Top Down Money: History and Definitions
Like bottom up money, top down money's value rests on the trust of its users that it can be traded for whatever its holder wants or needs, from anyone in the community, even though the authority creates the money, and enforces day to day system use.
Also a reminder here that there are two classes of authority money, that 'created' by the government, and that 'created' by a private banking system. After defining terms and functions of the different players, we will describe characteristics common to both of these systems, and then discuss their differences and the implications of those differences.
Another Short History
A bit of the history of the development of authority fiat money is necessary to understand our present money system. Around 3,000 BC, at the same time that we have evidence that Shubati began to be used, government authorities in Babylonia started organizing the collection of taxes in a methodical way.
They adopted two standardized weights of commodities to measure value; the shekel of silver and the gur (bag) of grain. One gur was equal to one shekel in value. Taxes could be paid in either one. If taxes were not paid on time, which happened when the harvest was lean, interest was charged on taxes past due.
Starting around 600 BC governments began creating coins in order to regularize trade which used precious metals. A major use of these coins was to pay members of their military. Taxes were charged in these same coins.
It was soon found that coins could be created with less precious metal content than their face value, and still maintain their trading value since they were required for the payment of taxes. After the fall of Rome, there was a vacuum in coinage.
In the Middle Ages, money consisted of precious metal coins, tallys, and bills of exchange. Goldsmiths, who used precious metals in their work, started a side business of loaning their excess gold and silver, with interest. Metallic money, unlike tallys and bills of exchange, was created by an authority, rather than its users.
Since the goldsmiths had vaults which were safe places to store gold and silver, customers also deposited their gold and silver coins with the goldsmith for safe keeping when they were not needed for trade. Customers got a receipt from the goldsmith when they deposited their precious metal. It soon became easier for the customers to trade using the receipts rather than withdrawing the metal.
At this point, the goldsmiths recognized that they could give out receipts for gold or silver when they made a loan, rather than the precious metal coins. Then it was not a stretch to loan out more receipts than they held in silver and gold.
This system increased the money supply in the authority based money paradigm beyond the limitations created by the finite amount of precious metals available for trade. It allowed for growth and development of the economy and new technologies.
This banking structure made possible the industrial era. It was also a 'gold mine', a source of income and wealth for the goldsmiths turned bankers. A great deal of their income was functionally unearned; and not backed by gold.
This situation also left the bankers in charge of managing the money supply, to their advantage. For example the banks encouraged wars, then loaned money to governments to fight these wars, and got the governments in debt to them.
As governments got dependent on the banks, the banks got informal power over the economy. The Bank of England was an early example of this trend. Bank loans replaced tally sticks that required the Crown to balance its budget. With bank money the Crown could spend more than it took in as taxes and fees, borrowing from the banks.
The caveat for the banks was that care had to be taken if more people wanted to retrieve their gold than a goldsmith held, which too often occurred, causing bank runs and failures. The goldsmiths learned to support each other to prevent any of their group members from failing.
This system came to be known as fractional reserve banking and lending. The money loaned in excess of reserves was in fact fiat money 'created' by the bankers. We have now gotten to the point where the reserve requirement is zero , and our bank money is all created by fiat .
Definitions and Terms
Authority 'created' fiat money has additional layers of complexity in its creation, issuance and operation while leaving in place most of the basic characteristics of public mutual money, at the same time duplicating and creating new roles required by the new players and circumstances. The money 'creation' process cannot be fully understood under current theory, because of the externalization-omission of the role of the community commons in all money transactions and the non-recognition in practice of including the community as a functional player.
Money is not in fact 'created out of nothing'. This follows from the universal bookkeeping rule that for every credit, there is a corresponding debit. Somebody has to get a debit to counter the credit of authority money 'creation'. We will demonstrate where that debit lies. The term money 'creation' will be used loosely to describe the actual process after it has been explained, sometimes in quotes as a reminder, and other times without.
So to describe how authority money systems operate, in terms that include the importance of the community of users in its creation, issuance and use, we need to completely re-assess money structure and function.
We will describe two aspects of the power of money authorities; the function of money 'creation' and of money management. Money creators have gained the authority to both 'create' and issue money. Money managers have accumulated money to issue as loans with the money they have already accumulated.
Money users are limited to trade between ourselves with money either earned or borrowed from a money authority. Money users comprise the productive economy. It must be noted that these are functional definitions, and an individual or group can operate in one or more of these groups, according to their activity in the economy.
As a result, we are now required to acknowledge a sub-unit of the larger money community we will call the money authority community. This sub-unit is further divided between the money creator community and the money manager community. Money creators are also money managers. Any member of the user community that involves themselves in lending or investing surplus money is a de facto member of the money manager community.
New Accounts Required by Authority Money
In order to fully describe the authority money creation and operation process, it is necessary to add new accounts in addition to the user community current account, the user community asset-liability account and the individual community user accounts we have already discussed. The new accounts are for the use of money creators and money managers, as they operate in the money authority functional community.
Functionally we have to add what we will call a money creator equity account. Only the money creator(s) have access to this account. We also add a money authority equity account. Both money creators and money managers have access to this account.
In addition we require individual money authority equity accounts for individual money creators (in systems where there are multiple money creators) and individual money authority equity accounts for money managers.
Money creators can have transactions that move back and forth through all of these accounts. They function as money creators, money managers, and money users.
Money managers have access to the money authority equity account and the money user accounts. They function as both money managers and money users. The actions of the money authorities in creating and issuing money to money users bring in new rules.
When money creators and managers trade for value, with money users (or between themselves) they follow the same rules used by the rest of us money users, each through their individual community money user account. These transactions, like all other transactions between users are again still backed by trust within that community, as well as, now, trust in the integrity of the money authorities.
We money users can only trade among ourselves, and borrow or earn money from the money authorities in order to have money to trade with. At the same time, our user community accounts remain as the foundation of system structure; used by all for trade of value, with the caveat that balances must now always be positive due to the changed money creation structure. An added complication is that we will have to distinguish between the money authority money supply and the money user money supply when we get to the discussion of interest.
Money creation, money management and money use for trade make all of these distinctions necessary. It may seem complex at first, but will become clearer as we apply these definitions and terms.
The details of how authority fiat money works will be described in the next chapters. The reader may want to come back to review these basic definitions and relationships.