Transcript Document

The Evolution and
Transformation of Money
Thomas H. Greco, Jr.
If You Don’t Understand This,
What Kinds of Airplanes Can
You Build?
Building a Healthy Economy
Requires an Understanding of
Money
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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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Topics of Discussion
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This presentation will show the progression of
forms that money has taken, and explain their
essential nature.
It will dispel the confusion that arises from the
failure to distinguish among them.
It will explain how money is now being
transformed, and describe the most efficient
and equitable exchange mechanisms that are
now emerging.
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Basic Kinds of
Economic Interaction
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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
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The Ladder of
Economic Civilization
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Stages in the development of the
process of reciprocal exchange:
 Barter
trade
 Commodity money
 Symbolic money
 Credit money
 Clearing
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Specialization of Labor Makes
Economic Exchange a
Fundamental Necessity
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When the division of labor has been once
thoroughly established, it is but a very small part
of a man’s 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?
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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
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Barter is the most primitive form of
reciprocal exchange.
Barter involves only two people; each
has something the other wants.
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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
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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
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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
payment medium and a measure of
value.
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Examples of Commodity
Money
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Various commodities have historically
served as money –
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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
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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
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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.
 Currency 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
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“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.”
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Hartley Withers, The Meaning of Money, p. 18
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The Emergence of Credit
Money
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The introduction of the bank note was
the first step in the development of the
machinery for “manufacturing credit.”
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.
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Two Distinct Kinds of Paper
Money
Symbolic
Money
Gold
Bank
Mortgage
Note
Credit
Money
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
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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.
There was never enough gold to redeem all the
notes, so this became known as the “fractional
reserve” banking system.
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Redeemability Abandoned
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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
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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
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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
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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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Particle or Wave?
Thing or Account Balance?
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Light can be described as either a
particle or a wave.
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Money can likewise be described as
either a thing or a fluctuating account
balance based on a relationship
agreement.
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Clearing -- The Ultimate
Evolutionary Step
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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
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“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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How Does Clearing Work?
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When you sell something, your account
balance is credited (increased); when
you buy something, your account
balance is debited (decreased).
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Money Viewed as a “Wave”
Ongoing difference between accounts
receivable, A/R, and accounts payable, A/P
Positive
(sales)
A/R – A/P
0
Negative
(purchases)
Time
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Conventional Payment Process
Using Bank Credit Money
Bank
Bravo
Company
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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Clearing Process Without
Bank Credit
Bravo
Company
Alpha
Company
Charlie
Company
Delta
Company
Mutual credit used to clear debts among companies.
No interest paid.
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Benefits of Clearing
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Participants save on interest costs.
Never any shortage of internal credit.
Credit allocation among members is
determined by the participants
themselves according to their own
contract, rules, and evaluations.
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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.
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?
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Clearing is what banks already do, but
it is not widely recognized as such.
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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?
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Banks also authorize some of their
customers to spend money into
circulation.
They do this by evaluating the
creditworthiness of the customer and the
value of any collateral, and granting them a
“loan.”
This process is called “monetization,” which
converts the value of illiquid assets into
liquid or spendable form.
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The Debt Money System
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Banks call this practice, “making a loan,”
even though nothing is loaned.
Banks charge interest on these “loans.”
That turns “credit money” into “interestbearing debt money,”
Which results in a growth imperative that
destabilizes the entire economy.
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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.
 Mediating savings and investments
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Alternatives to Debt
Money
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Mutual credit clearing associations and private
currencies can reduce the need for
conventional, bank-created, debt-money.
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Who Is Qualified to Issue
Currency?
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Any entity that produces goods or services
and offers them for sale in the market –
productive businesses and individuals, or
their associations.
Any entity that has the power to collect
revenues – 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?
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Goods foundation or “shop”
foundation
Service foundation
Tax foundation
Donor pledge foundation
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Examples of Shop
Foundation
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Canadian Tire money
Larkin “Merchandise Bonds”
All redeemable coupons
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Examples of Service
Foundation
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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
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Tally sticks
Argentine provincial “bonds”, e.g.,
Patacones, LECOP, Petrom
Municipal “tax certificates” or “tax
anticipation warrants”
What All This Means
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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 will result in a stronger, less costly
business environment, and healthier
communities.
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Opportunities for Business
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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
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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
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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
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Abundant supply
Low cost
Democratically allocated
Gives 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.
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Guidelines to Assure
Fairness and Success
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A clear agreement (contract) between the issuer
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
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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 nonbank credits will proliferate.
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Shake-out and Standardization
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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 on Developments
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Explore the websites:
ReinventingMoney.com
circ2.home.mindspring.com
Read, Money: Understanding and Creating
Alternatives to Legal Tender,
by Thomas H. Greco, Jr.
Join one of the many complementary
currency e-mail lists.
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