We all know the tale of the goldsmith who became the bankster via the invention of fractional reserve banking...
Today we will consider the 'tale of the baker'...
Anton, a baker in a medieval town, writes a promissory note for the exchange value of 4 loaf’s of his bread, which he has baked before the village had awoken. He offers this note as payment for goods he needs to acquire in the market. Since he is known in the town and is reputable, people take his note in exchange for goods they offer for sale. They redeem it later for Anton’s bread, and Anton takes the note out of circulation. This is an obvious solution to the temporal friction of barter, based upon the credit for the baker’s economic production as the means of deferring payment. The baker effectively created money as capital from his production C-M and then deferred payment via M-C. The capital as credit was created by and consumed by trade and hence deprecated to C-C or a deferred barter trade.
Anton issues his own credit, which is accepted in trade based on his production, not on debt; some fraudster promises to pay him at some point in the future, and knowing full well the issuer of debt has no capability to create any economic production. The credit Anton issues is not anonymous, and were Anton to issue certificates for production he does not have, the losses would not be socialized, and it would be limited to those who hold his note and himself.
This is the tale of why no form of money can exist or circulate as anonymous debt, as debt assumes that nothing was originally produced or will be produced and hence nothing exists to trade, even barter would be impossible with debt, as debt without any intrinsic value cannot be valued within a trade, as it exist outside of human comprehension of its value? Debt exists to socialise trade losses to the community, rather than the issuer of the debt.
The moral of the tale of the banker is money can never be scarce, as long as economic production exists.
The tail of the baker leads us to the concept of the digital coin as a means of capital flow within a currency deferred payment solution within each local currency area. In essence this concept will become the subject of two latter chapters, The World Currency Unit and the Local Currency Area. But let’s develop the basics in this introductory section.
The first is that the money put in circulation must be extinguished so it can be re-issued as to represent capital for the new production or goods. To be extinguished it must be extinguished by trade (M-C-M => M-C => C-M). Since no one could issue capital or coins without offering products in services in proven demand, there can exist no counterfeiting or debt based money in circulation within the currency area. Since supply and demand fluctuate, the value of a coin (exchange value) will vary with the tradeable item or commodity (M). Hence this means capital formation cannot be limited by monetary value or currency within payments, the only limit is the economic production of the currency area.
Thus the theory of two coins is born; a "perpetual coin" (the World Currency Unit), which will be fixed in supply and convertible on demand to a fixed supply of intrinsic value (capital), and the "digital coin" issued by each local currency area, which is issued via the production of each currency area peoples or GDP. The conversion between each of these is via a free market exchange.
At any given moment, a given local currency area coin would be worth its buy/sell ratio time’s one perpetual coin. Expressed as a formula, c=(b/s)1, if the buy orders exceeded sell orders, it would be worth more than the perpetual coin, if the sell order exceeded buy orders, it would be worth less than the perpetual coin. This way an excess one way or another can be planned by the business and corrected, pushing it back to exchange rate equilibrium with perpetual coin. Since the local coin will not be abstract or increase by scarcity, it will always be, backed by real goods and services, or put another way, earning power will be tied directly to local area economic production, not speculation or creating money from money and hence extracting rent from the system. This is a blend of sound economic philosophy with simple arithmetic which could indeed liberate us from the debt servitude imposed on us by governments and banks.
The world’s people’s ability to actually switch to such a system has a precedent in modern history; as represented by the European Monetary Union, the perpetual coin is the Euro, and the local coins are the 19 sovereign nation’s currencies. Two prices were posted for some time after the Euro went into effect, the price for given goods in Euro, and also in Lira, or whatever currency was in use in a given country, and people reckoned the value of 1 euro to 5,000 Lira etc. Each digital coin could first be priced in the current currency of whatever country or currency area, as the price of a Euro to Lira was accepted by its people, the difference to the EMU is that the within the Two Coin model, the Lira currency continues to exist and circulate within the Italian currency area, the Italian people do not need to cede monetary control to the ECB. Each local coin will find its natural equilibrium exchange value based upon inter-currency area trade and the ratio of currency area gross economic production via the perpetual coin.
