Monday, January 31, 2011

The Problem with Money, Part I: What IS that Stuff?

No, we mean the other problem. What's that? Oh, sorry. Okay, the other, other problem with money. The first problem, of course, is that those of us who need it can't seem to get it, and the second problem is that most of us lack access to the means of getting it — a different, yet related problem. The other, other problem, then, is that few people really know what the heck "money" is. Oddly enough, it's not all that difficult, once you shed the chains binding you to the slavery of past savings and understand a few basic principles . . . such as life, liberty, property, and the pursuit of happiness.

There are several reasons for this. Primarily (as we noted in last week's News from the Network) most people simply don't bother to think. They just take some authority's word for something. Unfortunately, while that is fine for dogs and children (up to a point), it wreaks havoc when it comes to a tool as socially important as money.

Thus, most people simply copy the "experts" and use the "standard" definition of money within the paradigm established by the British Currency School of finance. That is, "money" consists of coin, banknotes, demand deposits (checking accounts), and certain time deposits (savings accounts). The experts have decided that the State decides of what money consists and under what circumstances . . . and reserves the right to change that definition when it feels like doing it.

Case in point: Benjamin Bernanke's decision to drop "M3" from the "official" definition of money, leaving only "M1" and "M2." (When I was in college, I vaguely recall the "Ms" going up to something like 14 or 15 in an effort to fit definitions to economic and financial reality.) In the opening passages of the first volume of his Treatise on Money (1930), Keynes said that the State has this power (i.e., to change definitions — substantial reality — at will and to interfere in contracts "involving money"), therefore, the State has that power . . . even though that means, effectively, that private property and freedom of association/contract are now, to all intents and purposes, mere noises.

Picky, picky, picky.

What's wrong with that? Doesn't the State create money?

No — at least, not legitimately. The State's role with respect to money is to set the standard of the currency and to enforce contracts in the event of a dispute. Setting the standard is no more "creating money" than when the State decides to use inches and feet is "creating length." There's a very good reason why the Constitution lists the federal government's power to set the standard and regulate the currency under "weights and measures." It was supposed to ensure that nobody would ever think anything as silly as the State creates money, any more than it creates length or weight.

So who "creates money"? Assuming that we're engaged in productive activity, the answer is — we do. That's right. Us'ns. The Concerned Ordinary Citizens Of America, the COCOAs. You see, "money" is not (as some have claimed) "instant purchasing power." Nor is "money" necessarily the same as "currency" (coin and banknotes) or "currency substitutes" (demand deposits). No, money is anything — anything — that can be used in settlement of a debt, that is, used to convey a private property right from one person or persons to another person or persons in fulfillment of a contract. In a very real sense, all money is a contract, just as all contracts are money.

To enter into a contract, that is, to create money, you need to meet a few conditions. First, you have to be competent to enter into a contract. You can't be unconscious, crazy or a convict. Contracts with minor children are voidable, while contracts with those judged incompetent are void, but we don't need to get into the technicalities. All we need to know is that you are presumed competent.

Second, you have to have a right to dispose of that for which you are contracting to deliver. That means, ordinarily, that you have to own it. If you are entering into a labor contract, you have to own your labor. If you are purchasing something in a store, you have to own whatever you tender to the shopkeeper. If you are selling something (and all these things are "contracts") you have to own the thing you're selling.

Third, there has to be "consideration" that passes between the two parties to a contract. That is, genuine value has to be exchanged.

Fourth, it has to be voluntary. A thief who says, "Give me your money or I'll bash your head in" is not making a contract with you, although most people would certainly agree that their own lives have value. It's just not voluntary.

Thus, all contracts are money, and all money is a contract. (Okay, we shouldn't have put it that way; it makes it sound as if we've proved our case. No, we haven't — but there's enough information there that you can figure it out for yourself.)

The bottom line is that "money" is not just coin, banknotes, checking accounts and selected savings accounts. No, money is anything that is used to convey a private property right in or to anything, that is, to settle a debt. As long as the matter of the contract is legal, the State has no say-so as to what form that settlement must take. Contrary to Keynes's assertion that the State has the power to change contractual provisions at will and define "money" any way it likes, the State does not, and could not possibly have that power and preserve the illusion that people's natural rights are being in any way respected.

That leaves us with the question, If (as you say) each and every one of us has the power to create money, how come I don't have any? We'll start to look at the answer to that tomorrow.


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