The Evolution and Transformation of Money

1. The Evolution and Transformation of Money Thomas H. Greco, Jr.

2. 3/26/2007 Prepared by Thomas H. Greco, Jr. 2 Building a Healthy Economy Requires an Understanding of the Principles of Money Money is a human contrivance. That has evolved over centuries. Much of the present misery in the world derives from a general failure to understand the nature of money, banking, and credit.

3. 3/26/2007 Prepared by Thomas H. Greco, Jr. 3 Basic Kinds of Economic Interaction Gifts -- Transfer of value without any particular expectation of anything in return. Involuntary Transfers � e.g., theft, robbery, extortion, taxes. Reciprocal Exchange � equal exchange of value between two parties by voluntary agreement.

4. 3/26/2007 Prepared by Thomas H. Greco, Jr. 4 Money Plays Its Role Within the Realm of Reciprocal Exchange

5. 3/26/2007 Prepared by Thomas H. Greco, Jr. 5 The Ladder of Economic Civilization Stages in the development of the process of reciprocal exchange: Barter trade Commodity money Symbolic money Credit money Credit Clearing Each of these will be considered in turn.Each of these will be considered in turn.

6. 3/26/2007 Prepared by Thomas H. Greco, Jr. 6 Specialization of Labor Makes Economic Exchange a Fundamental Necessity When the division of labor has been once thoroughly established, it is but a very small part of a man�s wants which the produce of his own labor can supply.. � Adam Smith, Wealth Of Nations, p. 29

7. 3/26/2007 Prepared by Thomas H. Greco, Jr. 7 What Is Required for Efficient, Effective, and Fair Exchange? Free Markets An Honest Medium of Exchange or Means of Payment An Objective and Stable Unit of Measure of Value Much of our current difficulty stems from a failure to separate the means of payment from the measure of value.Much of our current difficulty stems from a failure to separate the means of payment from the measure of value.

8. 3/26/2007 Prepared by Thomas H. Greco, Jr. 8 Barter Trade Barter is the most primitive form of reciprocal exchange.Barter involves only two people; each has something the other wants. The Barter LimitationIf Jones wants something from Smith, but has nothing that Smith wants, there can be no barter trade. Whole barter, according to Riegel.Whole barter, according to Riegel.

9. 3/26/2007 Prepared by Thomas H. Greco, Jr. 9 The First Evolutionary Step From barter trade to commodity money Transcending the Barter Limitation Barter depends upon the coincidence of wants and needs. Money bridges the gap in both space and time by widening the exchange circle. Money acts as a �place holder� enabling needs to be met wherever and whenever the needed good or service may be found.  Thus, you may satisfy my need even though I may have nothing you want. Then, you can get what you need from someone else at a later time.Thus, you may satisfy my need even though I may have nothing you want. Then, you can get what you need from someone else at a later time.

10. 3/26/2007 Prepared by Thomas H. Greco, Jr. 10 Commodity Money The most primitive type of money is commodity money.Some useful commodity that is in general demand is used as an exchange medium and may serve both as a means of payment and a measure of value.

11. 3/26/2007 Prepared by Thomas H. Greco, Jr. 11 Examples of Commodity Money Various commodities have historically served as money � Cattle, tobacco, sugar, grains, nails, shells, hides, metals, etc. But the transaction is still essentially a barter trade of one good or service for another good. �Split barter,� in Riegel's terminology.�Split barter,� in Riegel's terminology.

12. 3/26/2007 Prepared by Thomas H. Greco, Jr. 12 Metallic Money Metals became the commodities of choice because they are durable, fungible (divisible), and easily portable. �In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity.� � Adam Smith, Wealth of Nations, p. 30

13. 3/26/2007 Prepared by Thomas H. Greco, Jr. 13 Symbolic Money The simplest form of symbolic money is the warehouse receipt, or �claim check� for goods on deposit somewhere. Examples: Grain bank receipts. Vouchers for redemption of various goods that have been deposited. Currencies redeemable for gold or silver. The shift from direct exchange of commodities to the exchange of notes or tokens representing claims to commodities was a sort of half-step that prepared the way for the next evolutionary step.The shift from direct exchange of commodities to the exchange of notes or tokens representing claims to commodities was a sort of half-step that prepared the way for the next evolutionary step.

