What is Money?

By Tim Jenkin

Most people would reply that money is that which we use to buy things; that which we use to pay others for what they give or do for us. From a seller perspective it is what we receive for services that we perform for others or for goods that we sell.

Economists usually define money by the overt functions that they perceive it to have. Here is a typical definition of money, this one from Wikipedia:

In economics there are various definitions for money, though it is now commonly considered to be any good or token that fulfils the money functions: to be a medium of exchange, store of value, and unit of account.

The problem of defining money is in the question "What is money?", for that question has a built-in assumption that we are talking about a thing, like asking "What is food?". To dispute that money is a thing seems crazy because we can all count the coins and notes in our wallets and purses, and surely cash is money!

Sure cash is money if we decide to define money in that narrow way. This is the same as saying that honey is food and assuming that we now know everything about food. In the same way that food is a much grander concept than honey, so money is a much grander concept than cash.

So what is the essence of this concept 'money'?

Let's continue with our food analogy to help explain. The concept of 'food' cannot be fully understood with definitions such as "food is the edible stuff that we get from supermarkets" or "food is that which provides us with the energy we need to keep on living" or "food is any substance, comprised primarily of carbohydrates, fats, and/or proteins, that is consumed by living organisms for nutrition or pleasure". This does not explain why bees build hives to store honey, why gazelles are so swift and agile, why cheetahs can run so fast, why some whales have baleen instead of teeth, why spiders and snakes have poison, why some trees have thorns and why fruits are sweet and juicy. If we do not understand the chemistry of food and digestion we will never understand why some foods are not good for us and why too much of certain kinds of food causes problems. We also need to understand that food looks different from the perspectives of the eater and the eaten, and that the forms of food have evolved over the aeons as the eater and eaten have evolved in a symbiotic relationship with each other.

To fully understand the concept of food we cannot define it by its functions or limit our study of it to the study of a class of substances that provide living organisms with energy to keep them alive. Food is a complete system. More than that food is the very essence of life and explains how and why organisms relate to each other, and about the very shape of life on earth itself.

Similarly, to fully understand the concept of money we shouldn't limit our definition and study of it to its functions - indeed there might be some disagreement about those functions. Like food, money is also a system, but much more than a mere financial system consisting of institutions and clients. Money is a social construct that has evolved as a crucial component of human society and has to be defined in the social context.

Money has been an aspect of human society since the beginning of history. You could even say that 'money' is nature's exchange mechanism (e.g. the nectar in flowers is the plant's 'payment' to the bee for carrying its pollen). In primitive hunter-gatherer societies there was no requirement for money as we know it, but there was nonetheless exchange. People did things for each other and the 'currency' was simply the mental record of what was owed to those who had done favours or given something. Those who took advantage of others and gave nothing in return for favours received were socially reprimanded or ostracised.

When humans settled in communities and started to grow their own crops and herd animals, there inevitably developed a division of labour. By limiting their range of activities, individuals and communities needed to exchange what they had for what they didn't have, and hence arose the need for some form of money. Where it was possible, people bartered their goods and services but barter was never a very good way of exchanging things because it always required a coincidence of wants.

There was no single origin of money. Perhaps the first forms of 'money' were again the mental or symbolic recording of 'credit' given by one party and the clearing of that 'debt' at a later time by the delivery of something else by the 'debtor'. The 'debt' might have been cleared indirectly by the 'debtor' doing or giving something to a third party to whom the original 'creditor' owed something.

Simultaneously or later the use of commonly accepted commodities became 'money' (e.g. cattle, grains, salt, firewood, shells etc.). Later the most commonly accepted commodities were precious metals, because they were more portable and divisible, and were acceptable just about everywhere.

What is of interest here is not so much the actual exchange mechanisms employed in a particular place at a particular time but the 'money systems' that arose out of the use of these forms of money. These 'money systems' were essentially a set of rules and conventions that had an impact on the way people related to each other. From these early beginnings it is easy to see that money is really about how humans relate to one another in the realm of producing their means of life and in exchanging the services and products of their labour. 'Money' allowed humans with different skills to share their different products and collaborate in social projects. It allowed them to share the social product according to the simple principle of contribution. Money was both a product of human ingenuity and a determinant of human behaviour. This was true of money then and is equally true today.

When precious metals got coined and money took on a special form distinct from other commodities a dramatic change occurred in human society. Those who coined the precious metals found a way of obtaining something for nothing, or more for less. The coins could be issued with a 'face value' of more than they were worth (in terms of labour input) and thus those who issued them could live off the labours of others. Not only that, by preventing anyone else in the community from issuing coins the issuer had tremendous power over those who received and were dependent on the issue. The discovery of 'money power' enabled the rise of ruling and exploiting classes. Others discovered that if they found a way to 'make money' they could obtain a claim on the social product greater than that which they had contributed to it.