Even the simplest of human structures are built around the division of labour and, with it, of exchange. The division of labour is a direct consequence of comparative advantage (i.e., our productivity while undertaking different tasks are different). The existence of exchange follows nearly directly from the division of labour. A human society based on the division of labour requires allocating the output produced by the effort of its members. If agent A specializes in hunting and agent B in cooking, agents A and B must divide the final output, the meal, between them.
The difficulty with non-temporal or immediate exchange, is that completing it through barter is rarely feasible. This is particularly true of deferred trade: even if two agents are fortunate enough to satisfy the double coincidence of wants, each product may be completed at different times (or, equivalently, in different quantities). A possibility to implement exchange is to use a ledger system within the society: the hunter gets a debit every time he gets an arrowhead (or some other items) from someone and a credit when he delivers meat to another party. However, keeping a ledger system is costly, prone to errors, and informationally inefficient.
The first solution to reduce the frictions of barter based trade and to implement a fully decentralised accounting system was the invention of currency as manifested in a metallic coin. It exists as a bearer currency which is passed, via possession, as payment between trading parties. A coin has no need for any centralised accounting ledger, it is fully autonomous and instant and has human based intrinsic value within a deferred payment. The coin is tendered for payment and upon acceptance affords legal finality of payment and full cancelation of the debt, via the process known as legal tender. The issuance of coins based currency has never required the pre-existence of a central bank, and even today no central bank has the authority to mint currency as a coin. Currency exists today as a medium of exchange and unit of account to reduce the frictions associated with barter based trade, and support a temporal based deferred payment.
It should be noted that as no currency has an intrinsic value equal to or greater than its face value, Gresham’s law does not apply to coins or any currency, as currency does have a store of value capability; only capital can be a store of value. The intrinsic value embedded in coins has the sole purpose to support the regression theorem of money as applied to the deferred payment via currency (the coin).
As currency circulates through the economy, via trade based deferred payments, it flows in a circular fashion; it is created, circulated, and then extinguished. In an ideal money circuit, the medium of currency should function in a similar fashion, as each individual who generates capital can exchange its ‘exchange value’ at the point of a transaction for negative-equity based currency which can subsequently be used to pay the seller for goods and services. The currency would circulate in possession via payment from trade to trade as each recipient utilizes currency to make his or her own purchases. Currency is created when a producer of goods and services accepts a currency in exchange via a currency payment (C-M). The currency is extinguished when holder accepts a currency based payment from a buyer in exchange for goods or services (M-C). This means that, in an ideal currency payment circuit, the right to issue currency carries with it an obligation to redeem the currency created exchange value by providing the market with goods or services of equal exchange value, at which point currency exchange value is extinguished. This is in essence the tale of the baker and is represented within the C-M-C => C-M => M-C circular value flow via trade mediated via deferred payments. Hence, an individual’s right to create monetary value should only be limited by their ability to redeem its value in the currency area via a market place for the exchange of goods and services (C-C), as currency mediated payments must be neutral and not affect the trade of goods and services via the circular flow of currency (C-M => M-C).
In this ideal circuit, currency is always created usury-free, and in the exact amount needed to meet payment demand. A mutual accepted currency system, or currency area, based solely upon conversion of economic production (capital) into a currency to support a deferred payment between trading parties. Sometime a generalised barter based version without the need for a currency deferred payment, is referred as a mutual credit system, but in essence it must always have a standardised unit of account and hence self-deprecates to a coin based currency payment. As a coin based payment system meets the regression theorem of money and is the most liquid of all commodities in circulation within a currency area.
So what happens when the banks close their doors and everyone understands that no cheque can now bounce, even if the cheque writer has no money? Will anyone accept your cheque? Why not just write a cheque to buy the car when there is not enough money in your current account or in your approved overdraft? If you start thinking like this, you would not trust someone offering you a cheque in exchange for goods or services. You would insist on being paid in cash. But there is not enough cash in circulation to finance all of the transactions that people need to make. Everyone would have to cut back, and the economy would suffer.
How did Ireland avoid this fate? As will see, it happened at the pub.