14. 3/26/2007 Prepared by Thomas H. Greco, Jr. 14 The First Kind of Paper Money

15. 3/26/2007 Prepared by Thomas H. Greco, Jr. 15 The Second Evolutionary Step From commodity money to credit money �Some ingenious goldsmith conceived the epoch-making notion of giving notes not only to those who had deposited metal, but to those who came to borrow it, and so founded modern banking.� Hartley Withers, The Meaning of Money, p. 18

16. 3/26/2007 Prepared by Thomas H. Greco, Jr. 16 The Embodiment of Credit in Bank Notes At first, bank notes were redeemable on demand for commodity money (gold or silver), so they were symbolic money; later bank notes were credit money. The paper money so largely in use in all civilized countries as a common medium of exchange is in reality a coinage of credit or trust. � Henry George, 1894 We see then that the problem of the scarcity of conventional money which, at that time, consisted of gold, was alleviated by the introduction of a new kind of payment medium, credit, which took the form of paper, which was in fact the banker's promise or i.o.u. It was necessary, however, for the community to develop sufficient confidence in this form of money to accept it as a form of payment. Making the new (credit) money redeemable for the old (gold) money was seen as necessary to building that sort of confidence, but once established, the redeemability feature could be, and was, abandoned.We see then that the problem of the scarcity of conventional money which, at that time, consisted of gold, was alleviated by the introduction of a new kind of payment medium, credit, which took the form of paper, which was in fact the banker's promise or i.o.u. It was necessary, however, for the community to develop sufficient confidence in this form of money to accept it as a form of payment. Making the new (credit) money redeemable for the old (gold) money was seen as necessary to building that sort of confidence, but once established, the redeemability feature could be, and was, abandoned.

17. 3/26/2007 Prepared by Thomas H. Greco, Jr. 17 Two Distinct Kinds of Paper Money

18. 3/26/2007 Prepared by Thomas H. Greco, Jr. 18 Problems With Early Credit Money Bank notes were often problematic because now there were two different kinds of paper money being issued into circulation, the one a �claim check� for gold on deposit, and the other a credit instrument issued on the basis of a promise to pay and backed by some collateral assets, yet both were redeemable for gold. This became known as �fractional reserve� banking because there was never enough gold to redeem all the notes. This became known as the �fractional reserve� system of banking. The problems inherent in making both kinds of money redeemable on demand were dealt with quite ingeniously by the Bank of Scotland, during the mid-eighteenth century. Given a scarcity of specie which then prevailed, the bank inserted an �option clause� on their notes. This clause allowed the bank the option of delaying redemption for some period of time, but promised the payment of interest during that period. This worked quite well for the bank in that its notes continued to pass at par. It should now be clear, that credit money is a major advance over commodity money, and that no commodity backing is necessary for a fully functional credit money system. Indeed rapid expansion of industry known as the industrial revolution could not have happened without the availability of credit money. Still, credit money has not yet been perfected. Because of political interference and favoritism, along with a general misunderstanding about the nature of money, credit money remains monopolized and the amount of credit available is sub-optimal.This became known as the �fractional reserve� system of banking. The problems inherent in making both kinds of money redeemable on demand were dealt with quite ingeniously by the Bank of Scotland, during the mid-eighteenth century. Given a scarcity of specie which then prevailed, the bank inserted an �option clause� on their notes. This clause allowed the bank the option of delaying redemption for some period of time, but promised the payment of interest during that period. This worked quite well for the bank in that its notes continued to pass at par. It should now be clear, that credit money is a major advance over commodity money, and that no commodity backing is necessary for a fully functional credit money system. Indeed rapid expansion of industry known as the industrial revolution could not have happened without the availability of credit money. Still, credit money has not yet been perfected. Because of political interference and favoritism, along with a general misunderstanding about the nature of money, credit money remains monopolized and the amount of credit available is sub-optimal.

