Thursday, August 29, 2013

FM on Money (7) Equity

Felix Martin says that money is a social technology which depends on people. This is a good insight, but I have a problem with his view that money is debt. He argues that and notes are a circulated IOU and that money was originally created by the sovereign going into debt and issuing paper debt instruments. People were will to accept these notes as a settlement if debts, because the assume that the sovereign is creditworthy and that others will trust them to back their debt.

The argument that money is created by a debtor issuing debt gets things the wrong way round. Money is not created by a debtor. Money is validated by a person selling something in a half completed transaction. They have given up something, but have not received anything back yet. They are willing to accept the money (whether cash or bank record) because they trust the people in the community that they live in to honour it.

The person accepting money gives the community credit. They believe that someone in the community will give them goods or serviced in exchange for their money. Money is created by a community respecting money claims.

If I sell something for $10.00, I do accept it because I trust the bank, or think that the government will give me something. I trust my community to honour it.

Taking money as payment gives the person holding it equity in the output of the community. They can’t guarantee what they will get, but they will get a share of what is available in the immediate future. I have an equity in the goods that will be made available by them in the next period of time. I explains this in Trade.

Sovereigns do not decide the value of money. Businesses decide the value of money when they set the prices of goods and services offered for sale. The community decides the value of money when they agree to buy goods and services. The government does not decide the value of money.

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