receive pledges of financial or in-kind contributions.
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Basis of Issue or Foundation

What makes a currency sound and credible?
Goods foundation or shop foundation Service foundation Tax foundation Donor pledge foundation

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Examples of Shop Foundation

Canadian Tire money Larkin Merchandise Bonds All redeemable coupons

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Examples of Service Foundation

Railway notes or other notes redeemable for services Airline frequent flyer miles, if transferable Utility vouchers electric, gas, water.

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Examples of Tax Foundation

Tally sticks Argentine provincial bonds, e.g., Patacones, LECOP, Petrom Municipal tax certificates or tax anticipation warrants

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, healthier communities, and sustainable economies.
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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.

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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.

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Opportunities for Non-profit Organizations

Donations received in the form of pledges of goods and services or discounts can be monetized into the form of community currency and used to pay employees and suppliers. No need to market or handle in-kind donations. Currency may also be issued on the basis of services sold to the public.
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Private Complementary Currencies Have Many Direct Benefits

Private, interest-free currencies can be spent into circulation as a substitute for bank financing, promoting the health of the local economy because they recirculate locally.

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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
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Guidelines to Assure Fairness and Success

A clear agreement (contract) between the issuers and the users of the currency. Currency issued on a sound foundation or basis. Amount issued must be in proper proportion to the foundation upon which it is issued. Administration must be fully accountable to the users. Full and timely disclosure of all information needed to assess the credibility and value of the currency in circulation. No forced circulation (no legal tender status).
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Future Prospects
Non-bank clearing will proliferate in the form of
private clearing services, and mutual credit associations comprised of businesses and municipal governments.

Private currencies issued by businesses and lower levels of government will become common. Internet payment systems using non-bank credits will proliferate.

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Shake-out and Standardization

In the early stages, things will seem chaotic, many errors will be made, and there will be some failures. But as learning progresses, there will be a shake-out process in which standards are developed and the best protocols come to be recognized and generally adopted. Surviving systems will form federations to extend members trading opportunities and strengthen their market position.
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To Learn More and Keep Up-to-date

Read, Money: Understanding and Creating Alternatives to Legal Tender, by Thomas H. Greco, Jr. Read the books of E. C. Riegel. Consult the works of the German school of free money Ulrich von Beckerath, Heinrich Rittershausen, Walter Zander. Explore the website: www.ReinventingMoney.com Join one of the many complementary currency e-mail lists.
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