thomas h. greco jr. the evolution and transformation of money

The Evolution and Transformation of Money

Thomas H. Greco, Jr.

3/26/2007 Prepared by Thomas H. Greco, Jr. 2

Building a Healthy Economy

Requires an Understanding of

the Principles of Money

� 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.


Basic Kinds of

Economic Interaction

� 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.


Money Plays Its Role

Within the Realm of

Reciprocal Exchange

The other traditional roles of money

(measure of value, savings medium)

should be considered separately and

achieved by other means.


The Ladder of

Economic Civilization

� Stages in the development of the

process of reciprocal exchange:

� Barter trade

� Commodity money

� Symbolic money

� Credit money

� Credit Clearing


Specialization of Labor Makes

Economic Exchange a

Fundamental Necessity

� 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


What Is Required for Efficient,

Effective, and Fair Exchange?

� Free Markets

� An Honest Medium of Exchange or Means of Payment

� An Objective and Stable Unit of Measure of Value


Barter Trade� Barter is the most primitive form of

reciprocal exchange.

Barter involves only two people; each

has something the other wants.

� The Barter Limitation

If Jones wants something from Smith, but

has nothing that Smith wants, there can be no

barter trade.


The First Evolutionary Step

From barter trade to commodity money

� 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.


Commodity Money

� 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

means of payment and a measure of

value.


Examples of Commodity

Money

� Various commodities have historically

served as money –

� 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.


Metallic Money

� 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


Symbolic Money� 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.

� Currencies redeemable for gold or silver.


Bank

Gold

The first bank notes were symbolic money. They

were warehouse receipts for gold or silver placed on

deposit.

The First Kind of Paper

Money

Symbolic

Money


The Second Evolutionary Step

From commodity money to credit money

� “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.”� Hartley Withers, The Meaning of Money, p. 18


The Embodiment of Credit in

Bank Notes

� 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.

The paper money so largely in use in all

civilized countries as a common

medium of exchange is in reality a

coinage of credit or trust.– Henry George, 1894


Bank

Gold

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.

Two Distinct Kinds of Paper

Money

Symbolic

Money

Mortgage

Note Mortgage

note

Credit

Money


Problems With Early

Credit Money� 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.

� This became known as “fractional reserve” banking

because there was never enough gold to redeem all

the notes.


Redeemability Abandoned

� 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.


Money and Banking Have

Been Politicized � 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.


The Power to Issue Money

Rightly Belongs to Sovereign

Individuals

� 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.


The Third Evolutionary Step

From Credit Money to Clearing

� 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.


Clearing -- The Ultimate

Evolutionary Step

� 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.


The Possibilities of Clearing

Have Long Been Recognized

� “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


Particle or Wave?

Thing or Account Balance?

� Light can be described as either a

particle or a wave.

� Money can likewise be described as

either:

� a thing or

� a fluctuating account balance based

on a relationship agreement.

How Does Clearing Work?

� When you sell something, your account

balance is credited (increased);

� When you buy something, your account

balance is debited (decreased).


Time

A/R – A/P 0

Ongoing difference between accounts receivable, A/R, and accounts payable, A/P

Positive

(sales)

Negative

(purchases)

Money Viewed as a “Wave” or Account Balance


Alpha

CompanyBravo

Company

Charlie

Company

Delta

Company

Bank

Conventional Payment Process

Using Bank Credit Money

Bank credit used to clear debts among companies.

Interest must be paid on credit borrowed from a bank.

$

$

$

$ $

$ Interest


Alpha owes Bravo $100, Bravo owes Charlie $100,

Charlie owes Delta $100, and Delta owes Alpha $100.

Typically, one or more of these debtors will borrow from

the bank in order to pay what they owe to each other. In

the simplest scenario, Alpha borrows $100 from the

bank to pay Bravo, who then uses it to pay Charlie, who

then uses it to pay Delta, who then uses it to pay Alpha.

Alpha can now repay the bank, but, in addition to the

$100 principal, it must also pay the bank interest. Where

does the interest amount come from?

In sum, each company used the bank’s liability (bank

notes) to pay the others what was owed.


Alpha

CompanyBravo

Company

Charlie

Company

Delta

Company

Clearing Process Without

Bank Credit

Mutual credit used to clear debts among companies.

No interest paid.

Alpha’s

i.o.u.

Alpha’s

i.o.u.

Alpha’s

i.o.u.

Alpha’s

i.o.u.


