Subject: THE EVOLUTION OF MONEY

Date: Wed, 15 Mar 2006

From: Leonardo Wild (Leonardo Wild is a professional writer and lives in Ecuador, South America.)

Hello,

A long time ago I posted this, in part, part of an article I wrote (nearly three years ago). It might be useful or interesting for those who did not read it back then.

All the best,

Leonardo

(TAKEN FROM "TAO OF ECONOMY" by Leonardo Wild)© 2003

The evolution of money

The path taken by economy, but particularly by money, varies from place to place according to the rise and fall of civilizations. Money started to exist when certain goods that were widely accepted as "valuable" began to be traded, not only for their own sake, but because they could be used to acquire other things.

Money is to consumers what transport is to distributors.

This means that widely accepted goods, which were deemed important, became a "commodity of trade" and, therefore, what is now known as money’s raison d'être, that is, a "means of exchange" that transcended the limitations of barter.

Commodities became money because, besides their inherent usefulness, they were also widely accepted and sought-for because they could do various other things besides fulfill needs:

a) store value over time,

b) be of a quantity enough to trade with in greater numbers and,

c) be scarce enough or difficult enough to acquire so not everybody

could come up with more.

These commodities, then, acquired a "cultural value," that is, they were "widely accepted" regardless of their real value.

Saying it differently, commodity money went through a process of evolution: at first it was cattle, rice (and other grains), tobacco, animal hides, among other things. After a while, instead of simply something that was in itself useful and of "real value," people began to accept particular commodities as means of exchange: cowry shells, axes, religious totems and assorted tokens, then later precious metals such as gold, silver and copper.

These metals were at certain times throughout history "officially minted" into coins to proclaim their purity. For example, Cresus of Lydia (around 560-546 BC), instituted the "royal seal" on coins to guarantee their purity and weight so people had a reasonable idea of their value.

When commodity money became mainly gold and silver -in the form of dust, nuggets, coins, or bars of a given weight and purity-, goldsmiths invented what is normally known as a "promissory note." A promissory note is a document that was, in practical terms, a warehouse receipt for a given object; in the case of the goldsmiths, a specific amount of gold of a given purity.

Soon, these promissory notes -a promise to return a given amount of something in exchange of the note- began to circulate instead of the things they represented. This then became what is know as "symbolic money."

Symbolic money stood "in place of" stored commodities -the real thing-, especially of gold and silver. Yet, because of this representation, symbolic money behaved much like commodity money in the sense that people looked upon it as a true commodity, forgetting that they couldn’t wear it, eat it, drink it or use it for anything other than to trade for real valuables.

We can say that "real value" became confused with "cultural value" to the point where, instead of seeking to acquire goods and services, people began to run after money as if money was something that could truly ensure their survival of its own accord.

A variation of symbolic money is "credit money."

Credit money is a so-called "monetization of assets." That is, real things are made "liquid" -monetized- by an institution that issues money, usually a bank.

Both symbolic money and credit money stand for something in particular. In the case of symbolic money, the process by which it was created happened more or less as follows:

1) An owner of gold went to a bank to deposit it;

2) The bank measured the gold (or checked the gold or silver coins’ soundness in terms of purity and weight);

3) The bank issued a promissory note (or presented pre-printed paper bills) in relation to the amount deposited.

The person holding the note or the "paper money" then could use it instead of the gold to carry our their trade, pay their debts, etc. This money circulated and, whenever someone wanted to have the gold instead of the symbol for the gold (printed bills), it went back to the issuing bank and they were given the gold in return. This meant that the bank promised the bearer of the bank note to "deliver gold in the value of" whatever amount was written on the face of the paper bills (or promissory notes or bonds of various sorts). In the case of credit money, the process was very similar, with a slight difference in the origin of the "value" that was being represented by the issued money:

1) The owner of some sort of physical property went to a bank and wrote out a contract (mortgage) where it was clear that he would give the bank ownership of the property in case the owner didn’t pay back the amount of money borrowed (that is, the credit);

2) The bank, with the mortgage contract in hand, delivered the paper money into the hands of the property owner (or "credited" the amount into the owner’s bank account);

3) The property owner spent the money into circulation, usually engaging in business that would, at the end of the term of the loan, return him enough money to pay the loan’s principal plus the interest charged for that service.

