Tuesday, April 16, 2013

Defining Money, II: The Medium of Exchange


Here is the beginning of the multi-part response to the question we were posed in yesterday’s posting.  Even considering the length of the reply, we didn’t get around to answering.  The e-mail arrived at the start of a holiday weekend, and for some reason known only to Baum’s demon of electricity, our internet access went out temporarily.

The quick answer to our correspondent’s question as to whether his friend and CESJ are saying the same thing is no, we do not believe so.

The main reason we say this is because binary economics does not, as our correspondent believed, redefine money.  Rather, binary economics returns to the original definition of money reflected in law and accounting: “anything that can be accepted in settlement of a debt.”  All money in whatever form it takes (and it can be verbal without any physical vehicle) is a contract, just as (in a sense) all contracts are money.

All contracts consist of offer, acceptance, and consideration.  “Consideration” is “the inducement to enter into a contract,” that is, the reason to engage in exchange of marketable goods and services.  A much easier way of saying it is that consideration is the thing or things of value being exchanged.

“Money” is therefore the “medium” by means of which exchanges are made, “the medium of exchange.”  This includes direct exchange of the consideration itself (barter), as well as the use of any or all “symbols” standing in place of the consideration.

When people move beyond barter, all exchanges continue to take the form of the offer of a contract.  If the consideration takes the form of the present value of existing marketable goods or services, the contract is called a “mortgage.”  If the consideration takes the form of the present value of future marketable goods or services, the contract is called a “bill of exchange.”

According to financial historian Benjamin Anderson, one of the first principles of finance is to know the difference between a mortgage and a bill of exchange.  Mortgages and bills of exchange are private sector instruments.  When a government borrows existing funds, the instrument is called a bond, just as it is in the private sector.  (There are technical differences between a mortgage and a bond that we needn’t get into.)

When a government issues contracts representing the present value of future tax collections, however (“creates money”), special language is used to indicate that the government does not have a property right in the present value the instrument represents.  The instrument is called a “bill of credit,” and instead of being “issued,” it is “emitted.”  A bill of credit is said to be backed by the faith and credit of the emitting government because the bill is good only if the government has the power to collect the taxes to meet its obligations.

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2 comments:

Bernadette said...

I curious if there is anything in "The Essence of Money" that is problematic to binary economics.

http://www.youtube.com/watch?v=qBX-jaxMneo

Michael D. Greaney said...

I think we can add "The Essence of Money" to our recommended "library" — with a few caveats.

The theory sounds right on the button. The facts and timeline are, not to be disparaging, more than a little distorted.

That gives leverage to people who insist that "money" is ONLY gold and silver coin and government banknotes and certificates.

No — what you see in the video is the sort of thing that happened from the dawn of human society, except that the certificates were not substitutes for coin, coin was was substitute for those certificates. Money being a contract, a coin or banknote is simply a very convenient, fungible and negotiable contract that facilitates transactions.

The invention of coinage was, in a sense, a step backwards, because it convinced a lot of people that coin and coin substitutes were the only way to carry out trade and commerce — which we know is not the case.