19. 3/26/2007 Prepared by Thomas H. Greco, Jr. 19 Redeemability Abandoned Eventually, the redeemability feature was abandoned and symbolic money disappeared. Now, virtually all of the money in circulation is credit money. Most of the money in circulation exists as deposits in bank accounts. Very little money exists as paper notes or coins.

20. 3/26/2007 Prepared by Thomas H. Greco, Jr. 20 Money and Banking Have Been Politicized There is a general, but erroneous, belief that the money power should be centralized and is naturally the province of government. Governments have generally given the money power over to bankers by establishing central banks, granting legal tender status to their currencies, and forcing people to accept them. Money is such a fundamental necessity in the exchange process that those who control the issuance of money (credit) control virtually everything. The notion of the money power vested in the government is as outmoded as monarchy or imperial rule.Money is such a fundamental necessity in the exchange process that those who control the issuance of money (credit) control virtually everything. The notion of the money power vested in the government is as outmoded as monarchy or imperial rule.

21. 3/26/2007 Prepared by Thomas H. Greco, Jr. 21 The Power to Issue Money Rightly Belongs to Sovereign Individuals If money is issued on a sound basis there is no need to force people to accept it. Forced circulation (legal tender) serves only to concentrate power and expropriate wealth. Democratic government requires the separation of money and state.

22. 3/26/2007 Prepared by Thomas H. Greco, Jr. 22 The Third Evolutionary Step  From Credit Money to Clearing Money is no longer substantial. Money is merely an accounting system. Money is a way of �keeping score� in the economic �game� of put and take.

23. 3/26/2007 Prepared by Thomas H. Greco, Jr. 23 Clearing -- The Ultimate Evolutionary Step The process called clearing is the simplest and most efficient mechanism for mediating reciprocal exchange. Clearing is simply the process of accounting that offsets debits against credits, purchases against sales.

24. 3/26/2007 Prepared by Thomas H. Greco, Jr. 24 The Possibilities of Clearing Have Long Been Recognized �If there were no money, any system of crediting sellers and debiting buyers would be fully competent to accomplish the work now performed by money.� � Bilgram & Levy, 1914

25. 3/26/2007 Prepared by Thomas H. Greco, Jr. 25 Particle or Wave?Thing or Account Balance? Light can be described as either a particle or a wave. Money can likewise be described as either: a thing or a fluctuating account balance based on a relationship agreement.

26. How Does Clearing Work? When you sell something, your account balance is credited (increased); When you buy something, your account balance is debited (decreased). Banks still prefer to act as if money is a thing which they can lend out so they can charge interest.Banks still prefer to act as if money is a thing which they can lend out so they can charge interest.

27. 3/26/2007 Prepared by Thomas H. Greco, Jr. 27 Money Viewed as a �Wave� or Account Balance Anyone who has studied or used a mutual credit system, like LETS, knows how this works. But this is not such a new idea. It�s potential has not been widely recognized. Business customarily sell to one another on �open account.� That means that goods are delivered without immediate payment. The buyer is �billed� by the seller, and the buyer has a certain length of time within which to �settle� his account, i.e., to pay up. In accounting terms, then, sales result in accounts receivable; purchases result in accounts payable. Anyone who has studied or used a mutual credit system, like LETS, knows how this works. But this is not such a new idea. It�s potential has not been widely recognized. Business customarily sell to one another on �open account.� That means that goods are delivered without immediate payment. The buyer is �billed� by the seller, and the buyer has a certain length of time within which to �settle� his account, i.e., to pay up. In accounting terms, then, sales result in accounts receivable; purchases result in accounts payable.