Credit meant "to trust" or "to believe." Thus, "giving credit" meant to trust that someone would return the loan. Just in case, however, something the person owned was "signed over" as a "collateral" (in case the person failed to deliver).

Symbolic Money vs. Credit Money

For a while, credit money was confused with symbolic money, and even today people (and banks) still treat money as a commodity -or a thing- with "real" rather than "cultural value."

We must remember that symbolic money stood "in place of" a real commodity. This means that paper bills were printed to the amount of the value of the real commodities it had in its vaults. Thus, if it had 2000 pounds of gold, it could print out bills to the amount equivalent to 2000 pounds of gold.

However, banks realized that people would seldom ask for the gold, that the bills tended to circulate because they were easier to handle and because customers trusted that they could, at any time, go to the bank and ask for the gold at the bill’s "face value." So, if the gold usually remained in the vaults, why not print out more money and lend it out at a cost (interest) and thus make a better business? Who would notice? While customers trusted the bank to hold the gold, few would come and ask for it.

A practice was instituted which is now called "Fractional Reserve Banking," which simply means that the money in circulation is only a "fraction of the reserve" that a bank holds in its vaults. Some considered this practice unethical. The bank was printing money and lending it out at face value when in reality no value stood behind it. But it worked (to the benefit of the bank). Only when the rumor spread that there wasn’t enough gold (or silver) in a bank’s vaults, and when most customers went to retrieve it -a bank run-, the "real thing" could not be delivered and the bank went "bankrupt." People afterwards held in their hands "valueless" bills that no-one would accept as a means of payment.

When credit money was instituted, the bank did "hold the value" though not in their vaults. They had "real assets" signed over to them, but on many occasions, when a bank run occurred, the "face value" of the printed bills offered to redeem them for gold or silver. Naturally there wasn’t all that gold or silver available. Thus a bank could go bankrupt even if it had a "reserve of value" that amounted to the money it had put in circulation, but this reserve of value had not been differentiated. In other words, "credit money" looked just like "symbolic money" even though the value it was "backed by" was not the same.

Symbolic money more or less stopped being emitted when the "gold standard" was dropped (in 1971, by the U.S. President Nixon). From then on, credit money has been the norm.

Getting into the details of banking and how banks make money is a whole chapter in itself (and an interesting one), but it will suffice to say that money-as-we-know-it has been malfunctioning and is at the core of some of the world’s greatest problems. Even before it became credit money or symbolic money, the fact that money was scarce -only scarcity could ensure the value of money, therefore sand was never a choice-, meant that it had great limitations as a "means of exchange" and that it was the greatest tool for channeling wealth from the bottom up.

The malfunctioning of money Money as a tool to facilitate distribution -a means of exchange that allows for multiple coincidence-, is in fact not doing what it has been created to do, at least not in terms of an economy of balance. This is mainly because the Social Agreement on which money is based is one of imposition -people are forced to use specific currencies-, because the Forms of Presentation are being kept artificially scarce, and because its three main Functions:

1) Means of exchange,

2) Measure of value,

3) Store of value,

contradict each other.

But let us take each at a time and see how this has happened.

The forms of presentation of money have evolved, as we have seen, from cows, tobacco, rice, gold, silver, and later coins of various metals, to the representation of these things in physical form -such as paper money, bonds, etc.-, to the latest forms of presentation in digital form, also known as "electronic money." But these are all "forms" of presentation, not the way money itself functions. Nevertheless, one important aspect must be mentioned in regards to the way money works in relation to its form of presentation.