As human society evolved and became more complex so too did the forms of money. Commodity monies turned into symbolic monies that merely represented the commodities, and with the development of literacy, numeracy and printing, money could be represented in writing in the form of receipts, bills of exchange, promissory notes and other paper instruments. The 'cheapening' of the actual creation of money gave the issuers of money even greater powers of exploitation. Along with the cheapening of money the creation of money shifted from monarchs and emperors to a new financial class. An enormous, parasitic, 'money class' arose that contributed little or nothing to the social product, yet had the greatest claim on it.

From the above it is reasonable to conclude that the way our money works to a large degree determines how our society works. This is a very bold statement that many would challenge by saying that the way our money works is to a large degree determined by the way our society works. While obviously it works in both directions, the way our money currently works is the product of a long, turbulent history. We are born into this world and have to learn the rules of the money game; we don't reinvent them with each generation. These rules are enshrined in the law and thus govern our economic behaviour and much else.

Most people find it difficult to accept that society works the way its money system works because they cannot conceive that money can be anything other than what it is conventionally understood to be. Because money is taken as an immutable given, most social commentators, and especially economists, explain human behaviour and social phenomena in terms of 'human nature' rather than as the products of the economic milieu in which we find ourselves. Human economic behaviour is said to be totally predictable because of these 'hard wired' factors, and entire economic theories are based on this presupposition.

To make our point let's look at the way money currently works and what effect it has upon us.

The first thing that can be said about money as we know it is that we all think of it as 'stuff' that exists. This is not surprising because for thousands of years money really did exist so the notion that money is 'stuff' is burned into the collective consciousness and has become embedded in the language and grammar we use around it. Today money is not 'created' in the sense that the creation process produces anything substantial or tangible. The 'creation' of money results in nothing more than some numbers changing on some computers. Even the notes and coins we use are mere portable tokens of money that started out in digital format. Despite the fact that money today is nothing more than digital information, a record of transactions, our entire money system operates as it has for thousands or years - as if money exists. Absurd as it might seem, we still believe that money has to be 'created', distributed and exist in a finite quantity. Undoubtedly, those who 'create' this money wish to perpetuate the myth that before we can do anything we have to have a supply of money, and that money has to be created and distributed so that they can continue lending it to us at interest!

Out of the belief that money exists flow the questions: "who creates our money?", "how is it created?", "how does it get to those who use it?" and "how much should be created?".

Who creates our money has profound consequences for society. Traditionally the money-creating prerogative lay with monarchs and emperors and they used the power this gave them to wage wars and keep their subjects in thrall. Today the money-creating power resides with the private banking sector, which includes the Reserve Bank. It 'creates' money by issuing credit (creating debt) and charging interest for it. Our money is thus not provided as a public service for the common good, but for private, profit-making purposes. This impacts on society in a multitude of ways, chief of which is that the major decisions about where and how money is spent (i.e. where society puts its efforts) are decided by an unelected and unaccountable minority of powerful individuals. Thus the very direction of our economies is determined by private, minority interests. If money was democratically created then it would be democratically allocated and society's efforts would be mobilised for the public good. In short, there would be more houses, schools and hospitals and fewer 5-star hotels, casinos and arms factories.

Money created as debt also has profound consequences for society because all debt has interest attached to it. As the money to pay the interest is never created we live in a world of musical chairs: more money is required to pay back what is borrowed than exists, meaning that some of the borrowers have to fail and there is a constant need for the money supply to grow faster than what is required to pay back the principle. This need is the force behind the growth imperative of our economies. If our economies do not grow they stagnate and the borrowers cannot pay the interest on their loans. The money lenders then expropriate the collateral, impoverishing the borrowers and transferring even more material wealth to themselves. This is the force behind the constant monopolisation, corporatisation and globalisation of society. More than that, usury transfers wealth from the wealth creators to the parasitic 'money class' that produces nothing but consumes most of what society produces. The structure of our society is thus the embodiment of the way our money system works.

The banking system, as the sole supplier of new money, pumps it into the circuit of buyers and sellers (the real economy) through the narrow pipe of self-defined eligibility. Only those deemed 'creditworthy' can get new money (borrow money) and these are institutions and individuals that already have money or assets that can stand as collateral. Thus money comes in at the top where there is already money, ensuring that society's major investment decisions are taken by a select stratum of wealthy individuals and that access to the most desirable products of society are blocked to the majority. So long as we believe that money is 'stuff' then we have to believe that it needs to be 'distributed', that we need a 'distributor' and that there have to be rules about how it is 'distributed'. And so long as we accept 'thing' money the distribution of that money will remain highly skewed.

