The use of money to facilitate exchanges has a very long history because humans have always had a need to make exchanges, of goods and/or services, with one and other. The exchanges have always been in order to, not only survive, but also to flourish. However, finding someone who wants something that you are offering in exchange for something that they are offering is not so easy to do. Basically, the disparate needs of the parties involved have to be successfully matched if any voluntary exchange is to complete satisfactorily.

At some point, the idea must have occurred to people that the matching needs problem would be totally eliminated if there was a Universally Exchangeable Item [UEI] that could be used as one of the items in exchange.

But what should a UEI be comprised of?

As the conceptual understanding of money has evolved along with its history, I first intend to answer this question with a conceptual argument for UEI realisation before discussing the realisations of UEIs in actual practice.

Voluntary exchanges are complete when the different needs/desires of the participants are satisfied with the exchange. Thus a natural characteristic of any completed exchange must be the desirability of the items involved in it. If it could be guaranteed that the participant who receives a UEI will at some point be able to satisfy the desire which was associated with the exchange the UEI would work, in which case a recording of the desirability involved would definitely work as a UEI, the only proviso being that the person offering the desired item is prepared to accept the UEI in exchange for the item.

So how is a recording of desirability to be created? Not only that, but to serve as a UEI the recording needs to be fungible, i.e. something that can be contracted for without an individual specimen being specified because any specimen is replaceable by another identical specimen.

In order to meet the above requirements, the following questions need to be answered: how is desirability to be extracted, from the heads of the exchanging parties in a two-person voluntary exchange, then measured and displayed in a fungible form?

It is not normally necessary, in a two-person exchange, for the desirability, of the items involved, to be articulated. However, if one of the parties to the exchanged is replaced by two people, one to supply an item to the remaining party and the other to receive the item being offered by the remaining party then the desirability of the item involved has to be articulated for the benefit of all three parties.  

Desirability can be ranked from 0 to infinity so it can be measured, or quantified, numerically and as numbers are naturally displayed in a textual format, desirability can be displayed numerically. Numbers are fungible too so, as desirability can be recorded in numbers, UEIs could be created by recording desirability numerically.

Once a way to create ‘desirability‘ UEIs had been developed and widely accepted the UEIs became known as money and because it is very effective at facilitating exchanges money became the preferred means of entering into exchanges. As a result, the possession of money became a pre-requisite for any person wanting to enter into exchanges of any kind, even exchanges needed for survival.

From this arose the possibility of a person being unable to enter into any exchanges at all purely because they didn’t possess any money, a human-created artifact. Such people were regarded by society as poverty-stricken, an unwelcome condition and wholly made by humans. But it need not exist because it is caused by the way in which the currency in use in a particular society is realised.

If the currency is commodity based then inevitably some of the people become poverty stricken. If the currency is a fiat currency then the poverty-stricken condition need never arise provided that the new money is only issued in a particular way.

Commodity-based currency

Initially, currencies were commodity based, i.e. precious metals were chosen as UEIs because these metals are generally recognised as exchangeable, i.e. they are desirable and thus have value, are fungible and easily physically divisible. But this way of realising money inevitably meant that some people in society became poverty stricken as money has value from issuance and thus has to be earned from others.

Fiat currency, or potentially, Democratic Money

A fiat currency, on the other hand, is, on issuance, just a recording of value, i.e. at the point of issuance, it has no value. It has first to participate in a completed voluntary exchange before it gets its value from the exchange.

The Rand is a Fiat currency. A Fiat currency has no backing value so Rand units have first to participate in completed voluntary exchanges before they have any real value. What this means is that if the issuing of new Rands is not to have a destabilising effect on the currency then new Rands should only be issued as interest-free new money debt to anybody who is short of enough money to enter into the purchase half of an exchange. The new Rands are issued as interest-free debt because the settling of this debt by the recipient marks the recipient’s execution of the supply half of the exchange and thus the completion of the full exchange.

It is essential for people to settle their new money debt as soon as possible because as long as the debt is unsettled the new money associated with it is inflationary.  To ensure this and minimise inflation a Money System enforced limit must be placed on the amount of new money debt that any person can carry at any point in time. The banks try to achieve this, immorally, by charging interest on any credit that is older than 30 days.

The Rand became a fiat currency once South Africa abandoned the gold standard. With the Rand as a fiat currency credit cards, which enable new money to be issued to cardholders at points of purchase, became possible.

Technology has since advanced even further with the arrival of the Internet and if the Rand became a wholly digital currency the Money System could be modified, issue new Rands, through the Internet, to any person who had need of them. This would allow anybody with an e-wallet App on their smartphones to make purchases from anybody who also had an e-wallet App on their smartphones.

With the digitisation of the Rand, the government would have to ensure that every citizen had a smartphone plus e-wallet so that they could freely enter into exchanges. Then all our citizens, including those currently poverty-stricken, would without any doubt enter the world of economic freedom. Economic freedom, in cash-based societies like ours, is being able to freely enter into voluntary exchanges of goods and/or services.

About the author: Rory Short is a retired IT professional. He was trained as a mechanical engineer but spent the majority of his life developing computer-based Information Systems. He has been a practising Quaker since 1963 and has developed an interest in understanding the physics of money at the end of 2004. His interest was fueled by his concern over inflation’s likely impact on his pension’s buying power over the long term. Rory is a firm believer in economic freedom and has been a member of the Free Market Foundation for over thirty years.