thomas h. greco, jr. - the evolution and transformation of money
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The Evolution and Transformation of Money
Thomas H. Greco, Jr.
3/26/2007 Prepared by Thomas H. Greco, Jr. 2
Building a Healthy Economy
Requires an Understanding of
the Principles of Money
� Money is a human contrivance.
� That has evolved over centuries.
� Much of the present misery in the
world derives from a general failure
to understand the nature of money,
banking, and credit.
3/26/2007 Prepared by Thomas H. Greco, Jr. 3
Basic Kinds of
Economic Interaction
� Gifts -- Transfer of value without any
particular expectation of anything in
return.
� Involuntary Transfers – e.g., theft,
robbery, extortion, taxes.
� Reciprocal Exchange – equal
exchange of value between two parties by
voluntary agreement.
3/26/2007 Prepared by Thomas H. Greco, Jr. 4
Money Plays Its Role
Within the Realm of
Reciprocal Exchange
The other traditional roles of money
(measure of value, savings medium)
should be considered separately and
achieved by other means.
3/26/2007 Prepared by Thomas H. Greco, Jr. 5
The Ladder of
Economic Civilization
� Stages in the development of the
process of reciprocal exchange:
� Barter trade
� Commodity money
� Symbolic money
� Credit money
� Credit Clearing
3/26/2007 Prepared by Thomas H. Greco, Jr. 6
Specialization of Labor Makes
Economic Exchange a
Fundamental Necessity
� When the division of labor has been once
thoroughly established, it is but a very small
part of a man’s wants which the produce of his
own labor can supply..
– Adam Smith, Wealth Of Nations, p. 29
3/26/2007 Prepared by Thomas H. Greco, Jr. 7
What Is Required for Efficient,
Effective, and Fair Exchange?
� Free Markets
� An Honest Medium of Exchange or Means of Payment
� An Objective and Stable Unit of Measure of Value
3/26/2007 Prepared by Thomas H. Greco, Jr. 8
Barter Trade� Barter is the most primitive form of
reciprocal exchange.
Barter involves only two people; each
has something the other wants.
� The Barter Limitation
If Jones wants something from Smith, but
has nothing that Smith wants, there can be no
barter trade.
3/26/2007 Prepared by Thomas H. Greco, Jr. 9
The First Evolutionary Step
From barter trade to commodity money
� Transcending the Barter Limitation
� Barter depends upon the coincidence of wants
and needs.
� Money bridges the gap in both space and time
by widening the exchange circle.
� Money acts as a “place holder” enabling needs
to be met wherever and whenever the needed
good or service may be found.
3/26/2007 Prepared by Thomas H. Greco, Jr. 10
Commodity Money
� The most primitive type of money is
commodity money.
Some useful commodity that is in
general demand is used as an exchange
medium and may serve both as a
means of payment and a measure of
value.
3/26/2007 Prepared by Thomas H. Greco, Jr. 11
Examples of Commodity
Money
� Various commodities have historically
served as money –
� Cattle, tobacco, sugar, grains, nails,
shells, hides, metals, etc.
� But the transaction is still essentially a
barter trade of one good or service for
another good.
3/26/2007 Prepared by Thomas H. Greco, Jr. 12
Metallic Money
� Metals became the commodities of choice because they are durable, fungible (divisible), and easily portable.
“In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity.”
– Adam Smith, Wealth of Nations, p. 30
3/26/2007 Prepared by Thomas H. Greco, Jr. 13
Symbolic Money� The simplest form of symbolic money is the
warehouse receipt, or “claim check” for
goods on deposit somewhere.
� Examples:
� Grain bank receipts.
� Vouchers for redemption of various goods
that have been deposited.
� Currencies redeemable for gold or silver.
3/26/2007 Prepared by Thomas H. Greco, Jr. 14
Bank
Gold
The first bank notes were symbolic money. They
were warehouse receipts for gold or silver placed on
deposit.
The First Kind of Paper
Money
Symbolic
Money
3/26/2007 Prepared by Thomas H. Greco, Jr. 15
The Second Evolutionary Step
From commodity money to credit money
� “Some ingenious goldsmith
conceived the epoch-making notion
of giving notes not only to those who
had deposited metal, but to those
who came to borrow it, and so
founded modern banking.”� Hartley Withers, The Meaning of Money, p. 18
3/26/2007 Prepared by Thomas H. Greco, Jr. 16
The Embodiment of Credit in
Bank Notes
� At first, bank notes were redeemable on
demand for commodity money (gold or silver),
so they were symbolic money; later bank notes
were credit money.
