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Money and Debt - Part III - Segregated Monetary Functions and an Objective, Global, Standard Unit of Account by Thomas Greco
Part I
Part II
PART III - Segregated Monetary Functions And An Objective, Global, Standard Unit Of Account
Money, a Confusion of Functions
Money is said to serve several functions: it is (1) a generally accepted “medium of exchange,” (2) “a store of value,” (3) a “standard of deferred payment” and, most fundamentally, (4) “a unit of account” or “measure of value” (Dunkman, Wm. E., Money, Credit and Banking, Random House, New York, 1970.) We think we know what we are talking about when we use the word “money,” but in fact we do not. All of the orthodox definitions of money describe its supposed functions and not its essence. Further, because the term “money” is commonly applied to a diverse array of financial instruments which are created in a variety of ways, the whole subject has degenerated into a sea of confusion. It is a curious fact that the problems arising from these contradictory functions, while they have not gone completely unrecognized, have been so completely swept under the rug.
I believe that the keys to transcending the confusion, and the creation of an equitable and efficient exchange system, free from political manipulation, lie in accomplishing the following:
The Unit of Account Function
The “unit of account” or “measure of value” function has not historically been well served by any money. Fiat monies, the type common in current use, are especially unreliable measures of value because they are undefined and subject to gross manipulation by governments and central banks. It seems not to have been widely recognized that there might be a better alternative. While money might appropriately be used in the settlement of accounts, it need not, and should not be used in defining the values to be exchanged.
Confusion of the Value Unit With a Currency Unit
The most disastrous confusion is the one which arises when the medium of exchange obliterates the meaning of the value measure or unit of account. This typically derives from state (legal tender) legislation designed to compel acceptance of a central bank issued currency. The clearest explanation of this which I have seen was given by Dr. Walter Zander in 1935, as follows:
The motivation which underlies every legal tender law, of course, is the attempt by governments and their central bank cohorts to escape the consequences of their irresponsible financial manipulations. Such consequences invariably involve a depreciation of the currency in the marketplace. When legal tender is imposed to prevent the devaluation of the currency relative to an objective standard and relative to goods and services generally, then prices, in terms of the legal tender unit, must rise. This is called “inflation.” Without compulsory acceptance of a currency, inflation could not occur. As Zander expresses it, “This confusion is only possible when a legal equivalence has been established between the notes of this bank and the standard of value.”
Money, a Confusion of Functions
Money is said to serve several functions: it is (1) a generally accepted “medium of exchange,” (2) “a store of value,” (3) a “standard of deferred payment” and, most fundamentally, (4) “a unit of account” or “measure of value” (Dunkman, Wm. E., Money, Credit and Banking, Random House, New York, 1970.) We think we know what we are talking about when we use the word “money,” but in fact we do not. All of the orthodox definitions of money describe its supposed functions and not its essence. Further, because the term “money” is commonly applied to a diverse array of financial instruments which are created in a variety of ways, the whole subject has degenerated into a sea of confusion. It is a curious fact that the problems arising from these contradictory functions, while they have not gone completely unrecognized, have been so completely swept under the rug.
I believe that the keys to transcending the confusion, and the creation of an equitable and efficient exchange system, free from political manipulation, lie in accomplishing the following:
- the separation of the various functions which money is supposed to serve,
- the establishment of an international objective standard unit of account and
- the recognition of the true nature of the ideal medium of exchange - pure information.
The Unit of Account Function
The “unit of account” or “measure of value” function has not historically been well served by any money. Fiat monies, the type common in current use, are especially unreliable measures of value because they are undefined and subject to gross manipulation by governments and central banks. It seems not to have been widely recognized that there might be a better alternative. While money might appropriately be used in the settlement of accounts, it need not, and should not be used in defining the values to be exchanged.
Confusion of the Value Unit With a Currency Unit
The most disastrous confusion is the one which arises when the medium of exchange obliterates the meaning of the value measure or unit of account. This typically derives from state (legal tender) legislation designed to compel acceptance of a central bank issued currency. The clearest explanation of this which I have seen was given by Dr. Walter Zander in 1935, as follows:
“Whatever the monetary system of a country, it is essential that the measure of value should be clearly and unequivocally determined. Thus, where there is a gold currency, a silver currency, or an index currency, the value should be measured by gold, silver and the index respectively. This basis of measuring economic values, and therefore of any monetary system, is destroyed when in the case of gold or silver currency the notes of the bank of issue are made legal tender, for this compels everybody to accept these notes in payment regardless of their real value. Compulsory acceptance renders it even impossible to measure the notes by the unit of value within the country. Indeed, it establishes a legal fiction on the basis of which note and unit of value are identical. [emphasis added] For this reason, the names of the units of value - e.g., the terms dollar, mark, pound - become ambiguous in that they mean now a fixed weight of gold and then the note of a bank of issue. Accordingly, the measure of value, on the unambiguity of which everything depends, comes to have two definitions. This renders impossible any real measurement and thus the whole monetary system is falsified.” (Dr. Walter Zander, “A Way Out Of The Monetary Chaos.” From The Annals of Collective Economy, Geneva, 1936?)
The motivation which underlies every legal tender law, of course, is the attempt by governments and their central bank cohorts to escape the consequences of their irresponsible financial manipulations. Such consequences invariably involve a depreciation of the currency in the marketplace. When legal tender is imposed to prevent the devaluation of the currency relative to an objective standard and relative to goods and services generally, then prices, in terms of the legal tender unit, must rise. This is called “inflation.” Without compulsory acceptance of a currency, inflation could not occur. As Zander expresses it, “This confusion is only possible when a legal equivalence has been established between the notes of this bank and the standard of value.”
Part II
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