THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, August 26, 2009

Some Thoughts on Money, Part I: Debt and Asset-Backed Money

Money, being anything that can be used in settlement of a debt, must represent something of value. Many things have been recognized throughout history as having value, often gold and silver or other items valued for their utility or beauty. Primitive economies often use draft animals as a standard of value, as they are usually the most valuable owned items, and money must be backed by something in which the issuer has an ownership interest. In ancient Rome and Ireland, for example, the standard was cattle. Our terms pecuniary and capital come from an obsolete word for cattle (pecus) and head of cattle (caput), respectively. In Ceylon, the standard of value was the elephant.

Of course, the standard of value doesn't have to be a draft animal. It can be anything that people generally recognize as having value, such as lumps of bronze, silver, or gold. Bronze money was even believed to have a sacred character in Rome, the alloy being considered essential to life for its utility in making tools and weapons. In Papua New Guinea, the standard of value was the severed human head.

The key is that, as Irving Fisher noted in The Purchasing Power of Money (1911, revised 1913), whatever is used as a currency must either itself convey something of value, such as gold, silver, livestock, or some other commodity (for example, the bread and other food tokens issued as Notgeld and Kriegsgeld in Germany and Austria-Hungary during the First World War and the subsequent hyperinflation), or represent a property right in something of value, such as inventories of gold, silver, livestock, or other commodities. In a modern banking economy, existing inventories of marketable goods and services, as well as productive assets (capital) serve this purpose, perhaps in the case of capital assets unconsciously echoing the ancient Roman bovine standard of value. When a certificate or some other symbol is issued and used as currency (current money) in place of the actual good or service, the money is said to be "backed" by whatever specific thing of value the symbol represents, whether it is herds of cattle, bars of gold or silver, or inventories of marketable goods and services or capital assets.

When the something of value backing the currency is debt instruments issued by the State (as is the case in most economies today), the currency is said to be backed by the full faith and credit of whatever government issues the currency. If the State is shaky either politically or economically, the currency will either have a low value, or fluctuate wildly in response to economic and political conditions. If the State is sound, and the government keeps its debt within reasonable bounds, the debt-backed currency will be relatively stable.