In this post, we ask the question "What is money?". Mike King, in a series of posts beginning with "1. Defining "money"", starts us off along one path. To him, money is an IOU and the market has an obligation to those owning IOUs because these owners have done prior work.
Our analysis takes us in a different direction. Money is not an IOU, it's more like a ticket. This analogy makes sense because ownership of a ticket entitles the owner to privileges equal to those enjoyed by all other owners of similar tickets.
Now we need to justify this argument:
I like the logic game Sudoku. In Sudoku, the player is presented with a set of assumptions and is tasked with finding a conclusive pattern. The player follows a sequence of logical eliminations or certainties to reach a single correct arrangement.
We can use logic to better define "money". Let's make six assumptions about money: 1. New money is created when banks make loans. 2. All bank money is sourced from past loans. 3. Borrowers spend money from loans very quickly. 4. All money has an owner. 5. There are multiple owners of money. 6. Money is exchanged between owners.
With these six assumptions in place, we see that money seems to be a product created by an entity that has the ability to create money (banks in this model). A loan is involved so we will presume that the created product is provided on a loan-to-borrower basis. The borrower apparently has an obligation to return the product to the creator. There is nothing to make us think that the product is an IOU.
Once created, money has continuous life (until something not yet contemplated occurs). We can deduce that only the initial borrowers have ownership of money which has not been spent first by others.
The first-spender is found to have a special place in the bank deposit accounting system. He is the only owner of money who has not done prior work in exchange for money. It seems like he has received a very special position in the economy, as if he has been awarded a valuable ticket.
King seems to think of money from the perspective of those doing prior work. This certainly does represent the vast majority of current money owners, but it is a distortion of the character of money as a product or object.
Mis-labeling money as an IOU takes readers down a thought path that completely misses the motivation that drives money creation. Borrowers and lenders act together to create money because the event of money creation increases the well-being of both borrower and lender. The borrower gets quick incremental access into the economic marketplace. The lender gets a claim on future wealth (assuming a loan document is signed). That's why the creation of money is like the creation of a ticket; a valuable, reusable ticket that has initial value by allowing the owner incremental access into the pre-existing economic marketplace.
We can expand our logical development of "What is money?".
Assume that a loan document is signed for every loan resulting in money creation.
Because money and loan documents both constitute wealth and both endure over time, we can deduce that the creation of money would proceed at the rate of two units of wealth creation for every unit of money creation. Recognition of this tie between wealth and money allows us to deduce that a destruction of money would occur when any loan associated-with-money-creation is retired.
The political implications of this model of money
This model of money makes it very clear that money is very easy to create. The difficult question that must be asked is how can such an easily created product be made into a vital, ubiquitous, economic tool?
I won't try to answer that question in this post except to say that it can be done with astute management by government.
Conclusion
We have an answer to our question "What is money?".
Money is best described as being a ticket; a valuable, reusable ticket that has initial value by allowing the owner incremental access into the pre-existing economic marketplace.
(c) Roger Sparks 2022
Roger,
ReplyDeleteI was watching a history of the stock market crash of 1929 yesterday and the interviewees all spoke of leverage as being the cause, or at least one of them, of the overheated and dangerous bubble economy which finally broke and plunged the world into a decade of misery and stagnation.
I am still working to understand these dynamics, but when you say that the bank created money is a ticket which will increase wealth by two units for every unit of that bank created money, is that a form of leverage? There is only an assumption that two units of wealth will be created for every one unit of bank money. Until that wealth is created, it is just speculatory in nature. Am I thinking of it the right way.
I like your ticket metaphor. I have a lot of tickets that I have kept as souvenirs recording my travels and participation in various events. Once the trip is over, once the concert is over, they have almost no practical value, but in the event itself they ruled the day.
I'm thinking.
Josh
Hi Josh,
DeleteI think you are understanding my thinking here. Creating money is not exactly the same as lending money. To clarify things in my own mind, I think of reusing money and actually creating new money. When I lend to you, we are reusing money because I cannot create money. For me to get money, I need to work or sell something first.
Banks may also relend their own money. If banks lend more money than they own in their own deposit account, then we ask how they can do that?
Two theories of how: 1. Banks lend my money to others without telling me. We know this may be happening because each year, we can add all the bank deposits in the nation and see that they increase each year. Someone must be creating money and then it shows up in bank deposit accounts. OR
2. Banks create money with every loan. This gives the same annual increase in deposit accounts but follows a different logic. Banks are not reusing my money; they are simply creating new money. This makes private banks look like a private version of the central bank. We need an assumption that banks have an implicit license from government to do this, which is logical considering that banks are heavily regulated by the central bank and government guarantees private bank deposit accounts up to a limit
Either way, the bank is giving the borrower access into the marketplace.
So far as the creation of wealth is concerned, we can have two views: 1. The creation of wealth is real; money has value; the bond can be sold. OR
2. The creation of wealth is an illusion. You can't create wealth from nothing; the bond has no value until it has performed.
I think reality wanders somewhere between these two extremes. Borrowers who sign loans tend to perform on them. They order their lives into a performing lifestyle. On the money side, access into the market is immediate and measurable. The problem here is that competition for existing goods is increased so all those folks who had to work for money now find an extra increment of borrowed money competing with their hard-earned money.
Sorry for the long reply but you asked a good question,
Roger