The paper money so largely in use in all
civilized countries as a common
medium of exchange is in reality a
coinage of credit or trust.– Henry George, 1894
3/26/2007 Prepared by Thomas H. Greco, Jr. 17
Bank
Gold
Banks issued two different kinds of money but they
did not distinguish between them, and few people
realized it.
The same identical bank notes were issued to
represent both symbolic money and credit money.
Two Distinct Kinds of Paper
Money
Symbolic
Money
Mortgage
Note Mortgage
note
Credit
Money
3/26/2007 Prepared by Thomas H. Greco, Jr. 18
Problems With Early
Credit Money� Bank notes were often problematic because now
there were two different kinds of paper money being
issued into circulation, the one a “claim check” for
gold on deposit, and the other a credit instrument
issued on the basis of a promise to pay and backed
by some collateral assets, yet both were redeemable
for gold.
� This became known as “fractional reserve” banking
because there was never enough gold to redeem all
the notes.
3/26/2007 Prepared by Thomas H. Greco, Jr. 19
Redeemability Abandoned
� Eventually, the redeemability feature was abandoned and symbolic money disappeared.
� Now, virtually all of the money in circulation is credit money.
� Most of the money in circulation exists as deposits in bank accounts.
� Very little money exists as paper notes or coins.
3/26/2007 Prepared by Thomas H. Greco, Jr. 20
Money and Banking Have
Been Politicized � There is a general, but erroneous, belief that
the money power should be centralized and
is naturally the province of government.
� Governments have generally given the
money power over to bankers by
� establishing central banks,
� granting legal tender status to their
currencies, and
� forcing people to accept them.
3/26/2007 Prepared by Thomas H. Greco, Jr. 21
The Power to Issue Money
Rightly Belongs to Sovereign
Individuals
� If money is issued on a sound basis there is no need to force people to accept it.
� Forced circulation (legal tender) serves only to concentrate power and expropriate wealth.
� Democratic government requires the separation of money and state.
3/26/2007 Prepared by Thomas H. Greco, Jr. 22
The Third Evolutionary Step
From Credit Money to Clearing
� Money is no longer substantial.
� Money is merely an accounting
system.
� Money is a way of “keeping score” in
the economic “game” of put and take.
3/26/2007 Prepared by Thomas H. Greco, Jr. 23
Clearing -- The Ultimate
Evolutionary Step
� The process called clearing is the
simplest and most efficient mechanism
for mediating reciprocal exchange.
� Clearing is simply the process of
accounting that offsets debits against
credits, purchases against sales.
3/26/2007 Prepared by Thomas H. Greco, Jr. 24
The Possibilities of Clearing
Have Long Been Recognized
� “If there were no money, any system of
crediting sellers and debiting buyers
would be fully competent to
accomplish the work now performed
by money.”
— Bilgram & Levy, 1914
3/26/2007 Prepared by Thomas H. Greco, Jr. 25
Particle or Wave?
Thing or Account Balance?
� Light can be described as either a
particle or a wave.
� Money can likewise be described as
either:
� a thing or
� a fluctuating account balance based
on a relationship agreement.
How Does Clearing Work?
� When you sell something, your account
balance is credited (increased);
� When you buy something, your account
balance is debited (decreased).
3/26/2007 Prepared by Thomas H. Greco, Jr. 27
Time
A/R – A/P 0
Ongoing difference between accounts receivable, A/R, and accounts payable, A/P
Positive
(sales)
Negative
(purchases)
Money Viewed as a “Wave” or Account Balance
3/26/2007 Prepared by Thomas H. Greco, Jr. 28
Alpha
CompanyBravo
Company
Charlie
Company
Delta
Company
Bank
Conventional Payment Process
Using Bank Credit Money
Bank credit used to clear debts among companies.
Interest must be paid on credit borrowed from a bank.
$
$
$
$ $
$ Interest
3/26/2007 Prepared by Thomas H. Greco, Jr. 29
Alpha owes Bravo $100, Bravo owes Charlie $100,
Charlie owes Delta $100, and Delta owes Alpha $100.
Typically, one or more of these debtors will borrow from
the bank in order to pay what they owe to each other. In
the simplest scenario, Alpha borrows $100 from the
bank to pay Bravo, who then uses it to pay Charlie, who
then uses it to pay Delta, who then uses it to pay Alpha.
