I had another date with my iPad over coffee and this was what resulted:
In a more conventional layout it looks like this:
- What money is
- Money is a promise to pay
- It is debt
- It has never been anything else whatever physical token is used
- A £ note is worthless but for the promise written on it
- Anyone can create debt that can be traded - but most of it only amongst a very close circle of intimates - and even then unreliably
- Only two types of organisation are generally trusted to pay
- Banks and the government
- And banks are only trusted because the government regulates them and guarantees their deposits
- So ultimately only the government's promise to pay is trusted
- Governments are trusted to pay because
- They can always print more money if need be - there is no doubt they can always pay as a result
- Their promise to pay is backed by their ability to tax - so the resort to printing is not usually needed
- That means all trust in money in an economy has to be backed by a sound tax system
- The difference between a strong economy and a weak one is its ability to tax effectively and in large enough amount to ensure it can back its promise to pay
- That is why too small an economy is a threat - money faces the risk of becoming worthless when the government can't command enough resources to fulfil its role
- But to avoid doubt
- Printing money is not the same as making money
- Printing money happens in two ways
- The government spends
- Banks lend (backed by government regulation that makes it safe for people to trust them)
- Printing can mean a figure in a bank account that is wholly electronic as well as physical notes and coins
- Money is made
- By people exchanging goods and services with each other
- Money that is made cannot be unmade, but it is spent
- Printed money is cancelled to prevent too much being in circulation and inflation resulting by
- Cancelling the impact of government spending with taxation
- Loans being repaid
- The money repaid is not recycled: it is destroyed. Notes and coin are the apparent exception but they are only 3% of all money balances. All other money is cancelled and even notes only last a year on average so printing has to be continuous or it too would disappear
- A summary
- Money is a government backed promise to pay that is only of worth because it alone can tax
- Money is a promise to pay
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Yesterday I was reading up on the pros and cons of fiat versus gold standard money.
http://www.philosophicaleconomics.com/2014/07/goldstandard/
Might I summarise it like this? If you wan to destroy the modern economy and the livelihoods of those in it by all means suggest a gold standard
Or you can seek to improve what we have
What a remarkable graphic – I have never seen the time value of money displayed in this way although, of course the centuries-old practitioners of Lombardy were not in tune with iPads!
>Money is a government backed promise to pay that is only of worth because it alone can tax
This doesn’t sound right…..
If I am given a £10 not, then I have £10. I don’t have a promise to pay from the government for £10….. because if I went to the BOE, and demanded my £10, I would be probably be escorted to the door by security!
The ‘Promise to pay’ – is for tradition. Its pretty meaningless now. What are they going to pay me in……another IOU? If they removed that ‘promise to pay’ wording from bank notes, I am sure people would still value them… If Chris Salmon signed a piece of scrap paper with ‘I promise to pay £10’ on it, do you think the governments tax office would accept it from me as payment of tax?…I think they would rather want a word or two with Mr Salmon!
Money has value simply because the government wants its tax denominated in it, and if you don’t pay up, then you get thrown in prison…. and that’s that. So, the whole economy is about finding enough of these Unique, and secure printed pieces of paper to satisfy the tax man in order to avoid punishment…..
This induces demand in what otherwise would be completely worthless…., and as its supply isn’t infinite, the result gives it value.
I know, we’re probably saying the thing…. but philosophically there is a difference.
The promise to pay is real because I is the I only thing you can pay your taxes in
And you can ask for the debt to be redeemed – albeit they will just give you another £10 note
But that’s because all that can replace a promise is a promise
And the ability to settle a liability
And because we can pay our taxes in £10 notes everyone else then accepts them too – because they also need to pay their taxes
I agree with your conclusion in the first instance that money is debt and that the majority of it is created by banks rather than the government. I’m reminded of a JK Galbraith quote ‘the process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent’.
The only thing I would contend with in this would be that banks are regulated so that people can trust them – I suspect that the appearance of regulation is all that there is – surely that was made obvious by the need for the bail out in 2008. And debt is continuing to grow again. Crash 2.0 on the way according to some economists. Will they never learn?
The bail out proved banks are government backed
Thanks for this Richard. I’d be interested to hear your thoughts on something like BitCoin which could be considered money without the backing of a bank or government.
Bitcoin is a ledger system
Search it on this blog for more my thinking
If money is a promise to pay that must be issued by a government owing to the latter’s ability to levy tax, then this implies that Bitcoin and the stone money of Yap are not money? And in what sense is the British pound a promise to pay, given that the link to gold was abandoned in 1971?
Bitcoin is not money
Nor was stone money as such
Both were / are ledgers which is not the same thing
In the UK most money does not exist as notes and coins. It is ledger entries. On Yap, the money supply is fixed and all of it is represented in stones. Maybe an adjustment is needed in your thinking.
Not at all
Stokes are not money – they are at best a ledger of promises
And I addressed the issue of bank money too
Fabulous graphic and a powerful reminder. Something I might share with my own readers.
Did you get to listen to the recent BBC Radio Four episode of Analysis? It was called How Low Can It Go? It painted a pretty dismal picture of a future of the U.K. (not exclusively) hamstrung by extreme levels of national debt.
Would be very interested in your own analysis of the next few years (and how it might link to your next post about the dying days of freedom).
Interesting times!
Give me time
Paul
I’m 22 years younger than you and from where I stand it is not interesting – it is frightening.
I compromise
I am worried
PSR, I used the word interesting as a euphemism for something a great deal more scary! Scary on behalf of millions of others who still depend on a work income, probably have families to support, mortgages to pay, and more. I can’t even imagine the reality for you and so many others. I would be keen to better understand what causes you to sense these times as frightening. Going to check if you run a blog!
There is nothing , repeat nothing, ‘ frightening ‘ about the size of the Natioanl Debt . It will never, repeat never, be repaid . It never need be repaid for the simple, repeat simple, reason the government – our government – is the issuer , repeat issuer , of the currnecy ( the pound sterling, the only currency in which you can pay taxes in this country ). The size of the National Debt is irrelvant to future generations . Please don’t waste your time listening to anyhting the BBC puts out in relation to money . It has no more clue than almost everyone else who has bought into the myth that a ( currency issuing government ) is just like a household and has to balance its books . Just think about this example of the operational reality of government spending : it’s getting near the end of the month and the civil servants wages are due to be paid in a couple of days time . Does a wages clerk in the Treasury ring up up someone in HMRC and ask if there is enough money in the bank account from tax receipts this month to pay those wages. No, of course not because it’s irreleavant . Tax exists to curb spending power not to finance government expenditure.
I’m a bit worried about ALL money being debt.
But a really dense philosphical description of debt by David Graeber was on R4 and, for me at least, it is not something you can listen to whilst doing the washing up!
http://www.bbc.co.uk/programmes/b07mclw8
“Money is a government backed promise to pay that is only of worth because it alone can tax”
That would be a deeply troubling thing to hear in a country whose government is losing the consensus and the competence to tax.
True
Hence the power of the dollar in so many states