The question "how much money should be created?" also only makes sense if money is thought of as 'stuff', for if we treated money as information - which it really is - it would be absurd to ask such a question. But as we do think of money as something that needs to exist in a finite quantity, there are elaborate mechanisms in place to regulate the amount of it. The most important requirement is to keep it scarce, for without the scarcity factor 'thing' money would have little value and it would be difficult to lend it.

The amount of money in circulation has nothing to do with what is required for everyone to engage in free and fair trade with each other; it is entirely determined by the banking system, which includes the Reserve Bank, according to the sole criterion of what is the most profitable amount. Too much money reduces the demand for money and so interest rates have to be low, while too little makes it too expensive and deters the borrowers. The 'correct' amount for everyone to engage equally in the economy would definitely be too much for the money lenders, for no one would then be keen to borrow their money.

Answering the four questions above has given us some idea of how 'thing' money shapes our world, but perhaps the most important thing about 'thing' money is that it can be treated as a tradable commodity. This means that it can be bought and sold in the market for a profit just like any other commodity. And having the properties of a 'thing' it can also be stolen, lost, destroyed, counterfeited, borrowed, lent and obtained in a multitude of fraudulent ways. Because obtaining it is not necessarily associated with the delivery of value to anyone, many people spend their lives finding ways of 'making money' rather than delivering value. As it is usually far easier to get money through dishonest means than by honest work, money-as-we-know-it thus encourages dishonesty and corruption. And because 'things' are not information, the money system is opaque and hides the sordid detail from public scrutiny.

There is much else that could be said about 'thing' money and how it shapes our world and governs our behaviour, but lets consider briefly what effects a 'non-thing' money would have upon human society.

Money as information

When we begin to realise that money doesn't have to work the way it does, that money can perform the 'money functions' without being 'stuff', we can begin to understand that the way we relate to each other in the economic arena can be very different.

The Community Exchange System is an attempt to reinvent money and it does this by taking the concept of 'money as information' to its logical conclusion. Where money is not a thing nothing passes from a buyer to a seller when a purchase is made. All that happens is that the details of the transaction and the value of what was received by the buyer are recorded. The value is recorded as a positive number (credit) for the seller and a negative number (debit) for the buyer.

The buyer owes nothing to the seller but the debit represents the buyer's obligation to the community. The buyer is thus not indebted to multiple sellers as in the conventional economy but has one single 'debt' and that 'debt' is always to the community. Immediately it can be seen that from a psychological point of view a trader in the CES economy does not have that feeling of being 'hounded' by multiple debtors. It is in fact absurd that we should have multiple debts because we actually owe nothing to those from whom we have received something. We 'pay' for what we have received by doing or selling things to others. Money is a social instrument that specifically allows us to settle our scores without having to engage in barter.

The single most important consequence of treating money as information is that the money system is rid of borrowing, lending and usury. As there is no need for a third party (banks) to provide money for buyers and sellers, there are no systematic opportunities for parasites to suck wealth out of the economy. Society would be rid of the 'money class' and the 'tax' that we all pay to sustain them through inflated prices that contain the costs of interest. Only those who supply real value to the economy can get credited and thus have a claim on the social product.

The consequences of getting rid of borrowing, lending and usury would be so profound that human society would become almost unrecognisable to those of us who have grown up with the debt-based money system. The chief factor behind the need for our economies to grow and the requirement that some must fail for others to succeed would be removed. Instead of growth at all costs and cut-throat competition we would have a more relaxed, caring and co-operative economy. This seems to be the only way to save our planet from the destructive ravages of the economy that is a child of the debt-based money system.

With the competitive urge removed our economies would make a u-turn and focus on the local instead of the global. The drive towards monopolisation and corporatisation would stop as money would not need to constantly seek new markets.

With the 'thing' factor removed, it would no longer be possible to steal money and money itself would not be a tradable commodity. The multitude of ways that people have found to make money out of money would disappear, thus eliminating further the opportunities for living off the social product without contributing to it. Money crime, embezzlement and fraud would become almost impossible. Dishonesty, hostility and aggressiveness would give way to honesty, friendliness and humility as the need to cheat and get ahead of ones fellows is removed.

This is not wishful thinking, it is already happening in our trading community and the consequences of changing our money would become even more apparent if the 'other' money system wasn't there to counteract the trends that are already under way.

Let us grow our exchange and demonstrate that by changing our money we really can change our world!

From Community Exchange News No.28, 15 November 2006

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