When money was a commodity, it existed to the extent in which the amount of the commodity was availability. So ten cows were ten cows and if there were no more, there was no more money. Similarly, the number and value of gold coins was directly related to the amount of gold from which the coins were made. So gold, being more scarce than silver, ended up having a "greater value" than silver. This is so because, as a rule:

Value is directly proportional to the availability of something, as long as there is a need for it.

But then symbolic money came along and the promissory notes (and later paper bills) were issued in relation to the amount of the physical goods available. A note representing a thousand pounds of grain, meant that with that note one could retrieve a thousand pounds of grain. But bankers, when they realized that people did not retrieve the gold but rather preferred to keep it stored away, invented Fractional Reserve Banking. The important thing to understand is that "the symbols didn’t meet reality." Banks could print out more bills than they had stored value, and no-one noticed until everyone (or at least a majority) wanted to collect that "value" from the bank.

The interesting thing about this is that money "transcended the limitations of physical reality" when it became symbolic money and later credit money. In both cases:

Money can become "more" without "reality" growing at an equal rate.

To put it differently, money doesn’t really have to be scarce, and money doesn’t really have to be bound by the limitations which binds commodities. But there is the catch if money is meant to have the function of storing value:

Money isn’t scarce unless it is meant to have "value."

Or, turning that around:

If money is meant o have value, it must be kept scarce.

This means that "the edition of money is limited," which is just another way of saying that money is artificially scarce. The question that must be asked, then, is:

1) "Why is money kept scarce?"

Also:

2) "Who keeps money scarce?"

And perhaps less obvious:

3) "Where is money scarce?"

To start by answering the last question:

3) Money is scarce where it is most needed, for if you have enough money you don’t need that much of it to fulfill your real needs.

2) Money is kept scarce by those who issue it.

1) Money is kept scarce so those who issue it can lend it out at a cost, because they are in the business of making a profit with money.

If everyone would have enough money, there would be no sense in lending out money.

The simple fact is that those who have enough money can make more money by lending it out at a cost, while those who don’t have enough money must borrow it (in most cases, at a cost). This cost -which is not the same as "value"-, begins to exist with the charging of "interest rates" and it doesn’t only cover the "cost of creating money," but goes beyond that to a practice that is now viewed as "normal."

However, charging interest was considered un-ethical and even prohibited in Judaism, Christianity and Islam. Though back in the early days it wasn’t called "interest" but "usury."

Usury, from the Latin word usura (which means "to use"), was a price set on the loaning out of money. It was eventually replaced by a more widely accepted term "charging interest." However, back in the days when interest was in fact usury, to charge interisse meant to "cover the costs" and no more. A "cost" was only the "loss incurred" when someone loaned out something and not, as today, an expected gain for taking a so-called "risk."

Usury nowadays is referred to "higher than legal" interest rates missing the point entirely, for in reality the practice of charging interest has more than just ethical or religious consequences. It forces money to grow exponentially, which in the short term may not have too many visible effects, but in the long term it has catastrophic consequences at all levels, especially since it creates a contradiction in the primary purpose of money: its "functions."

Money’s primary function is to serve as a means of exchange of goods and services in order to allow for "multiple coincidence."

Means of exchange implies that the more money circulates, the more "value" can be exchanged, which should indicate that "more needs have been met."

We can see it in the following example:

1 USD x 10 People who use it 1 Time, have each acquired something for the "value" of one dollar, and all together -as a group- "moved" value for the equivalent of ten dollars. 1 USD x 10 People who use it 10 Times, have each acquired something for the "value" of ten dollars, and all together -as a group- "moved" value for the equivalent of one-hundred dollars.

This function is readily contradicted with that of "store of value." Store of value, as its name itself implies, has the purpose to create reserves that can be stored over time. Thus, if someone sells potatoes for the "value" of one hundred dollars, he receives money which is then stored away. Those one-hundred dollars can be later used to buy products or to make contract for some kind of service for the "value of" one-hundred dollars. However, what does "storing (or saving) money" mean?

