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.
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