Ask most people to show you what money is, and they will pull out a dollar bill, a pound note, a crown, franc, or some other piece of currency — assuming they have some, and they are reasonably certain you’re not going to grab it and run off down the street or try to guilt them into giving it to you just because you’re rich enough to be carrying around such enormous amounts of cash.
|Cowrie shells were used as trade tokens in Africa|
Such people would be partly right, and wholly wrong. Why? As we have seen in the previous postings in this series, “money” is a contract, that is, an agreement consisting of offer, acceptance, and consideration, “consideration” being the thing or things of value being exchanged.
In one sense, then, that piece of paper (or leather, parchment, clay tablet, sea shells, stone block, etc.) on which the terms of the agreement are written is the contract — but only in a sense. The agreement itself is the contract, not the physical form of the contract. This is hard for some people to grasp, as they confuse the symbol, with the thing symbolized.
|Æs Signatum: money sacred because it's bronze, not because it's money.|
That dollar bill, pound note, etc., etc., is “current money” (for that is the meaning of “currency”), but in another sense it is not money at all. Strictly speaking, it is simply the physical form, the symbol, that the money takes — and money is, in turn, a symbol of the “underlying,” whatever stands behind the promise conveyed by the money, a symbol of a symbol, if you will. Nor does it have to be paper, gold, silver, or electronic impulses. Any means by which the terms of a contract can be conveyed can, by that fact alone, serve as the vehicle of money, that is, as the symbol of the symbol. All something has to do is meet the definition of a contract, and consist of offer, acceptance, and consideration.
Thus, in binary economics, the money supply must be linked directly through private property and the law of contracts to the things of value it represents. This is the case whether the “underlying” (the actual thing of value behind the symbol of the symbol — the “consideration”) is existing inventories or the present value of future production.
The question then becomes, what is the most common form of money today? Oddly enough, it’s not currency. Nor is it coins or checks. Instead, the most common form of money throughout the world is bills and notes. These take two different forms: mortgages and bills of exchange.
|Ancient Sumerian financial instrument: commercial contract.|
These are so important that the financial historian Benjamin Anderson declared, “The first principle of commercial banking is to know ‘the difference between a bill of exchange and a mortgage’.” (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946. Indianapolis, Indiana: Liberty Fund, Inc., 1980, 233.) What does that mean? If the money represents existing inventories (and by “inventory” we mean any existing marketable good or service), the contract is called a “mortgage.” If the money represents future inventories, the contract is called a “bill of exchange.”
These instruments — mortgages and bills of exchange — may be used directly as money. They may also be taken to a financial institution called a “bank” that converts contracts representing existing things of value (mortgages) into more usable forms of money, or “creates” money by accepting contracts representing future things of value (bills of exchange).
|Government debt money is backed by the State's coercive power.|
(As a side note, we mentioned previously that Keynesian monetary theory is based on confusion between private sector bills of exchange based on private property, and government bills of credit, based on the government’s power to levy and collect taxes. In both cases the bill represents the present value of something to be realized in the future. The difference is that a bill of exchange represents the present value of a private property claim on future wealth — the creditworthiness of the issuer, while a bill of credit represents the present value of the sometimes tenuous hope that the government will be able to collect enough in taxes out of existing or future wealth to make good on its promises — the faith and credit of the emitting government, backed up by its coercive power to levy and collect taxes.)
This brings in the question, What is a “bank”? We’ll look at that next week.