Alpha can now repay the bank, but, in addition to the
$100 principal, it must also pay the bank interest. Where
does the interest amount come from?
In sum, each company used the bank’s liability (bank
notes) to pay the others what was owed.
3/26/2007 Prepared by Thomas H. Greco, Jr. 30
Alpha
CompanyBravo
Company
Charlie
Company
Delta
Company
Clearing Process Without
Bank Credit
Mutual credit used to clear debts among companies.
No interest paid.
Alpha’s
i.o.u.
Alpha’s
i.o.u.
Alpha’s
i.o.u.
Alpha’s
i.o.u.
3/26/2007 Prepared by Thomas H. Greco, Jr. 31
It is not necessary to “rent” a bank’s liability to clear
debts owed to one another. In a clearing circle, each
company’s debt (account payable) is offset by the
amount owed to it (account receivable). There is no
need to use “money” as a payment medium.
“Under the politico-financial scheme of things the
business man must go to the banker and pay a
lending fee for what is merely a clearance service.
The government even subjects itself to this tribute-
taking device by "borrowing" from banks whereas it
could create deposits just as well by non-interest
bearing currency or other notes.” – E. C. Riegel
3/26/2007 Prepared by Thomas H. Greco, Jr. 32
Clearing Compared to
Currency
� Remember, a currency is typically a third
party debt, an i.o.u., that a seller accepts as
payment from a buyer.
� That may be a Federal Reserve note or a
bank deposit, or a private debt.
� The supply of such third party instruments is
usually artificially limited.
� Interest must generally be paid for their use.
3/26/2007 Prepared by Thomas H. Greco, Jr. 33
Clearing Compared to
Currency� Clearing eliminates the need to use any third party
debt as payment.
� Goods and services pay directly for other goods and
services.
� The supply of internal credits is limited only by the
available goods and services being traded.
� Credit allocation among members is always sufficient;
determined by the participants themselves according to
their own contract, rules, and evaluations.
� There is no need to pay interest to anyone.
3/26/2007 Prepared by Thomas H. Greco, Jr. 34
A Successful Credit Clearing
Association
The WIR business circle cooperative (Wirtschaftsring)
was founded in Switzerland in 1934 as an answer to
the money scarcity of the Great Depression, and still
thrives after 70 years.
Membership, at first completely open, was later
restricted in order to build solidarity among the
“entrepreneurial middle-class.”
A balance between ideology, adaptability, and good
business sense has enabled its long-term success.
3/26/2007 Prepared by Thomas H. Greco, Jr. 35
What Do Banks Do?
� Clearing is what banks already do, but
it is not widely recognized as such.
� Banks still prefer to act as if money is
a thing which they can “lend” out at
interest.
3/26/2007 Prepared by Thomas H. Greco, Jr. 36
What Else Do Banks Do?
� Banks also authorize some of their
customers to spend money into
circulation.
� They do this by making “loans” based on the
“creditworthiness” of the customer and the
value of their collateral assets.
� This process is often called “monetization,”
which converts the value of illiquid assets
into liquid or spendable form.
The Debt Money System� Banks call this process “making a
loan,” even though nothing is loaned.
� Banks charge interest on these “loans.”
� That turns “credit money” into “interest-bearing debt money,”
� Which results in a growth imperative that destabilizes the entire economy.
Deb
t
Time
3/26/2007 Prepared by Thomas H. Greco, Jr. 38
Bank
Debt
Money
Mortgage
note
Mortgage
Note
(asset)
Banks now issue only debt money, not as notes, but in the
form of bank “deposits” when a “loan” is granted.
Account
Deposit
(liability)
The Creation of Bank Debt
Money as Deposits
3/26/2007 Prepared by Thomas H. Greco, Jr. 39
Banks Provide Some Useful
Services
Banks provide:
� Clearing services.
� Assessment of asset values.
� Risk assessment services.
� Intermediation between savers and
investors.
3/26/2007 Prepared by Thomas H. Greco, Jr. 40
Alternatives to Debt
Money
� Mutual credit clearing associations and
private complementary currencies can
� Reduce the need for conventional, bank-
created, debt-money,
� Make the exchange process less costly and
more equitable, and
� Free civilization from the devastation of the
growth imperative.
3/26/2007 Prepared by Thomas H. Greco, Jr. 41
Who Is Qualified to Issue
Currency?
� Any entity that produces goods or services
and offers them for sale in the market, i.e.,
productive businesses and individuals.
� Any entity that has the power to collect
revenues, e.g., local or regional
governments and their authorities.
