Some Thoughts On Money

Harry Pollard

[Reprinted from a Land-Theory online discussion, 1 October 2004]

First, the thing we call money is actually two very different things with opposite characteristics. Mixing these two leads to the hopeless attempts of analysis that abound in economic discussion.

Money is said to have three functions. We'll abandon "store of value" right away and stay with the important functions - the ones taught in school and college for decades.

They are:

"Money is a measure of value." (I shall call it "money".)

"Money is a medium of exchange." (I shall call it Purchasing Media - PM.)

We know that when a bunch of widgets flood the market, widget values fall. In similar fashion, should a bunch of money (measure of value) flood the market, then money values fall.

So, the amount of money had better remain pretty constant. If the amount of money changes, we are confronted with a kind of 'flexible yardstick'. A builder using a flexible yardstick would be completely unable to build a house.

When the volume of money increases it is called inflation. Inflation isn't really an economic term - it's simply a spatial name for an increase in volume. The neo-Classicals have either cleverly, or idiotically, moved the name to one of the effects of inflating the money - the price increase.

So we have oil inflation, electricity inflation, widget inflation, which nonsense effectively subverts the original meaning of inflation. Any increase in the volume of the money is hidden among all the other 'inflations'.

The quantity of Money (measure of value) should remain pretty stable.

So we go over to the other "money" - Purchasing Media, or PM.

This is used to buy things and nowadays is mostly paper. But, not mostly dollar bills - though they have made something of a come-back with the large payments in cash demanded by the drug lords.

The paper we mostly use for purchasing is instant PM. We make PM on the spot by writing checks, or making credit card slips.

As purchasing fluctuates, for example there is a great increase at Christmas, the amount of PM varies widely.

So we have "money" whose quantity must remain the same, and "money" whose quantity must fluctuate considerably.

Obviously these two "monies" must be treated differently. Unfortunately they aren't, which makes meaningful discussion of money impossible.

A number of States have constitutional limits forbidding deficits. Deficits are forbidden in California. This didn't stop Governor Davis from changing the $12 billion surplus he inherited into a $36 billion deficit - in four years.

That's why he was thrown out to be replaced by Arnold.

So politicians simply take no notice of constitutions.

Now we should look at the banks.

Rent is a return to location, Wages is the return to exertion, Interest is the return to time. So, as well as charging you for their service, banks should also charge you for the length of time something is borrowed. Interest is a valid charge and historically, absent manipulation and various charges that are not really interest, seems to hover around 3%.

Major manipulation is of course privilege, which makes for fewer lenders and lots of borrowers.

There is nothing wrong with fractional banking that would not be solved by removing government enforcement of it.

If banks were freed, they could take the posture of 100% reserve banks, or of 50-1 fractional reserve banks, and anything in between.. It's up to them to decide and their customers to choose. I think a bank's policy should be transparent - something that the market can ensure.

Banks don't create money when they lend. They offer purchasing power. When they do so they are ethically bound to ensure the quality of that purchasing power. That it will do exactly what it promises to do.

The late Bob Tideman - former HGS Director in San Francisco - had a cute way of demonstrating the process.

The village was in the economic doldrums. Business had practically stopped. The printer drew a facsimile of a $50 bill and printed it. He used it to buy a suit from the tailor. The tailor used it to buy measuring and cutting devices from the hardware proprietor, who used it to buy food for a family gathering from the grocer, who used it . . . . The fake bill finally got back to the printer who went to work doing a print job for the stationery store.

So the whole village was humming with activity and it wasn't even a real dollar bill. But, it was adequate PM.

With PM getting all the action, one might wonder what is Money doing. Well, remember Money is the yardstick. Let's say the Money is a dollar which is defined as an ounce of gold.

All PM will be given and accepted in terms of the dollar. So if you buy bedroom furniture with a check written for $50, you are exchanging the same value as 50 ounces of gold for the furniture.

Gold may not be the best measure of value, but whatever is used should fulfill three conditions. It should be easily recognizable, it should not be easy to produce, and it should be constantly exchanged in the market place worldwide.