Monday, May 6, 2013

Defining Money, X: A Concluding Comment


Last week we posted the final part of our response to an enquirer who wanted a little clarification on our position on money and credit.  This was written before our annual Rally at the Federal Reserve on April 26, 2013.

Right after one of the talks at the Lincoln Memorial, as the speaker was walking away from the microphone, someone in the crowd called out, “So you’re just printing money!”  We don’t think he heard the response, “Not at all.”

The monetary and fiscal reforms proposed under the Capital Homestead Act do not include “printing money,” that is, first creating money, then handing it out to people to invest in equity shares.  That would be purely inflationary.  It is the embodiment of the currency principle, which we reject.

Rather, what we propose is a return to the banking principle.  Consistent with Say’s Law of Markets and the real bills doctrine, no money can be created until and unless there is something of definable present value to back the new money.  This may be existing marketable goods and services, or it may be the present value of future marketable goods and services.

Money creation properly carried out does not create value.  Money is the means of conveying value that already exists; it cannot create it.  If you simply print money without linking it through private property to an increase in value somewhere, all you’re doing is creating more claims on existing value.

Keep in mind that, just as all money is a contract, all contracts are, in a sense, money.  All contracts consist of offer, acceptance, and consideration.  “Consideration” is “the inducement to enter into a contract,” that is, what you’re giving up and what you hope to gain by making the promise.

Without these three elements, no contract exists.  To create money properly, and get away from the idea that money is simply a purchase order issued by the State, supported by the State’s ultimate ownership of everything, someone with a good, service or idea with present value makes an offer of that good, service or idea to someone else.

At this point you have two of the three elements of a contract, i.e., offer and consideration.  You do not yet have “money,” however, because you do not yet have a contract — and you do not have a contract until and unless someone accepts the offer, having been induced by the consideration (value) offered to enter into the contract.

The instant there has been an acceptance of an offer and consideration, however, money has been created.  When the terms of the contract are fulfilled, money has been cancelled or “de-created.”  This is why the “pure” definition of money is “anything that can be accepted in settlement of a debt.”

We could probably go on forever about how contracts can be made negotiable and used as “current money,” that is, “currency,” and how when the State prints money it is creating contracts for other people to fulfill without itself owning the value (consideration) conveyed, and so on.  All we really need to know, however, to understand the essence of money is that it is a contract, and anyone who can enter into a contract can create money.

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