A Challenge to Banking
[Back to contents page]
SECTION TWO - Honest Money
The Requirements of Money
Major changes are obviously required if the collapse of the
monetary system is to be averted. Before undertaking any change,
however, it is vital that we have a clear picture of the requirements
of sound money and a sound monetary system. We must know where
we are heading. Honesty and accuracy must be the prerequisites.
Money serves three specific functions. It acts
1. as a unit of measurement of exchange value
2. as a medium of exchange, and
3. as a store of exchange value for future use
No commodity which continually loses value can be acceptable
as a unit of measurement or as a store of exchange value for
future uses. Any commodity which physically deteriorates,
tomatoes for instance, will inherently lose value, and therefore
will prove unacceptable.
The commodity used most successfully for money to date has
been gold. By its very nature it is almost ideal. It is scarce.
To produce a small amount of it requires a large expenditure
of human energy. It is homogeneous and therefore can be divided
into small amounts of identical size, quality and exchange
value. It is inert: it does not physically deteriorate, so
it does not inherently lose value. It passes the first hurdle.
But there are other hurdles.
Supply and demand play a part in determining the exchange
value of any commodity. Demand in the case of money must reflect
the amount needed to service the numbers of and value of exchanges
in the market-place. Where survival is dependent upon exchange,
people will need money to buy food, drink and shelter. As
a result there will be a minimum demand for money equal to
the amount required to feed, house and clothe the total population.
Both the numbers and the value of exchanges will change as
the size of the population and its expectations change. So
increases in either the population or its expectations will
produce increases in the demand for exchanges in the market-place
and, consequently, increases in the demand for money.
Any commodity suitable for use as money must also meet the
requirements of ordinary people for their normal use in the
market-place. It must be available in quantities sufficiently
small for an individual to carry enough on his person to use
for expected daily exchanges. The product used as money should
therefore be such that it can be divided into small equal
and identical lots and that a small amount of it carries a
relatively high exchange value. Thus a commodity which is
scarce and homogenous would suit. Gold meets both these requirements.
Any commodity which is scarce will require a large expenditure
of time or energy to locate and produce it. If the exchange
value of money were to fall, those involved in its production
should consider producing something else. The level of production
would then decrease. It would fall until the demand sufficiently
exceeded the supply, and then its exchange value would begin
to rise. This rise would encourage more producers, and, as
the supply increased, its exchange value would once again
begin to fall. Over the course of time its level of exchange
value would tend to fluctuate less and less, eventually leading
to price stability. It is important to note here that the
control of the supply of the commodity used as money is the
willingness of people to expend their energy producing it.
Ideally, the product chosen as money would have a level of
exchange value as near to constant as possible. To achieve
constancy the product would have to be available in such quantities
and in such conditions that each measurable unit of human
energy would produce exactly the same amount of it, and each
amount produced would have exactly the same level of quality.
Gold does not have this quality. Nor has such a product yet
been found. Therefore the ideal unit of money has not been
achieved. There is nothing magical about gold which demands
that it be used as a medium of exchange. It is true that gold
has more of the characteristics that best serve in a medium
of exchange than any other natural commodity. Over the course
of time, people have come to recognise this fact. Should it
ever be legitimised again as a medium of exchange, there is
every indication that people will once more use it in that
Paper money, on the other hand, is not a natural commodity.
It is manmade. Ian, therefore, ought to be able to control
it. The weaknesses which need to be controlled are the following:
1. Paper money can be produced too easily.
2. It is subject to wear, damage and destruction.
3. There is no relationship between the cost of its production
and its exchange value: its production is limited only by
We know that any increase in the supply of paper money will
remove exchange value from the holders of previously existing
notes, and transfer it to the recipients of newly created
notes. We know that increases in the money supply under the
paper money system will reduce the size of the unit of exchange
value and produce all the distortions which were observed
It is clear that no production which will increase the existing
supply can be permitted. Therefore, if we are to salvage the
paper money system, procedures will have to be put in place
which ensure that no notes can be minted except for the replacement
of worn or damaged ones. In addition, the money-lending activities
of the banking system will need to be brought to an immediate
halt. The control procedures required will need to be very
exacting and rigorously enforced.
When such procedures are firmly in place we will experience
phenomena in the market-place which have been long forgotten.
With any general population increases or with any increases
in the level of expectation of the existing population, the
level of exchanges will increase and so, accordingly, will
the demand for money. Where it is not possible for the supply
of money to increase, any increase in demand for it will lead
to an increase in its exchange value. This means that prices
will fall and the same amount of money will service an increased
volume of transactions. So, we will discover that an economy
can expand without requiring an expansion of its money supply.
Of course, there is a catch: as money's exchange value increases,
some people will prefer to hang onto their money rather than
use it in exchanges. Hoarding and dumping could then lead
to artificially large swings in the level of exchange value
of money, which in turn could seriously disrupt the market-place.
This is a hurdle which can easily be overcome. Increases
in the exchange value of money will lead to people preferring
to use something other than money in exchanges so that they
can hold on to the money which is increasing in value. Buyers
will offer sellers a choice of substitutes instead of money
for the goods and services which they wish to purchase. Eventually
exchanges will occur using substitutes acceptable to both
parties. In due course some commonly acceptable substitutes
will emerge. If these commonly acceptable substitutes were
also made valid as legal tender or units of money, then the
money supply would expand according to demand.
This time, however, the expansion of the money supply would
be very different to that which we currently experience. Each
money substitute would have its own previously existing level
of exchange value, so it would not remove any exchange value
from existing holders of paper money and the value of money
would remain relatively constant.
Therefore, we can now see that it is possible to develop
a programme which can maintain the existing paper money system,
stabilise the level of exchange value of existing units and
provide us with a total money supply which can expand naturally
according to demand. This must be our goal.
A Major Re-Think
In this chapter we explore the legal issues that
must be overcome in the change from a debt based economy
to an equity based system.
[Back to contents page]
[Top of this page] [Download
Honest Money in PDF Format]