Democratic Money: The Case for a Decentralized Monetary System By Bryn Meyer Chapter Four: Designing a New Medium In order to obtain the optimal performance from our monetary technology, it should be managed within the context of its use. But redesigning administrative structures is not enough; interest-bearing money can still provide very destructive economic feedback. Hence, the first part of any potential reforms should be made upon the medium itself. I believe the goal should be to design an exchange system that can communicate accurate information conducive with social values and ecological limits. This information will be conveyed by money through its 4 basic functions: (1) medium of exchange, (2) standard of value, (3) unit of account, and (4) store of wealth. Conventional money has become a misinformation system, in part, because it has failed to perform adequately these four basic functions. Barter vs. Mediated Exchange As explained in chapter two, a classic barter system, also called “whole barter,” is one in which good and services, or wealth, are directly exchanged. John gives Mike a bushel of corn in return for a sack of potatoes. However if John does not want potatoes, no exchange will take place. This is the fundamental limitation of whole barter. Each trader must have something the other wants for any transaction to take place. Money was created to overcome this limitation. Money first appeared in the form of a culturally significant commodity, perceived to have inherent value. Such an exchange medium, regardless of whether it is sugar, tobacco, or gold, does not change the nature of the system. It still functions as a series of barter transactions, one commodity directly exchanged for another. However, in this system exchange is mediated by a commodity that is accepted, not because it is immediately useful to the recipients, but because they can trade it for something else. Such a system is known as “indirect barter” (Greco, 1990). From indirect barter, mediated exchange evolved into “symbolic exchange”; i.e. the use of tokens, representing a certain value of an exchange commodity, be it tobacco, sugar, or gold. Tokens have taken the form of warehouse receipts, bank notes, and scrip, for example. These tokens represented a claim on real value. They provided an exchange commodity that could be traded symbolically without the inconvenience of carting around large quantities of tobacco, sugar, or gold. Although symbolic exchange was more convenient, it was much more easily abused as there was no way to verify the quantity, quality, or very existence of the commodity represented by a token. Over time as the economy expanded, abuse became a generally accepted norm. A good example would be Great Britain’s use of fractional reserve banking on the gold standard.1 1 The gold standard is a specific type of symbolic exchange, and probably the most well known. On this standard, tokens (for the most part coins, scrip, or bank drafts) represented a claim on a fixed quantity of gold. At any time, the owner of these tokens could redeem them for the gold they represented. In the heyday of the gold standard (late nineteenth century), Britain’s currency, the pound sterling, was fixed at £3 17s 10.5d for one ounce of gold. It was generally assumed that British citizens would be content to use the currency instead of demanding its equivalent in gold. This was the logic behind the Bank of England’s Today money is backed by debt and issued with compound interest. Although, money has developed into an even more ethereal medium, we still regard it as a commodity. This unfortunately corrupts its function as a medium of exchange. As a commodity, money has a price, which like that of any other good is subject to the forces of supply and demand. The price of money is the interest a lender must pay to obtain it. In essence, we have placed an access fee on our exchange media, or as Mark Kinney would describe it, executive information. This access fee must be paid in order to organize labor and resources to produce real wealth. We have predicated the health of the market mechanism on the supply and demand of a virtual commodity. A market economy that treats its exchange medium as a commodity will always be at the mercy of its money market. To correct this problem we need to take the last step and turn money into a pure exchange medium. The goal is to decommodify money; turning it into the information medium of exchange it is supposed to be. This would entail, first and foremost, eliminating the access fee of compound interest. Interest encourages the speculative behavior that causes money to malfunction. Thus, it actually can hinder the production and exchange of real wealth. Standard of Value vs. Unit of Account In an ideal system, the dollar by itself would have no inherent value, but would simply represent a standardized unit of value. As Michael Linton has observed: Money is really just an immaterial measure, like an inch, or a gallon, a pound, or degree. While there is certainly a limit on real resources — only so many hours in the day — there need never be a shortage of measure. Yet this is precisely the situation in which we persist regarding money. Money is, for the most part, merely a symbol, accepted to be valued generally throughout the society that uses it. Why should we ever be short of symbols to keep account of how we serve on another (Linton, 1988)? Conventional money is incapable of functioning as a reliable standard of measurement. Unlike the inch or pound, the value of the dollar has changed, and is expected to change, over time. Thomas Greco provides three reasons why a stable monetary unit – a standard of value that over time remains relatively constant in terms of real goods and services – is essential to a healthy market economy: (1) To maintain the value of contracts, specifically transactions that are time dependent – debts, investments, insurance, pension plans, etc. These transactions are contracted to exchange a certain amount of value, measured by units of money. However, these claims are denominated in terms of a unit whose value can vary drastically within the time frame of the contract. Fairness would dictate that it is the intent of the contract which must be fulfilled, but unless the unit of value used remains stable there is no way to ensure the final value transacted will equal the value agreed upon in the original contract. (2) The instability of our conventional policy of fractional reserve banking. Fractional reserve banking simply means that the central bank maintains a supply of gold worth only a fraction of the country’s money supply. In the late nineteenth century, the Bank of England kept gold in reserve worth only 2-3 percent of the money in circulation (Rukstad, 1992). standard of value also threatens the integrity of current transactions. At first glance it would appear that a general rise in prices would cancel itself out as in theory, each commodity still carries the same value relative to others. Unfortunately, such shifts in value are never uniform. As a general rule, inflation in labor rates will typically lag behind that of consumer goods and services. The decline of collective bargaining power during the last two decades makes labor even more vulnerable to inflationary pressures. As real wages decline, workers begin to see their purchasing power consumed by inflation. (3) Inflationary instability, due to actions taken by governments and banking authorities, results in a loss of confidence in the system. Because our currency is expected to lose its value over time, interest on loans and investments are subsequently adjusted to compensate for inflation. Higher interest rates simply magnify the exponential growth imperative imparted by compound interest. This in turn exacerbates the very inflationary trends for which investors were initially trying to compensate. Ultimately, an inflationary currency will result in a general loss of confidence in the monetary unit, leading to reactionary economic behavior, as was experienced in Thailand during the height of the 1997 financial crisis. One of the attendant problems to any reform of the current monetary system is confusion over the difference between measurement and standards. Before we can design a monetary system that can maintain a reliable standard of value, we must clarify the difference between a unit of account and a standard of value. According to the American Heritage Dictionary, a unit of account, or unit of measurement “is a precisely defined quantity in terms of which the magnitudes of all other quantities of the same kind can be stated.” An inch, a pound, or in the case of money, a dollar, are all units of measurement. A standard of value, or standard of measurement “is an object which, under specified conditions, serves to define, represent or record the magnitude of a unit.” A standard would be the length of an inch, the weight of a pound, or the value of a dollar. In later sections I will present a number of alternative standards upon which we could base a reformed currency. Store of Wealth At first glance, this would seem a very straightforward function. Workers defer consumption by saving a portion of current earnings for some future use; e.g., retirement, college fund, rainy day, etc. We’ve already touched upon one way conventional money fails to adequately perform as a store of wealth − its decrease in value due to inflation. A second problem with money is inherent to the medium itself. When money is used as a store of wealth, this function comes into direct conflict with its role as an exchange medium.