Don’t hoard the Means of Exchange! (Part 1)
By: Anthony Migchels (sent by Invictus) on: 24.06.2012 [21:28 ] (63 reads)
Many economists, both of a mainstream or Austrian persuasion go even further and say money can only be a credible means of exchange if it has stable value. Stable value, they claim, is necessary for people to accept the money.
This is complete nonsense as practice shows in three different ways.
First there is Silvio Gesell. He destroyed the store of value function in his units with his ‘demurrage‘. A tax or interest on holding money, (as opposed to owing it), typically between 12 to 20% per year.
The result? Greatly enhanced circulation. Many more transactions and booming (local) economies. The Worgl is of course the most famous example, but also today’s Chiemgauer (and most other German Regional Currencies) are equipped with it.
Another important observation is ‘Gresham’s Law’. Bad money drives out good money. The unit depreciating quickest (with multiple units circulating simultaneously) will be used to pay with, the others will be hoarded.
And third there is the issue of inflation, which is linked to economic growth, exactly because people fear hoarding the means of exchange because it is losing value. Deflation, on the other hand, is associated with depression, because people sit on their cash, instead of having in it circulate.
So clearly practice does not confirm the proposition that money must be a good store of value to be a good means of exchange. Quite the opposite is true. A good store of value is a lousy means of exchange and a unit losing value sees enhanced means of exchange functionality.
So what do we want from our money. Does it need to be a store of value, or a means of exchange? Because we can’t have both. Not in one unit, anyway. And the answer is easy: there are many reasonable substitutes for money as a store of value, but it is indispensable as a means of exchange.
In fact: the designation of anything, any commodity, to be a means of exchange makes it money!
The modern definition of money is: ‘anything agreed upon by the community to be used as a means of exchange’.
Money derives its value exactly from this agreement. It is not because of its value that it is money. It’s clearly wrong to say a means of exchange needs to have (stable) value to be called money. It’s the other way around: by agreeing it will be money, it becomes valuable.
Just think of the Fed notes. Pieces of paper with ink slapped on it. And it’s not the State’s ‘extortion’ that makes it valuable either. No State power could force a community to accept money it didn’t trust. But people will accept every unit that they will be able to spend viably.
So it’s not ‘law’ that gives money its value, but the (tacit) agreement by those using it.
This, incidentally, is proved in practice by the thousands of free market units that circulate world wide in countless forms. From LETS to Regional Currencies or large scale ‘barter’ organizations using their own units that are created on a ‘Mutual Credit‘ Basis.
All this is even true of gold. Having lingered at $ 200 per ounce for two decades it started appreciating again on mounting speculation it would be money again after demise of the dollar and the American Empire. This is the key driver behind its relentless march over the last ten years, not a non-existent ‘inflation’ threat.
So while economic textbooks usually quote the three classic functions of money as being a means of exchange, store of value and unit of account, we can see clearly now that this is wrong.
It is wrong by definition and both monetary theory and practice show that for something to be called money it must be a means of exchange. Period.
Even the unit of account function is not necessarily part of it. Many units exist that use other units of account. for instance, most barter units and regional currencies use the dominant national unit as the unit of account. By saying, for instance: 1 Berkshare is 1 Dollar.
Detrimental effects of hoarding cash
Not only is money not meant to be store of value, using it as such hinders it as a means of exchange. After all: to exchange is to circulate. Circulation is the antithesis of hoarding. Hoarding the means of exchange hinders circulation. Less money is available for trade. The economy stagnates or more of the means of exchange must be made available.
Therefore, modern monetary systems should actively discourage hoarding. Gesell’s demurrage is just one way of doing this.
Interest on the money supply, incidentally, clearly favors the store of value function of money and therefore hinders its main aim. Astonishingly, mainstream economists will actually claim interest will increase circulation. Obviously it will not. If you gain by putting your money in a bank account, you will be less inclined to pay with it. You have, for instance, a clear incentive to postpone paying your bills.
In the omniscient Protocols (no 20.) we find this instructive quote on the matter: ‘On no account should so much as a single unit….be retained in the State’s treasuries, for money exists to be circulated and any kind of stagnation of money acts ruinously on the running of the State machinery, for which it is the lubricant; a stagnation of the lubricant may stop the regular working of the mechanism‘.
Libertarians should read ‘economy’ where it reads State. In the megalomaniacal dreams of the writer these are the same.
Savings and inflation
The classic case made for a strong store of value function in money is of course the perceived desire to store wealth. Individuals are encouraged to save for a rainy day or old age. This is considered prudent and common sense. We will consider the veracity of this idea in part two of this essay, but for now we will point out that there is no reason to hoard cash if one wants to maintain wealth for future use.
There are many alternatives and we have mentioned them before. Considering the negative implications for the other users of the money it is clear that the desire of the individual to hoard is of lesser priority than that of the community to use it for trade.
Just like it is considered common sense that when using a road, the need for safety for other users is considered more important than individual’s desire for speeding.
And yes, it is easily forgotten that money derives its value from the fact that our brethren agree to use it as a means of exchange along with ourselves. Meaning we are not alone in this and we have clear responsibilities to the other users of the money.
Also, using money to store wealth makes our wealth vulnerable to manipulation of the volume of the money supply, also known as inflation. The classic approach to this problem is has been to try to organize a system that was invulnerable to this kind of manipulation. But in a sense this is a strange approach, especially for libertarians, who tend to stress personal responsibility.
The idea that the individual has a ‘right’ to a stable unit does not withstand critical scrutiny. It has also proven to be impractical. It is simply unwise to put too much faith in the controllers of the system. Whether they are bankers, politicians, or even well meaning monetary reformers.
So it is easy to conclude that saving money for future use is simply unsound approach, both from the perspective of the community and of the individual.
But don’t we need savings for investments? Many Austrian and Mainstream economists are on record claiming this is the case.
But as has become well known over the last few years, the banking system creates all the money in circulation through fractional reserve banking. A rather inefficient, unstable, obscure and basically fraudulent way of going about the simple way of money creation. But it is true, that they need deposits to multiply the money supply.
So the notion ‘we need savings for investments’ is because banks need capitalization.
But in a rational monetary system, based on mutual credit, no reserves would be necessary. All credit would be created from scratch, backed by real assets, such as real estate.
So capital in the real sense of the word, meaning real assets belonging to real people, will provide the backing for all the credit, for all the investments we will ever need.
Money is a means of exchange. It is defined as such. It only has value because we agree to use it as such. So to use it as a store of value is simply abuse. To say it is a store of value is simply a mistake.