Money as a Measure of Value

Harry Pollard

[Reprinted with minor changes from a Land-Theory online discussion, July 2000]

The two important functions of "money" are as a measure of value (or unit of account) and as a medium of exchange. Now as I've said often - these are not complementary, but opposite functions. What is good as one is bad for the other.

What we have in the monetary system are three easily seen separate parts. The first is the measure of value (unit of account). The second is the media of exchange, which I call Purchasing Media and are invariably paper - best known as checks and credit card slips. Then, there is a third, standard Purchasing Media - generally, but not always produced by the government.

Now, I've named these in the past "Money" for the measure, "Purchasing Media" for the second, "Dollars" for the third.

The first - the "measure of value" is best tied to a commodity that shows a market value that is somewhat stable. Doesn't have to be exactly stable - this is the real world. This becomes the unit of account, that is the quantity or weight in which all values will be written (such as a thirty-fifth of an ounce of gold). Such a unit can be called anything you like - sullivans, dollars, totos. whatever - or a thirty-fifth of an ounce of gold The last is a bit cumbersome.

I've decided to call the whole bit the "Monetary System".

The measure of value, I'm going to call the "Unit".

The exchange media will continue to be called "Purchasing Media".

Don't know what to call the government issue purchasing media. Maybe, I'll simply call them dollar bills or "Dollars". At least while they are not tied to anything. If each dollar was a receipt for an ounce of gold, or something, that would be fine.

But, dollar bills are a recognizable in the community, are accepted at whatever is the present customary rate, and are useful for small purchases such as a packet of chewing gum.

The fact that the dollar bill 30 years ago might have bought 100 packets of gum isn't something we think much about.

I haven't change the concepts at all - just the names, which are:

Units ----- Purchasing Media ------ Dollars.

The Dollars were supposed to be a service of the State -- used to ease commerce and with no charge. The British Gold Sovereign was produced at cost for the longest while - and maybe still.

Actually such coins are worth more than their gold content - as coins usually are.

Whether we should pay anything for the service is for discussion, but there they are.

Others hold the view that all these issued dollars are "debt money" because when the banks receive a truckload of dollar bills for distribution, they owe this amount to the FED. I think that's what is meant.

First question: does this truckload cost the banks interest? If it does, why don't they charge me interest when I walk into my bank and ask for $300 in twenties? Do the banks swallow the charges for the dollar bills they give me? I pay no service charges. I do pay for my checks but that's easily avoided. I get a free safe deposit box to put my valuables if I had any. Most of my bills are paid automatically by the bank.

Heck, I get all this and they eat the interest charges too? Wow, private banks are wonderful.

The argument is then raised:

Think aggregate, whole economy like HG would. This present currency System requires ever mounting levels of debt to accomodate the real currency needs of producers. In addition, there can never be enough currency to pay back all of the debt because as soon as debt to the FED is payed off, currency volume contracts toward zero. In addition, the FED requires all loans to be paid with interest. As this interest debt accrues via the "miracle" of compounding interest on the mounting debt principle in the aggregate economy, there is no way to pay off this interest debt with denominated FRNs.

I do not understand this logic. I'm thinking aggregate -- watch me.

Why does the "present currency system requires ever mounting levels of debt to accommodate the real currency needs of producers"?

What real currency needs? The second part of the Monetary System, the Purchasing Media handles a high proportion of all transactions. I can't remember how much, but Fred will tell us.

Perhaps 90% - maybe 95%? - I understand more green stuff is now needed because of cash payments in the underground economy and the drug market - if we dare call it a market. But, overwhelmingly it's PM that producers and consumers need.

So, why do we need all this additional debt? You see my quandary.

Another point meant that I will respond to:

In addition, there can never be enough currency to pay back all of the debt because as soon as debt to the FED is payed off, currency volume contracts toward zero.

This seems to say that if the banks get tired of paying interest, they would send the truckload of dollars back to the FED. Then there would be no dollar bills in circulation. We would have to pay for our chewing gum in larger amounts. I would buy a couple of boxes of chewing gum and pay with my American Express. (I now have a AE card because COSTCO gives a 1% discount if I use American Express.)

I suppose without dollar bills, cab drivers would have to carry those little machines to process cards. A nuisance - but who would rob them if they had no dollars.

Hey, a country without dollar bills would have some advantages. I bet the banks would issue some scrip too, if people really, really wanted bits of paper.

Maybe the credit card companies would, under the pressure of competition, allow their better customers to charge down to a dollar.

I don't think it would happen, but you can see the economy could adapt.

And, then, there is this:

No FRNs are ever "minted" for the interest debt receivables due. The FED only "mints" FRNs for the principal it loans out, never the interest and it refuses payment in anything but FRNs, not even gold.

This I don't understand at all. My bank borrowed 1000 FRN and I have to pay (say) 1250 FRNs back, I apparently have to find another 250 FRNs from somewhere. Where do I get them? If the bank only lends principal - the only FRNs are principal. Where so the interest FRNs come from.

And:

Even secondary banks foreclosing on the real property of defaulting borrowers cannot accept the real property but must quickly sell the real property for FRNs.

All this coercive stuff is too much for me. I suggest we abandon the nonsense. In fact, I have said:

If I had to go into debt to get a note, I wouldn't get a note. Why should I?

The response to my comment was as follows:

You might not have to individually but someone prior to your getting FRNs would have to go into debt. There is no alternative, thinking aggregate economy.

Then we had better stop thinking about this aggregate stuff and start thinking about people which is what Political Economy is all about.

It has been argued that we were tied into this peculiar system. My thought is, "What do the banks get from these dollar bills that encourage them to pay interest for them?"

I would argue that they get the guarantee from the government that these dollars will stay a constant value. The government is selling its integrity. However, they cover themselves by coercive laws that give them a real edge in the "contract".

And we are well aware of the strength of their integrity.

I would argue that if the government were to issue paper that was essentially a receipt for something - like an ounce of gold and pay on request without fail, the bits of paper would be valuable because they would be ounces of gold in all but weight. The paper would be easier to use than the gold. We have unimaginable amounts of gold in Fort Knox (I don't think it's been accurately counted. Use that as a backing for the paper.

Would this be a public service, or something to charge for? As any gold given against a bit of paper would likely be gold coins (worth more than their gold content) the service could easily pay for itself.

It would be a shock to have the paper worth something other than a gleam in Mr Greenspan's eye - but we could get used to it.

How would the banks pay for the "gold notes"? They would simply give a credit in their books against which the FEDS could draw. Perhaps, then everyone would be happy.

Oh, yes! We would have the Unit too. Say, One Dollar equals one ounce of gold. So, we have two of the money parts I mentioned. We'll have the Unit and the Dollars.

The Purchasing Media can take care of itself and will, of course, continue to make possible the overwhelming bulk of transactions.