It is not necessary to “rent” a bank’s liability to clear

debts owed to one another. In a clearing circle, each

company’s debt (account payable) is offset by the

amount owed to it (account receivable). There is no

need to use “money” as a payment medium.

“Under the politico-financial scheme of things the

business man must go to the banker and pay a

lending fee for what is merely a clearance service.

The government even subjects itself to this tribute-

taking device by "borrowing" from banks whereas it

could create deposits just as well by non-interest

bearing currency or other notes.” – E. C. Riegel


Clearing Compared to

Currency

� Remember, a currency is typically a third

party debt, an i.o.u., that a seller accepts as

payment from a buyer.

� That may be a Federal Reserve note or a

bank deposit, or a private debt.

� The supply of such third party instruments is

usually artificially limited.

� Interest must generally be paid for their use.


Clearing Compared to

Currency� Clearing eliminates the need to use any third party

debt as payment.

� Goods and services pay directly for other goods and

services.

� The supply of internal credits is limited only by the

available goods and services being traded.

� Credit allocation among members is always sufficient;

determined by the participants themselves according to

their own contract, rules, and evaluations.

� There is no need to pay interest to anyone.


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, and still

thrives after 70 years.

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.


What Do Banks Do?

� Clearing is what banks already do, but

it is not widely recognized as such.

� Banks still prefer to act as if money is

a thing which they can “lend” out at

interest.


What Else Do Banks Do?

� Banks also authorize some of their

customers to spend money into

circulation.

� They do this by making “loans” based on the

“creditworthiness” of the customer and the

value of their collateral assets.

� This process is often called “monetization,”

which converts the value of illiquid assets

into liquid or spendable form.

The Debt Money System� Banks call this process “making a

loan,” even though nothing is loaned.

� Banks charge interest on these “loans.”

� That turns “credit money” into “interest-bearing debt money,”

� Which results in a growth imperative that destabilizes the entire economy.

Deb

t

Time


Bank

Debt

Money

Mortgage

note

Mortgage

Note

(asset)

Banks now issue only debt money, not as notes, but in the

form of bank “deposits” when a “loan” is granted.

Account

Deposit

(liability)

The Creation of Bank Debt

Money as Deposits


Banks Provide Some Useful

Services

Banks provide:

� Clearing services.

� Assessment of asset values.

� Risk assessment services.

� Intermediation between savers and

investors.


Alternatives to Debt

Money

� Mutual credit clearing associations and

private complementary currencies can

� Reduce the need for conventional, bank-

created, debt-money,

� Make the exchange process less costly and

more equitable, and

� Free civilization from the devastation of the

growth imperative.


Who Is Qualified to Issue

Currency?

� Any entity that produces goods or services

and offers them for sale in the market, i.e.,

productive businesses and individuals.

� Any entity that has the power to collect

revenues, e.g., local or regional

governments and their authorities.

� Non-profit organizations that receive

pledges of financial or in-kind

contributions.


Basis of Issue or Foundation

� Goods foundation or “shop”

foundation

� Service foundation

� Tax foundation

� Donor pledge foundation

What makes a currency sound and

credible?


Examples of Shop

Foundation� Canadian Tire money

� Larkin “Merchandise Bonds”

� All redeemable coupons


Examples of Service

Foundation

� Railway notes or other notes

redeemable for services

� Airline frequent flyer miles, if

transferable

� Utility vouchers – electric, gas, water.

Examples of Tax

Foundation

� Tally sticks

� Argentine provincial “bonds”, e.g.,

Patacones, LECOP, Petrom

� Municipal “tax certificates” or “tax

anticipation warrants”


What All This Means

� 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 results in a stronger, less costly

business environment, healthier communities,

and sustainable economies.


Opportunities for Business

� 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.


Opportunities for Governments

� 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.


Opportunities for

Non-profit Organizations

� 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.


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.


Summary of Advantages

� Adequate supply

� Low cost

� Democratically allocated

� Give 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.

� Help to stabilize the global economy


Guidelines to Assure

Fairness and Success� A clear agreement (contract) between the issuers

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).


Future Prospects

� 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 non-bank

credits will proliferate.


Shake-out and Standardization

� 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.


To Learn More and Keep

Up-to-date

� Read, Money: Understanding and Creating Alternatives

to Legal Tender, by Thomas H. Greco, Jr.

� Read the books of E. C. Riegel.

� Consult the works of the “German school” of free

money – Ulrich von Beckerath, Heinrich Rittershausen,

Walter Zander.

� Explore the website: www.ReinventingMoney.com

� Join one of the many complementary currency e-mail

lists.

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