There is a basic lack of understanding of the double-entry book-keeping implications of the creation and operation of fiat money, the kind of money we use today. As a result, there is an incomplete understanding of the implications of the inclusion of interest in the definition of money.
The purpose of the following is to try to shed light on these issues. For detractors, the following argument is not just original with this author. It is the result of a conversation with Bernard Lietaer, a well-known alternative-currency theorist, who, among other things was the designer of the transition mechanism from the various European currencies to the Euro.
Full disclosure: It is a basic assumption of this inquiry that provisioning of all of the users of money needs to be the prime directive of the monetary system, rather than profit, as is currently the case. It will be shown that this position is necessary to deal with the economic as well as the social and environmental issues before us today. Everything is connected, and that has to be taken into account in our analysis.
A Functional Description and Definition of Fiat Money
First we need to understand what fiat money is; how and why it is created, as well as used. Let's start out with the evolution from trade between individuals to money.
Individual trade can have two forms:
Immediate trade of value for equal value, or
Trade of value with a promise by the buyer to the seller to provide equal value in the future.
The promise to provide future value requires trust in the buyer to keep their commitments. As such it is a form of private money. Public money follows from this second form of individual trade, a promise to provide value in the future, and will be what we will simply call money in the following.
The difference between individual trade to provide future value, and money, is that in the case of individual trade, the promise to provide equal value in the future is just to the seller that provided value to the buyer. In the case of money, the promise of the buyer is to provide equal value to someone in the whole community of users of the money system. The commitment is to all members of the system, not just to an individual. The promise to the seller is that they have a right to spend, a claim on the commitment of everyone to receive equal value from anyone in the future.
The money transaction is as follows--the seller gives value and gets a credit with the community to provide equal value back to the seller in the future; the buyer gets value and gets a debit to the community to provide equal value to someone in the future.
This spreading of debits (commitments) and credits (claims on commitment) from an individual to everybody in the community of money users is the characteristic that separates money from barter.
A credit, a claim on the commitment of the community, is what we call money.
It is useful here to remember that fiat money is not 'stuff' in the usual sense. It is fundamentally numbers in an accounting system, which keeps track of who has contributed how much to the economy, and who has consumed how much from the economy.
The use of fiat money is an issue of balancing debits and credits. At the same time it is useful to remember that a credit represents a claim on commitment and a debit represents a commitment.
With this understanding of what money is, we now move on to how and by whom it has been, and can be, created. Functionally there are three main classes of money; mutual money, private bank-created money, and state-created money. The latter two are authority based, and have some characteristics in common and some differences. Their commonalities will be discussed together, and then their differences.
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