Professional Documents
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Thomas H. Greco, Jr. - The Evolution and Transformation of Money
Thomas H. Greco, Jr. - The Evolution and Transformation of Money
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Barter Trade
Barter is the most primitive form of reciprocal exchange. Barter involves only two people; each has something the other wants.
The Barter Limitation If Jones wants something from Smith, but has nothing that Smith wants, there can be no barter trade.
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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.
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But the transaction is still essentially a barter trade of one good or service for another good.
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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
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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.
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Bank
Gold
The first bank notes were symbolic money. They were warehouse receipts for gold or silver placed on deposit.
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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
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Bank
Mortgage Note
Credit Money
Gold
Mortgage note Banks issued two different kinds of money but they did not distinguish between them, and few people realized it. The same identical bank notes were issued to represent both symbolic money and credit money.
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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.
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A/R A/P
Negative
(purchases)
Time
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Bank
$ Interest
Alpha Company
$
Charlie Company
$
Delta Company
Bank credit used to clear debts among companies. Interest must be paid on credit borrowed from a bank.
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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. Where does the interest amount come from? In sum, each company used the banks liability (bank notes) to pay the others what was owed.
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Alphas i.o.u.
Alpha Company
Alphas i.o.u.
Charlie Company
Alphas i.o.u.
Delta Company
Alphas i.o.u. Mutual credit used to clear debts among companies. No interest paid.
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It is not necessary to rent a banks liability to clear debts owed to one another. In a clearing circle, each companys 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 tributetaking device by "borrowing" from banks whereas it could create deposits just as well by non-interest bearing currency or other notes. E. C. Riegel
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Debt
Time
Banks now issue only debt money, not as notes, but in the form of bank deposits when a loan is granted.
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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
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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.
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