It means that:

Money is taken out of circulation in order to "store value."

It also means that:

Value stored in the form of money is "cultural value" that cannot be used except for future exchange at the "price" money has acquired in the "market."

Furthermore, it happens that:

Money which is taken out of circulation in order to store cultural value is money that isn’t available for those who need it to fulfill their needs.

It is obvious then, that storing value is the opposite as moving value. If money has both functions in a single tool -as it used to be when the "value of money" was stored in a coin rather than in a bank, in a "pound of rice" rather than in a "warehouse receipt"-, the primary function of money is not put to work. Socially, the result is that:

Those who need money to fulfill their needs, are forced to spend -circulate- money, while those whose needs have been met, can take the luxury to store it away for future use.

Since money is kept in short supply, and since those who don’t have enough must borrow it at a cost -paying interest rates-, it purports that those who have money can lend it out (or invest it) at a price, so they will receive more than they loaned, which means that money will attract even more money. If this happens at an exponential rate, those who have money and allow others to use it at a cost, will eventually hold most of the money available. Once there isn’t enough money in circulation, the most basic needs cannot be met, which is the simplest definition of poverty.

Poverty is the economic inability of acquiring goods and/or services.

Which is the opposite of "being rich":

Being rich -wealthy- is the economic capacity of organisms to acquire good and services and to store "value" in greater amounts than they immediately need for survival.

As in everything, "being poor" and "being wealthy" are relative to the circumstances and subjective to what individuals believe are real needs. A company that owns billions in assets but cannot pay their employees’ wages and their debts for lack of "liquidity" -money-, can be considered "economically unable to acquire goods and services" and thus it will be poor in the strictest sense of the word "poverty." So perhaps when can say that:

Real poverty is the economic incapacity of organisms -be these people, families, communities, companies, nation-states, etc.- to fulfill their basic survival needs.

If there is wealth stored away, and there are organisms who are not meeting their basic survival needs, then it implies that there is a problem with the distribution of wealth. And if a economic system has the capacity to produce -even over-produce-, and there is the physical capability of transporting the needed products to the "poor," and there is the knowledge -information- that there are unmet needs to the point of endangered survival, something is at fault with the system which is devising the "store of value" and, as a consequence, with the mechanisms to "measure value," because value is not allocated (transferred) properly so "economic pressure" can be equalized. Measure of value is an agreement, a social abstraction. Measure of value is a "point of reference" based on a triangulation between "real" needs, subjective needs and cultural needs. Just like a foot is based on a "standard" taken from feet, a meter a fraction of the circumference of the Earth as measured at the equator, a degree Celsius the division in one hundred equal parts as measured between the freezing point and the boiling point of fresh water at sea level at standard "atmospheric pressure," and other measures of pressure, weight, volume, temperature and so forth are based on various parameters, the "measure of value" of currencies is based on various agreements, some completely ad hoc, others based on some external value based on standards of cultural value as carried down through history. However, since money itself has been over the ages a "commodity" that changed in value according to its availability, its "price" or so-called "measure of value" has not been stable over time -like a meter, a pound, a degree Celsius. This means that, as a "measuring unit," money’s "value" has become greater or smaller, fluctuating according to its availability in the "market." This characteristic inherent of commodities has been maintained as part of money even though money has stopped being, in strict terms, a real commodity. In other words, it comes into being as a "process of accounting," but it behaves like a commodity. This means that:

The function of money as a measure of value is an unreliable function because it fluctuates since it behaves like a commodity rather than a unit of measure.

It would make us presume, then, that money is still, somehow, a commodity. But how can electronic blips be a commodity? How can kilograms, kilometers, degrees Celsius or Fahrenheit, kilopascals or calories, be Units of Measure that show signs of scarcity? They are all symbols carrying certain information. They are all "reference points." No-one has set a monopoly (control of issuance) on the use of such measures of reference, yet money is working exactly under the assumption that it needs to be scarce to work.