28. 3/26/2007 Prepared by Thomas H. Greco, Jr. 28 Conventional Payment ProcessUsing Bank Credit Money Alpha owes Bravo $100, Bravo owes Charlie $100, Charlie owes Delta $100, and Delta owes Alpha $100. Typically, one or more of these debtors will borrow from the bank in order to pay what they owe to each other. In the simplest scenario, Alpha borrows $100 from the bank to pay Bravo, who then uses it to pay Charlie, who then uses it to pay Delta, who then uses it to pay Alpha. Alpha can now repay the bank, but, in addition to the $100 principal, it must also pay the bank interest. In sum, each company used the bank�s liability (bank notes) to pay the others what was owed.Alpha owes Bravo $100, Bravo owes Charlie $100, Charlie owes Delta $100, and Delta owes Alpha $100. Typically, one or more of these debtors will borrow from the bank in order to pay what they owe to each other. In the simplest scenario, Alpha borrows $100 from the bank to pay Bravo, who then uses it to pay Charlie, who then uses it to pay Delta, who then uses it to pay Alpha. Alpha can now repay the bank, but, in addition to the $100 principal, it must also pay the bank interest. In sum, each company used the bank�s liability (bank notes) to pay the others what was owed.

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30. 3/26/2007 Prepared by Thomas H. Greco, Jr. 30 Clearing Process Without Bank Credit Why is it necessary to �rent� a bank�s liability to clear debts owed to one another. In a clearing circle, each company�s debt (account payable) is offset by the amount owed to it (account receivable). There is no need to use �money� as a payment medium. �Under the politico-financial scheme of things the business man must go to the banker and pay a lending fee for what is merely a clearance service. The government even subjects itself to this tribute-taking device by "borrowing" from banks whereas it could create deposits just as well by non-interest bearing currency or other notes.� � Riegel, Valun Monograph 2.Why is it necessary to �rent� a bank�s liability to clear debts owed to one another. In a clearing circle, each company�s debt (account payable) is offset by the amount owed to it (account receivable). There is no need to use �money� as a payment medium. �Under the politico-financial scheme of things the business man must go to the banker and pay a lending fee for what is merely a clearance service. The government even subjects itself to this tribute-taking device by "borrowing" from banks whereas it could create deposits just as well by non-interest bearing currency or other notes.� � Riegel, Valun Monograph 2.

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32. 3/26/2007 Prepared by Thomas H. Greco, Jr. 32 Clearing Compared to Currency Remember, a currency is typically a third party debt, an i.o.u., that a seller accepts as payment from a buyer. That may be a Federal Reserve note or a bank deposit, or a private debt. The supply of such third party instruments is usually artificially limited. Interest must generally be paid for their use.

33. 3/26/2007 Prepared by Thomas H. Greco, Jr. 33 Clearing Compared to Currency Clearing eliminates the need to use any third party debt as payment. Goods and services pay directly for other goods and services. The supply of internal credits is limited only by the available goods and services being traded. Credit allocation among members is always sufficient; determined by the participants themselves according to their own contract, rules, and evaluations. There is no need to pay interest to anyone.

34. 3/26/2007 Prepared by Thomas H. Greco, Jr. 34 A Successful Credit Clearing Association The standards applied in granting credits were often far too lenient. The standards applied in granting credits were often far too lenient.

35. 3/26/2007 Prepared by Thomas H. Greco, Jr. 35 What Do Banks Do? Clearing is what banks already do, but it is not widely recognized as such. Banks still prefer to act as if money is a thing which they can �lend� out at interest. Increasingly, receiving funds and disbursing funds (making payments) is accomplished by direct transfers into and out of bank accounts.Increasingly, receiving funds and disbursing funds (making payments) is accomplished by direct transfers into and out of bank accounts.

36. 3/26/2007 Prepared by Thomas H. Greco, Jr. 36 What Else Do Banks Do? Banks also authorize some of their customers to spend money into circulation. They do this by making �loans� based on the �creditworthiness� of the customer and the value of their collateral assets. This process is often called �monetization,� which converts the value of illiquid assets into liquid or spendable form. Banks call this practice, �making a loan.� Banks call this practice, �making a loan.�

37. The Debt Money System Banks call this process �making a loan,� even though nothing is loaned. Banks charge interest on these �loans.� That turns �credit money� into �interest-bearing debt money,� Which results in a growth imperative that destabilizes the entire economy. Interest causes debt to grow with the mere passage of time, making it impossible for debtors, in the aggregate, to pay what they owe.Interest causes debt to grow with the mere passage of time, making it impossible for debtors, in the aggregate, to pay what they owe.