Cheques were accepted in payment as money, because of the trust generated by the pub owners via their human relationships and daily interactions. Publicans (owners of the pubs) spend hours talking and listening to their patrons. They were prepared to accept cheque, which could not be cleared in the banking system, as payment from those judged to be trustworthy. During the six-month period that the banks were closed, individuals and businesses wrote cheques to the value of about £5 billion pounds, which were not processed by banks. The ability to trade, was assisted by the reality that Ireland, had one pub for every 190 adults, at the time. With the assistance of the local pub and local shop owners, who knew their customers, cheques could circulate as money. Even when money in bank accounts was inaccessible, the citizens of Ireland created the amount of new money needed to keep the economy growing during the bank closure.
The moral of the story, is one can do without the banksters but not your local pub...as people trust people and their local.
One morning, everyone in the Land of Funny Money awakened to find that the monetary value of everything had increased by 20%. The change was completely unexpected. Every price in every store was 20% higher. Pay checks were 20% higher. Interest rates were 20% higher. The amount of money—everywhere from wallets to savings accounts—was 20% larger. This overnight inflation of prices made newspaper headlines everywhere in the Land of Funny Money. But the headlines quickly disappeared as people realized that, in terms of what they could actually buy with their incomes, this inflation had no economic impact. Everyone’s pay could still buy exactly the same set of goods as it did before. Everyone’s savings were still sufficient to buy exactly the same car, vacation, or retirement that they could have bought before. Equal levels of inflation in all wages and prices ended up not mattering much at all, as we’d still have the same number of farms, people, houses, cars and factories as before.
Yet, turn on the news almost any day of the year and you could easily get the impression that all the world’s economic problems are due to a lack of money. Politicians or commentators argue that we can’t afford to build new schools or provide better healthcare because we don’t have enough money. They claim that we don’t have enough money to provide everyone with a decent pension and a comfortable retirement at a reasonable age. Such claims, however, are nonsense. Of course, simply printing loads of money wouldn’t actually solve our economic problems — because lack of money isn’t the cause of our problems in the first place. Printing money might cause prices to go up — and that’s because, whilst we can pretty much magic more money up out of thin air, we can’t magic real resources out of thin air. It is this ridiculous and misleading assumption about the overriding importance of money that prevents people from understanding Economics. Far from economists being obsessed with money, it is the ability to see the world in terms of real resources and real people, rather than in terms of money, that is the hallmark of a real economist. You must purge your brain of this obsession with money if you are ever to understadn money.
When the people in Robert Shiller’s surveys explained their concern about inflation, one typical reason for their worry was that they feared that as prices rose, they would not be able to afford to buy as much. In other words, people were worried because they did not live in a place like the Land of Funny Money, where all prices and wages rose simultaneously. Instead, people live here on Earth, where prices might rise while wages do not rise at all, or where wages rise more slowly than prices.
Economists note that over most periods, the inflation level in prices is roughly similar to the inflation level in wages, so they reason that, on average over time, people’s economic status is not greatly changed by inflation. If all prices, wages, and interest rates adjusted automatically and immediately with inflation, as in the Land of Funny Money, then no one’s purchasing power, profits, or real loan payments would change. However, if other economic variables do not move exactly in sync with inflation, or if they adjust for inflation only after a time lag, then inflation can cause three types of problems: unintended redistributions of purchasing power, blurred price signals, and difficulties in long-term economic planning and capital allocations.
Why did ancient kings impose taxes?
After all, a king owned everything, or at least he could take everything in his kingdom by force. He did not really need tax revenues. Kings introduced taxes to create an object that people owed him—to be precise, kings created tax to create money. Money, as a transferrable token of debt, simplified matters for the king.
For instance, instead of feeding vast armies, a king could let soldiers feed themselves at local inns using the sovereign tokens he had issued, which in turn had value for inn-keepers only because they had to pay their king taxes in those tokens.
In essence, in the beginning, people did not sell money to buy food; they sold food to buy money.
We the people, have been conditioned for centuries to imagine that all we have is a debt that we need to repay, somehow, in some form to someone as money.