Through this analysis, we can come to the conclusion that:

Money, as a man-made contrivance, is not working as it pretends to be because it is functioning under "assumptions of use" that aren’t true.

If this is the case, then an economy based mainly on the "transfer of value" through the use of (present-day) money, must necessarily be working in an inefficient or even harmful way. In fact, most of the problems related to economy derive from the way money works. Looking at how the issuers of money -banks- abuse their power through the control and miss-allocation of money, would only add details to this argument. The primary goal of consumers has been to chase after the money because it is scarce and because it is also almost the only way in which they can acquire what they need. And producers have been put in a similar situation, with the aggravating fact that, in order to be "competitive," they need to make loans to "up-date" their means of production so they can make even more money. Distributors, those in charge of taking the goods from producers to consumers, are also in need of money to fulfill their needs.

In the meantime, those who are merely recording the "transfers of value" and renting the means for doing this -banks- (without really having had to expend much energy), do so at a profit based on consumers, producers and distributor’s efforts. All this would not be necessary or even possible would money work differently. It is quite obvious that techniques of production which deplete the resources and destroy the environment are economically unsound because they endanger the survival of future generations. It is also evident that consumers who acquire things that don’t fulfill their real needs are wasting their energy and maybe even endangering their health. Transport that is ecologically unsound and at times even unnecessary, is also part of a puzzle that doesn’t quite seem to be right or make sense.

Cars produced in Germany are sold cheaper in Spain even though extra costs come from the transport of those cars across thousands of kilometers? Foods are available within a city yet people are starving right next to the food because they lack a symbol called money to acquire them? It may seem like "social inequity" at first sight, but in fact it all points to a miss-allocation of money directly related to its inherent dysfunctions.

Many of the aspects related to unsound practices of production, transport and consumption are social and cultural in nature, but if they are greatly exacerbated by the way in which value is transferred (or siphoned off through unnecessary costs to the users), then perhaps some of the functions of money should be revised, as well as the social agreements that dictate how it is issued and under what criteria.

The future of money

Money has evolved in its forms of presentations, but not in its functions. The banking system puts money into circulation that is primarily debt money, that is, money that earns interest. This means as well that the assumption that money is a "thing" continues, when in reality the percentage of paper money and coins -things- in relation to a electronic money entered at a key-stroke in customer’s accounts (or debited from their accounts), is just around 3 percent. And even electronic money is given all the functions of paper money, when in reality all that banks are doing is using a new kind of money without telling the customers that this has happened.

Money has become, besides a means of exchange, a "store of memory," that is, it keeps track of who owes whom a given "amount" of value.

This kind of money is, in fact, what is commonly known as "clearing house" money. Banks are the clearing houses yet they still make everyone believe that the money they are "making" holds value. Also, they make it seem that the money they loan out isn’t new money, but rather customers’ deposits. In fact, what they are doing, is exactly what was done in the times when symbolic money represented gold without the gold. They gave out more money than they had gold in their vaults (Fractional Reserve Banking), and today they can create more money than they hold in deposit.

The percentage of the Fractional Reserve Banking -say, 10%-, means simply that they can create 90 percent new money over their deposits every time they make a loan. This leads to a constantly growing "money supply" as loans are deposited appearing to be "original" money, and new loans are made on top of that at the allowed Fraction Reserve Banking percentages. True, when a loan is repaid, the bank "destroys" the amount of the principal. But the customer didn’t just repay money for the amount of the loan taken out, but the interest as well, which goes to form part of the bank’s assets.

Economists do not agree that this takes place, even though official publications like "The Swiss National Bank and that vital commodity: money" offer clear descriptions of how this is carried out at any commercial bank.

When credit money was created, it represented a customer’s collateral to a loan. But customers could, if they wanted to, redeem that money for gold or so called "real (cultural) value."