38. 3/26/2007 Prepared by Thomas H. Greco, Jr. 38 The Creation of Bank Debt Money as Deposits Any cash (Federal Reserve notes) drawn out from banks is charged against your account balance, so cash is merely a physical representation of bank credit money.Any cash (Federal Reserve notes) drawn out from banks is charged against your account balance, so cash is merely a physical representation of bank credit money.

39. 3/26/2007 Prepared by Thomas H. Greco, Jr. 39 Banks Provide Some Useful Services Banks provide: Clearing services. Assessment of asset values. Risk assessment services. Intermediation between savers and investors.

40. 3/26/2007 Prepared by Thomas H. Greco, Jr. 40 Alternatives to Debt Money Mutual credit clearing associations and private complementary currencies can Reduce the need for conventional, bank-created, debt-money, Make the exchange process less costly and more equitable, and Free civilization from the devastation of the growth imperative.

41. 3/26/2007 Prepared by Thomas H. Greco, Jr. 41 Who Is Qualified to Issue Currency? Any entity that produces goods or services and offers them for sale in the market, i.e., productive businesses and individuals. Any entity that has the power to collect revenues, e.g., local or regional governments and their authorities. Non-profit organizations that receive pledges of financial or in-kind contributions. Remember, every currency is an i.o.u., not necessarily repayable in official money, but in goods and services. Reciprocity demands that there be a solid value basis upon which currency is issued.Remember, every currency is an i.o.u., not necessarily repayable in official money, but in goods and services. Reciprocity demands that there be a solid value basis upon which currency is issued.

42. 3/26/2007 Prepared by Thomas H. Greco, Jr. 42 Basis of Issue or Foundation Goods foundation or �shop� foundation Service foundation Tax foundation Donor pledge foundation "shop foundation", "service foundation", "tax foundation", "service foundation", "readiness to accept foundation", "debt foundation" "shop foundation", "service foundation", "tax foundation", "service foundation", "readiness to accept foundation", "debt foundation"

43. 3/26/2007 Prepared by Thomas H. Greco, Jr. 43 Examples of Shop Foundation Canadian Tire money Larkin �Merchandise Bonds� All redeemable coupons Canadian Tire money is issued as a discount. Customers receive coupons based on the amount of merchandise they buy. These coupons may be redeemed when a subsequent purchase is made. They are accepted just the same as cash.Canadian Tire money is issued as a discount. Customers receive coupons based on the amount of merchandise they buy. These coupons may be redeemed when a subsequent purchase is made. They are accepted just the same as cash.

44. 3/26/2007 Prepared by Thomas H. Greco, Jr. 44 Examples of Service Foundation Railway notes or other notes redeemable for services Airline frequent flyer miles, if transferable Utility vouchers � electric, gas, water.

45. Examples of Tax Foundation Tally sticks Argentine provincial �bonds�, e.g., Patacones, LECOP, Petrom Municipal �tax certificates� or �tax anticipation warrants�

46. 3/26/2007 Prepared by Thomas H. Greco, Jr. 46 What All This Means Sound and credible exchange media can emerge from a variety of sources. There is no need for the exchange process to be limited by centralized power, i.e., governments or banks. Competition among currencies and exchange options results in a stronger, less costly business environment, healthier communities, and sustainable economies.

47. 3/26/2007 Prepared by Thomas H. Greco, Jr. 47 Opportunities for Business Companies of all kinds, either individually or in association, can economize on their needs for conventional working capital by using their own currencies to pay suppliers and employees.

48. 3/26/2007 Prepared by Thomas H. Greco, Jr. 48 Opportunities for Governments Municipalities and provincial governments can fund a large proportion of their current operations by using their own currencies to pay part of what they owe to local suppliers and employees. Infrastructure development can, to some degree, be financed by making payment in municipal currency.

49. 3/26/2007 Prepared by Thomas H. Greco, Jr. 49 Opportunities for Non-profit Organizations Donations received in the form of pledges of goods and services or discounts can be monetized into the form of community currency and used to pay employees and suppliers. No need to market or handle in-kind donations. Currency may also be issued on the basis of services sold to the public.

