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.
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| 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.
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| 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.
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| 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).
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| 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.
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