Nowadays, banks create new money by adding it to a customer’s bank account (rarely is the money given out as paper bills), and a customer can then draw (in paper money, through writing checks, by using the credit or debit card) from the account. However, all the bank did was add numbers to an account and called it "money" as if it were a thing, and then charges an interest on that with the upshot that, in case the customer fails to pay back, they receive the collateral or go after the guarantees offered in exchange for the loan. The implications of this system are varied, and could be explained in a larger paper in detail.

What is important to know, now, is that money has transcended from mere credit money to a system of "clearing" without people realizing it. This has occurred in such a way that the world at large is still paying for the cost of money as if it were a commodity, and is suffering the consequences related to (scarce) commodity money —the oldest form of money. Those who have a right to issue money are doing it in ways that are short of outright deception, perhaps without even realizing that this is the case because they still live a paradigm that is around ten thousand years old: money holds value, and thus it must be scarce. Money today is unnecessarily expensive, needlessly scarce, overly dysfunctional and therefore economically damaging. It is the cause of manifest scarcity in times of over-production, the motor behind power struggles (and thus, ultimately, for most wars), and all because it isn’t what it is meant to be. If this is the case, what is money meant to be?

Once again, money is primarily a means of exchange that allows for multiple coincidence rather than barter’s limited double coincidence. This is the purpose of money, to allow for more efficient and easier means of distribution. But if the other functions attributed to money (store of value and measure of value) are a contradiction or dysfunctional, what other functions should money have or how should it be made to work to avoid scarcity?

Throughout history, there has been a kind of money that, instead of "becoming more" while stored away under certain circumstances, "lost value." In pre-Christian Era Egypt and in the mid-Middle Ages in Europe, a kind of monetary system known as renovatio monetae made it unlikely for people to wish to store it over a given time, because the issuers of the money took it out of circulation -through an imposed law- and the population had to buy the new edition, which was worth less (though was purchased at the same price as the outgoing edition) by up to 30 percent in 5 or 6 years. This was a way of collecting taxes, and a way to avoid those who weren’t in power to hoard too much wealth.

In the early 1930’s, in Wörgl, Austria, a Municipality issued their own money based on a similar principle -known as demurrage or negative interests-, where the money, in order to remain valid, had to have stamps attached to it (bought from the Municipality) on a regular basis.

However, all these methods are ways to keep people from hoarding money (thus taking it out of circulation), but they are based on money that still has the three functions of "means of exchange," "measure of value" and "store of value." These are paradigms based on money that is, in its use, a commodity that can be hoarded and whose price fluctuates according to availability, which means that it is of limited edition.

The new paradigm of money implies that money isn’t a store of value, nor is it a measure of value, but it is re-engineered as a technology to serve the following functions:

1) Means of Exchange,

2) Unit of Measure of Transactions,

3) Memory of Transactions.

The "unit of measure of transactions" becomes something similar to the way various measures are used -kilograms, meters, pounds, feet, degrees Celsius-, all used to serve as immutable standards of measure and in no way symbols that can be hoarded. When it comes to measures of longitude such as meters vs. feet, or fathoms vs. miles, the ratio between them is always the same: i.e., a meter can not have more feet today than yesterday. Which is not what happens when we use "measures of value" called Yens vs. US Dollars, or Euros vs. any of the different kinds of Pesos available in different countries.

And instead of "store of value," this function is replaced with a "memory of transactions" as represented in an accumulation of units added up from the prices set during the transactions.

So, instead of using an elusive concept of value, the Unit of Measure of Transactions is a locally standardized unit based on some agreed-upon set of references whose number -or quantity- represents the "price" of a given transaction. This goes through an accounting system -or ledger- that keeps track of debits vs. credits. The information reflects the "level of energy" or "quantity of value" -as plus or minus points- that a given party has within its economic circle. Those who have positive points in their favor will have given "value" for the amount represented in their accounts, while those who have negative points will have taken "value" for the amount.