� Non-profit organizations that receive
pledges of financial or in-kind
contributions.
3/26/2007 Prepared by Thomas H. Greco, Jr. 42
Basis of Issue or Foundation
� Goods foundation or “shop”
foundation
� Service foundation
� Tax foundation
� Donor pledge foundation
What makes a currency sound and
credible?
3/26/2007 Prepared by Thomas H. Greco, Jr. 43
Examples of Shop
Foundation� Canadian Tire money
� Larkin “Merchandise Bonds”
� All redeemable coupons
3/26/2007 Prepared by Thomas H. Greco, Jr. 44
Examples of Service
Foundation
� Railway notes or other notes
redeemable for services
� Airline frequent flyer miles, if
transferable
� Utility vouchers – electric, gas, water.
Examples of Tax
Foundation
� Tally sticks
� Argentine provincial “bonds”, e.g.,
Patacones, LECOP, Petrom
� Municipal “tax certificates” or “tax
anticipation warrants”
3/26/2007 Prepared by Thomas H. Greco, Jr. 46
What All This Means
� Sound and credible exchange media can
emerge from a variety of sources.
� There is no need for the exchange process to be
limited by centralized power, i.e., governments
or banks.
� Competition among currencies and exchange
options results in a stronger, less costly
business environment, healthier communities,
and sustainable economies.
3/26/2007 Prepared by Thomas H. Greco, Jr. 47
Opportunities for Business
� Companies of all kinds, either individually
or in association, can economize on their
needs for conventional working capital by
using their own currencies to pay suppliers
and employees.
3/26/2007 Prepared by Thomas H. Greco, Jr. 48
Opportunities for Governments
� Municipalities and provincial governments can
fund a large proportion of their current
operations by using their own currencies to pay
part of what they owe to local suppliers and
employees.
� Infrastructure development can, to some degree,
be financed by making payment in municipal
currency.
3/26/2007 Prepared by Thomas H. Greco, Jr. 49
Opportunities for
Non-profit Organizations
� Donations received in the form of
pledges of goods and services or
discounts can be monetized into the
form of community currency and used
to pay employees and suppliers.
� No need to market or handle in-kind
donations.
� Currency may also be issued on the
basis of services sold to the public.
3/26/2007 Prepared by Thomas H. Greco, Jr. 50
Private Complementary Currencies
Have Many Direct Benefits
Private, interest-free currencies can be
spent into circulation as a substitute for
bank financing, promoting the health of
the local economy because they
recirculate locally.
3/26/2007 Prepared by Thomas H. Greco, Jr. 51
Summary of Advantages
� Adequate supply
� Low cost
� Democratically allocated
� Give local suppliers preference
� Reduced risk of default because –
A promise to deliver goods or services is less speculative than a promise to pay official money.
� Help to stabilize the global economy
3/26/2007 Prepared by Thomas H. Greco, Jr. 52
Guidelines to Assure
Fairness and Success� A clear agreement (contract) between the issuers
and the users of the currency.
� Currency issued on a sound foundation or basis.
� Amount issued must be in proper proportion to the foundation upon which it is issued.
� Administration must be fully accountable to the users.
� Full and timely disclosure of all information needed to assess the credibility and value of the currency in circulation.
� No forced circulation (no legal tender status).
3/26/2007 Prepared by Thomas H. Greco, Jr. 53
Future Prospects
� Non-bank clearing will proliferate in the
form of
� private clearing services, and
� mutual credit associations comprised of
businesses and municipal governments.
� Private currencies issued by businesses and
lower levels of government will become
common.
� Internet payment systems using non-bank
credits will proliferate.
3/26/2007 Prepared by Thomas H. Greco, Jr. 54
Shake-out and Standardization
� In the early stages, things will seem chaotic, many errors will be made, and there will be some failures.
� But as learning progresses, there will be a shake-out process in which standards are developed and the best protocols come to be recognized and generally adopted.
� Surviving systems will form federations to extend members’ trading opportunities and strengthen their market position.
3/26/2007 Prepared by Thomas H. Greco, Jr. 55
To Learn More and Keep
Up-to-date
� Read, Money: Understanding and Creating Alternatives
to Legal Tender, by Thomas H. Greco, Jr.
� Read the books of E. C. Riegel.
� Consult the works of the “German school” of free
money – Ulrich von Beckerath, Heinrich Rittershausen,
Walter Zander.
� Explore the website: www.ReinventingMoney.com
� Join one of the many complementary currency e-mail
lists.
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