Written by: Rory Short
For aeons we have had, and thus have become thoroughly accustomed to, artificial money and its associated problems. Consequently, we think that the problems with money are inherent in money itself.
But these problems are not inherent and will disappear if we change our Money System (MS) so that it only produces Natural Money.
Artificial money is money that is produced independent of any exchange and until the advent of mobile phones, information technology and the internet, we had little choice but to produce new money artificially.
But for us today, with the aforementioned technology, plus the fact that the rand has been a fiat currency since the 1970s, this is no longer the case. What this means is that the rand Money System is already part way to producing only Natural Money; all that is required is to make some adjustments to the Rand MS itself.
So, what does the Rand MS do? It produces and administers money.
What is Money?
The beauty and power of money lies in the fact that it can be exchanged for absolutely anything of equivalent value. In other words the units of a currency, legitimate within a legally established monetary area, are universally exchangeable for goods and services within the area.
But how does money come by this miraculous property?
The answer to this question is central to any deeper understanding of money. There is however an even more fundamental question that needs to be answered first. This is: what is an economy? Why this question, you might ask? It is because money’s miraculous ability is totally bound up with its role in the economy.
What is this role?
In order to survive, let alone flourish, human beings have a constant need to make voluntary exchanges of goods and services with one another. Now, each of these exchanges is an economic event in its own right and the accumulation of these events is what makes up an economy.
Basically, if there are no exchanges then there is no economy. Thus, if we are to fully understand what money is, we need to first understand the role of money in exchanges.
Of course we can, and do, make exchanges without the aid of money, so why is money needed? Because it facilitates the making of exchanges and this increases the volume of successful exchanges happening in an economy, thus increasing its size which is to everybody’s benefit.
Voluntary exchanges without money
For convenience we call such one to one exchanges Moneyless Simple Exchanges (MSEs). These exchanges are logistically very difficult to arrange, however. They require the simultaneous satisfaction of a number of coincident conditions, i.e. both parties must be face to face, they must have with them, and show the other party, the item that they wish to exchange and they must be happy to accept the other party’s item in exchange for their own item. In addition, these one to one exchanges only happen if both parties feel that the item that they are getting in exchange is worth more to them than the item that they are losing.
From the last sentence, we can see that money, in its natural form, is just a name for the externalisation of the values that are in the heads of the exchanging parties, namely, the values of the exchanged items.
Moneyless Simple Exchanges might be difficult to arrange, but they nevertheless contain all the ingredients needed for the creation of a healthy economic event. These are:
b) one to one
c) automatically healthy because they are healthy, both
(i) economically, i.e. fair value, and;
(ii) socially, each party, plus offering, is accepted by the other,
otherwise the exchange would not complete
d) when completed they form, one, integral, healthy, economic unit, or event.
Voluntary exchanges involving money
Money is introduced into exchanges because it hugely facilitates the exchange process, whilst maintaining the economic health, if not the social health, of the resulting economic event. Consequently, in cash-based societies like ours, exchanges using money, old or new, have become the norm. They are not automatically socially healthy, however because all the people involved in exchanges using money do not have sight of one another, nor of all the items involved in all the exchanges.
This uncertainty in the social health of completed exchanges could be remedied, however, by attaching a list of its successive holder identities to each UoC. The provision of this information on request will enable any potential recipient of a UoC, in payment of a debt, to decide whether any particular UoC is acceptable to them or not.
Money is not a product of nature; it has to be produced by people before it can be used in exchanges, and new money is produced in one of two ways, artificially, i.e. apart from any exchanges, or naturally as a by-product of a completed complex exchange.
Initially, money could only be produced artificially and to prevent its fraudulent production if it was given its backing value on issuance. The backing value came from the State’s precious metal holdings – gold in our case. Thus, right from its issuance, artificial money could legitimately be used as a replacement for the item(s) in one half of a simple exchange.
We now have the technology (mobile phones, the internet, information technology) which enables us to issue fiat money, new or old, at any point of purchase. We call such money ‘fiat’ because it has no backing value on issuance. It has to gain its backing value from its participation in a successfully-completed complex exchange, otherwise it has to appropriate it from the backing value of all the money already in circulation, and this misappropriation debases the currency, causing inflation. Gained in the correct way, however, the backing value is a natural consequence of a completed complex exchange.
Exchanges involving fiat money are of two kinds: complex and simple. Complex exchanges involve three or more people and the use of newly-issued fiat money. Simple exchanges use old money and involve only two people. Old money is money that has already been used in a previously successful completed exchange whether complex or simple.
Complex exchanges use new money
Newly-issued fiat money, V, enables one of the two parties, in a Moneyless Simple Exchange, to initiate the complex exchange, whilst the other party is replaced by two people: a seller person and a buyer person.
The initiator anchors the exchange by receiving V as interest-free debt from the Money System. The anchor then uses V to purchase something of value V from the seller person. They then sell something of value V to the buyer person. The income from the sale enables them to settle their interest free debt V. This completes the exchange and fills V, now in circulation, with its backing value.
Thus natural money is quite simply the externalised, shared, or equal in value, in quantitative terms, of the items exchanged in a completed complex exchange.
The completion of the complex exchange indisputably establishes
a) a voluntary exchange
b) a healthy economic event, through the use of V
c) the backing value of V
The allocation of legitimate backing value to V turns V into old money. This makes it possible for V to serve as a legitimate stand-in for the exchangeable item(s) in one half of any Simple Exchange.
Simple exchanges use old money
Because of the universal exchangeability of money, Moneyless Simple Exchanges have virtually ceased to exist. Monied Simple exchanges are referred to either as purchases, or sales, depending on their initiator’s role in the exchange.
The Pros and Cons of using artificial money
Currently we use artificial money in exchanges but its use is not without both negatives and positives. The pros and cons are as follows:
a) it completely eliminates the logistical difficulties associated with arranging Moneyless Simple Exchanges;
b) money makes visible and quantifiable all ‘in-process exchanges’ in the economy.
The Cons depend on the type of money being used in exchanges. If it is natural there are no cons but if it is artificial then:
a) where old money, fiat or commodity-based is being used, exchanges are:
i) not automatically socially healthy
b) where new commodity-based currency is being used, exchanges are;
i) not automatically socially healthy;
ii) not open to those who have no money.
This is money poverty which means that people are unable to automatically participate in a cash based economy and thus the size of the economy is unnecessarily reduced and people experience real poverty in terms of access to goods and services.
c) where new Fiat money is being used exchanges are;
i) not automatically socially healthy
ii) not economically healthy, until the new money gains its legitimate backing value
iii) not open to those who have no money
iv) the money is not stable, it is susceptible to chronic debasement, i.e. inflation, depending on the MS responsible for administering it.
Inflation means continuous theft of value from all the money already in circulation. The SA Reserve Bank has a target range for inflation, not of 0% but of 3 to 6 percent. Consequently people are confronted on a daily basis with the ever decreasing purchasing power of Fiat money.
In view of the above cons the obvious next question is, can the pros be preserved whilst eliminating the cons? Yes, they can by completing the transition to an MS that produces only Natural Money. We have, however, continued with the artificial money approach even though the Rand has been a Fiat currency since the ‘70s. But there is no reason why the Rand MS could not be altered to produce only Natural Money thus eliminating the four Fiat money cons listed above.
Author: Rory Short is a retired IT professional who worked and lectured at Wits. His lecturing focused on the front end of the systems development life cycle for information systems. The money system is actually an information system that reports on the allocation (distribution) of purchasing power within the economy.