There is an incomplete understanding of the double-entry bookkeeping implications of the creation and operation of fiat money; the kind of money we use today. There is also an incomplete understanding of the implications of the inclusion of interest and profit in the structure of our money and economy. Both of these lacks are related to the fact that money's users are relegated to the position of passive consumers, rather than active players in the operation of money.
The purpose of this series is to try to shed light on these issues. For the record, the seed of the following argument is not original with this author. It follows from conversations with Bernard Lietaer before his death. Lietaer was 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. However we take responsibility for the implications described here.
In the following we will attempt to describe the moral and ethical positions baked into our current money institutions. Other ways of creating and using money have different moral and ethical positions baked into them, which we will also look into.
This study operates from the assumption that provisioning of all of the users of money needs to be the prime directive of the monetary/economic system. We will be using the term 'provisioning' throughout this paper. For those who are not acquainted with the term, provisioning relates to the trading and gifting that cares for the needs of all of its users as well as the earth and all of its life. We will show why provisioning will have to replace profit as the prime directive of the money system for us to deal with the economic as well as the social and environmental issues we now face.
It will also be shown that when the role of the user community is acknowledged and brought into the accounting equations, everything on earth becomes connected in a circular economy, and has to be taken into account in our analysis of how economic interchange does, and can, work.
Some new and different words and concepts are necessary to completely describe our money relationships. New concepts and terms, as they are introduced and where they are important to the presentation, will appear in italics.
A Functional Description and Definition of Fiat Money
The purposes of money are
1)To measure value (through a unit of account),
2)To keep track of who has contributed how much to their community, and who has consumed, used, or otherwise withdrawn how much from their community (as a medium of exchange)
3)To make it possible to 'buy' something without simultaneously trading something of equal value with the seller (the store of value function), and
4)To do so within agreed upon rules and limitations (the standard of deferred payment function).
This is done through double-entry bookkeeping, the accounting of debits and credits. For every credit, there is an equal and opposite debit.
The word 'community' as it will be used here, can be anything from a local group of friends, through local towns and townships, bio-regions, major cities, and countries, to the community of all people of the earth. We will describe the nested relationship between smaller communities and the larger communities of which they are a part.
To understand our current money, which is called fiat, or bookkeeping, money, first we need to describe what it is; how and why it is created, as well as how it is used.
First we must understand that fiat money is not "stuff" in the usual sense. Fiat money is simply numbers in an accounting system that measures and keeps track of who has contributed how much to the community and who has withdrawn-used community resources. These numbers can be exchanged for goods/services-value.
Every money transaction is between two trading accounts, one of which is debited and the other credited. People can have trading accounts; businesses, governments, and other organizations can have trading accounts. The use of fiat money is an issue of maintaining balance between the debits and credits in all trading accounts. Money is the name we give to credit numbers.
Money numbers may at times be represented by pieces of paper or coins, however it is the numbers in the accounting system that these physical evidences represent that is important. Coins have much less value as a metal than their face value, and paper money has little intrinsic value at all.
Whether or not money numbers are noted in a ledger is not as important as their effect on the accounting system. Their effect on individual's accounts, or group accounts, is the same whether they are entered on a ledger or mediated with coins or paper money. Anyone can look in their billfold or purse and count how many money numbers they have there, or observe on their computer or smart phone the same thing.
It is important to get our heads around these concepts before we move on. Again, fiat money is not "stuff" in the usual sense. It is simply numbers in an accounting system that measures and keeps track of its user's balances.
Bottom line: It is the value in trade represented by money numbers that is recognized as money. Try to get your head around that fact as we continue.
In the money we use today, users can't authorize the creation of these numbers; only trade with money numbers, or coins and paper money that represent money numbers, authorized, created, and issued by an authority. Remember that also as we move on.
Who is authorized to create money numbers, and how they are created, is one of the things we will look into, including alternatives. We will find that everyone can authorize the creation of their money numbers in a system different than ours; bottom-up mutual money.
It is easy to overlook the money-creation process because we, its 'consumer' users, currently can't create money numbers; only trade with numbers that an authority has created. We thus have no experience to understand the money-creation process or its implications. It is not in the best interest of the current money-number creators that this situation be changed.
Private Fiat Money
To understand fiat money, we will start out with the most simple money relationship; one between two individuals. We will then describe the transition from trade between individuals to public community money, and what makes them different.
Individual trade can have two forms:
Immediate trade of value (goods/services), for equal value, or
Trade of value with a promise by the buyer to the seller to provide equal value in the future.
The first case is straightforward barter. Each trader simultaneously trades value for equal value from the other. However in the second case, the buyer makes a commitment to provide equal value to the seller in the future in exchange for receiving value in the present from the seller.
In money (bookkeeping) terms, the buyer gets a debit, a commitment to the seller, and immediate value. The seller gets a credit; the commitment of the buyer to provide equal value in the future.
The seller's claim on the buyer's commitment to provide equal value in the future is private fiat money created by its users. In this case the community is a community of two. The system depends on trust between trading partners. The seller has to trust that the buyer will keep their commitment. The buyer has to fulfill that trust. In this kind of system it is generally accepted that the value of the commitment will not increase or decrease over time. Punctuality in reciprocating is sometimes expected. This is a personal matter between the traders. We will find that the terms delayed transactions will be different in different kinds of money systems.
Public Fiat Money
Functionally there are three major classes of public fiat money; mutual fiat money, private bank authority-created fiat money, and state authority-created fiat money. The latter two are more complex than mutual money; the same or similar to each other in some ways, and different in others.
In our analysis we will start by describing the more simple system, mutual fiat money. We will then move on to authority created money, describing its general nature, using what we have learned in describing the less complex mutual system.
Then we will describe the similarities and differences between bank authority fiat money and government authority fiat money, again with references back to mutual money.
Finally we will deal with interest, and other forms of profit, their rationale and implications. Interest and profit are an integral part of our, and most other, authority-based money systems.
Public Bottom-Up Fiat Money Structure and Function
Public fiat money is similar to the second type of private fiat money in that there is a commitment to provide value in the future. The system is again based on trust. However public fiat money has another layer of complexity over that of individual deferred barter.
This difference in complexity is that in public fiat money systems, the buyer is committed to the whole community, to provide value to anyone there, not just to the seller . The commitment to the seller is that they have a credit with the whole community which can be used for a transaction with anyone there. Again it is usually assumed that the value of commitments will not change over time.
In short, the buyer gets their debit, and the seller gets their credit, each through the community commons. The community is acting at least implicitly as the mediator between buyers and sellers; everyone in the community . To make this process explicit , it will be necessary to include the community commons in our description of what is happening.
These details of money creation and issuance in bottom-up money systems may seem trite now, but as we study authority money, as well as interest which is introduced in its practice, we will see how understanding these details is important in that analysis as well.
In our next post in this series we will cover the details of the explicit understanding of how bottom-up fiat money is structured and operates.