50. 3/26/2007 Prepared by Thomas H. Greco, Jr. 50 Private Complementary Currencies Have Many Direct Benefits Private, interest-free currencies can be spent into circulation as a substitute for bank financing, promoting the health of the local economy because they recirculate locally. Reduced need to borrow working capital can save significant interest costs. Risk of default on a promise to deliver goods or services under your control is less than the risk of default on a promise to deliver money, which you do not control. Official money can be spent outside the community so it quickly flees; local currency stays close to home so it is available to enable many trades within the community. Reduced need to borrow working capital can save significant interest costs. Risk of default on a promise to deliver goods or services under your control is less than the risk of default on a promise to deliver money, which you do not control. Official money can be spent outside the community so it quickly flees; local currency stays close to home so it is available to enable many trades within the community.

51. 3/26/2007 Prepared by Thomas H. Greco, Jr. 51 Summary of Advantages Adequate supply Low cost Democratically allocated Give local suppliers preference Reduced risk of default because � A promise to deliver goods or services is less speculative than a promise to pay official money. Help to stabilize the global economy Reduced need to borrow working capital can save significant interest costs. Risk of default on a promise to deliver goods or services under your control is less than the risk of default on a promise to deliver money, which you do not control. Official money can be spent outside the community so it quickly flees; local currency stays close to home so it is available to enable many trades within the community. Reduced need to borrow working capital can save significant interest costs. Risk of default on a promise to deliver goods or services under your control is less than the risk of default on a promise to deliver money, which you do not control. Official money can be spent outside the community so it quickly flees; local currency stays close to home so it is available to enable many trades within the community.

52. 3/26/2007 Prepared by Thomas H. Greco, Jr. 52 Guidelines to Assure Fairness and Success A clear agreement (contract) between the issuers and the users of the currency. Currency issued on a sound foundation or basis. Amount issued must be in proper proportion to the foundation upon which it is issued. Administration must be fully accountable to the users. Full and timely disclosure of all information needed to assess the credibility and value of the currency in circulation. No forced circulation (no legal tender status).

53. 3/26/2007 Prepared by Thomas H. Greco, Jr. 53 Future Prospects Non-bank clearing will proliferate in the form of private clearing services, and mutual credit associations comprised of businesses and municipal governments. Private currencies issued by businesses and lower levels of government will become common. Internet payment systems using non-bank credits will proliferate. The commercial �barter� industry, as it matures, will discover that its fundamental role is to provide clearing services for its members. Trade exchanges will continue to also provide brokering services but will abandon the delusional practice of granting trade credits to members based on artificial prices. Only the market can properly set prices.The commercial �barter� industry, as it matures, will discover that its fundamental role is to provide clearing services for its members. Trade exchanges will continue to also provide brokering services but will abandon the delusional practice of granting trade credits to members based on artificial prices. Only the market can properly set prices.

54. 3/26/2007 Prepared by Thomas H. Greco, Jr. 54 Shake-out and Standardization In the early stages, things will seem chaotic, many errors will be made, and there will be some failures. But as learning progresses, there will be a shake-out process in which standards are developed and the best protocols come to be recognized and generally adopted. Surviving systems will form federations to extend members� trading opportunities and strengthen their market position.

55. 3/26/2007 Prepared by Thomas H. Greco, Jr. 55 To Learn More and Keep Up-to-date Read, Money: Understanding and Creating Alternatives to Legal Tender, by Thomas H. Greco, Jr. Read the books of E. C. Riegel. Consult the works of the �German school� of free money � Ulrich von Beckerath, Heinrich Rittershausen, Walter Zander. Explore the website: www.ReinventingMoney.com Join one of the many complementary currency e-mail lists. Read E. C. Riegel, Ulrich von Beckerath, heinrich Rittershausen, Walter Zander, and others on the Reinventing Money website.Read E. C. Riegel, Ulrich von Beckerath, heinrich Rittershausen, Walter Zander, and others on the Reinventing Money website.