Tuesday, October 18, 2011

Halloween Horror Special VIIb: Hell Money

In the previous posting in this series of Halloween Horror Specials, we saw that most governments today rely on hell money to keep the economy running. As such currency is created for and by ghosts and shadows (or, if you prefer, smoke and mirrors), something is bound to give way whenever reality happens to intrude on the fantasies of politicians and academics that keep assuring us that "all is (or will be) well" . . . as long as we continue to believe every word they say.

What, however, are we to do if we lose faith in the fantasy and have to take refuge in reality? We have to establish justice somehow in order to ensure our domestic tranquility . . . and put food on the table (or, better yet, in a dish on the table).

The first step in achieving monetary justice is to understand that "money" doesn't consist exclusively of hell money: State-issued or sanctioned coin, banknotes, or (if you're broadminded) demand deposits (checking accounts) and some time deposits (savings accounts) with only the State's word behind it, or even gold and silver coin.

The second step is realize that money is anything that can be used to settle a debt, and that money and credit (two forms of the same thing) are simply contracts — promises — conveying a right to receive some marketable good or service or the value thereof on demand or on the occurrence of some future event. Understood properly, all money is thus "debt backed." The only real question is whether the issuer of the money has the ability to make good on the promise conveyed by the money, that is, redeem the debt.

The third step is to grasp the fact that a contract can be turned into a "negotiable instrument" and circulate beyond the original parties to the contract, as long as the original group or individual making the promise remains liable for making good on the promise when presented for redemption by a holder in due course. In this way, "money" turns into "currency," that is, "current money," money that passes "current" in the economy.

This was how the original currency, "coin," was invented in the West. People took lumps of gold, silver or electrum (a naturally occurring alloy of gold and silver), and turned the commodities into miniature contracts by stamping their personal guarantees — endorsements — as to the amount of metal in the coin.

The earliest known coin found in the West is one such lump of electrum, found in the Temple of Diana at Ephesus, bearing the statement, "I am the mark of Phanes." By making this statement, Phanes was certifying that the coin contained the full weight of metal and binding himself to make good any shortage — a contract.

In modern terms, Phanes was a banker, defining a bank as a financial institution that takes deposits, makes loans, and issues promissory notes — the latter being the most important of a bank. He could (and did) "create money" by offering his contract and having it accepted by the public.

For thousands of years before the invention of coinage, all money consisted of promises — "debts" — conveyed either by word or in written form, whether written on clay tablets, animal skin, papyrus, or some other material. The vast majority of documents surviving from the ancient world consist of such "bills of exchange," that is, money issued by private individuals to carry out exchanges with other private individuals.

Similarly, to this day, the bulk of any money supply in a non-socialist economy consists of "merchants" or "trade acceptances," and "banker's acceptances." No matter who issues the instrument, and regardless what form it takes, the instrument isn't "money" until and unless it is "accepted" in a transaction and settles a debt.

Phanes's coin was, strictly speaking, a promissory note, a form of a bill of exchange. The contract was between Phanes and any holder in due course, and consisted of Phanes's promise that the coin contained the full weight of metal. The difference between a promissory note and a bill of exchange proper is that a promissory note is endorsed once by the issuer and passes at face value until redeemed by the issuer. A bill of exchange is endorsed by each holder in due course of the bill, and passes at the present value of the bill (usually a discount from the face) until redeemed at its face value by the issuer.

If money is backed by the issuer's property in the present value of marketable goods and services, and in a free market economy the State neither owns nor controls the means of production, how did the State get into the money business?

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