Debate Magazine

Glad to Have Cleared That Up.

Posted on the 14 November 2014 by Markwadsworth @Mark_Wadsworth

Ralph Musgrave in the comments to an earlier post:
"If money is a “measure of indebtedness”, who is indebted to who when gold coins are used as money?"
If you swap gold coins for goods and services, those coins aren't money in the modern sense. They are just valuable assets, just like the goods you can exchange them for. So post-transaction, nobody is indebted to anybody.
"The answer is “no one”. And the same goes for all commodity monies."
Even back in the day when we used gold coins, the split second that any of the following occur, you have a debt-based money system:
a) You obtain (or supply) goods and services on credit, i.e. payment at a later date. The fact that the indebtedness is measured in terms of of how many gold coins will change hands in future is by the by. You can measure it in gold coins, pounds, dollars, payment in kind or bags of salt.
b) Somebody borrows gold coins from a money lender. The gold coins still very much exist, but the money lender no longer owns those gold coins, what he owns is a promise by the borrower that the borrower will repay x gold coins at a future date (an asset). The borrower now has whatever he spent the coins on and a liability. The money lender's new asset and the borrower's liability are equal and opposite and have been created out of thin air.
c) The money lender himself accepts "deposits" which is a polite way of saying "borrows gold coins from people". The gold coins he accepts from depositors are of course the gold coins from transaction (b). Each time they are lent out to borrowers and taken back in from lenders, the money lender's balance sheet grows. He splits the zero into assets and liabilties.
"Debt of course CAN BE USED as money, but it’s not the only form of money. Also the extent to which base money is form of debt is very debatable. E.g. £10 notes claim that the Bank of England will pay you on demand £10 (of gold presumably). But that’s an empty promise."
When I was a lad, the Bank of England very sensibly showed the face value of coins and notes in circulation as a liability from the point of view of the Bank. Which they are. The fact that they don't do this any more (h/t Bob Edmiston, deceased) is by the by, it's only tiny amounts.
And it's not an empty promise. If you owe the government £100 (for fines, fees, taxes) and have £100 in coins and notes, you can repay that liability by handing over the coins and notes. The government now has some worthless bits of paper and metal which it manufactured itself in the first place.
“If some "people's ability to buy... is thwarted" that's a PC way of saying that "they are poor". Nope. One can have a situation where everyone is well off (e.g. house and car owners) but if there was no money, their ability to trade with each other would be thwarted."
Money would come into existence all of its own accord, see a), b) and c) above. It always has done and always will.
The government *might* need to kick start this, like when they introduced the Deutschmark in the late 1940s. All Reichsmarks were declared null and void, every adult got bits of metal and paper with a nominal value of DM 40, and hey presto, things got moving again. Even people who were little children at the time remember this, suddenly, there was stuff in the shops, businesses were taking on employees and from that day on, everything hummed along nicely.
“No need for fancy "money creation"”. No? Then (as per above paragraph) if there was no money, we’d manage OK? A “no money” economy is a barter economy. That’s OK on desert islands, but not in Europe in 2014.
See previous response.
And, ahem, who started off by talking about gold coins?? Not me. I always assume that our starting point is Europe in 2014. And we are where we are, with a debt-based money system.
“As to "banning private money creation" if you understand double entry book keeping you would know this is impossible.” As regards whether I understand double entry book-keeping, I’ve got accountancy qualifications, so I think I pass that test. As to the idea that banning private money creation is not possible, several economics Nobel laureates think it’s possible.
All right, you try banning transactions a), b) and c) above, see how far you get.
For the umpteenth time, a bit of private money/debt/credit creation to oil the wheels and smooth the system is vitally important.
Where it gets dangerous is when banks capitalise land rents (that's eighty per cent of private money creation), which can only be sorted out by decapitalising land values i.e. with Domestic Rates, rent controls, mortgage restrictions caps etc. This is not hypothetical, it's what the UK did until the 1980s and it worked a treat - housing was affordable, owner-occupation rates shot up and the ocasional banking crises we had were as nought compared to what happened since 2008.

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