People think money is real, mysterious and valuable. They still think gold is involved in the process. It's actually nothing like that. It's nothing more than numbers on bank statements.
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This is the transcript:
Money is just made up.
Most people have a real problem with me saying that. They think that money is somehow real.
They think that a five-pound note, or a $5 bill or a five euro note is really money, and it isn't. It's just a record of the debt that a government owes you.
They think that coins might have some inherent worth because they look as though they're made of a sort of precious metal. We still make them look like they're gold, but in practice, they have no intrinsic value, and I promise you there is no gold to back up the value of any of the world's major, or even minor, currencies now.
If you ask for gold in exchange for your five-pound note in the UK, you won't get it. You'll get another five-pound note.
That will also be true if you ask for a dollar's worth of gold in the USA or a euro's worth of gold in Europe.
There is nothing to back up the value of money except the right of a government to tax in the future - and they will tax by demanding that money back from you. And because they will demand to be paid in the legal currency of the country in which they have created the money, they give that money value.
So why do we think the numbers on our bank statements have value? That's only because by convention and custom and law and seasoned practice, we have discovered that we can actually exchange the numbers on a bank statement - or these days more likely on a computer screen - for something that is real because people will accept a reduction in the value of our bank statement by inflating the value of their bank statement balance to give us real things in exchange.
It's just a process of swapping numbers out of one computer account into another computer account. That is what we call money payment. Nothing physically moves. There is no such thing as physical money in the process.
The only thing that is required to make that process work is one of these things – a computer keyboard. They are what makes money, because tapping a loan balance into a computer keyboard is what creates money - because all money is created by loans. And all money payments are recorded likewise - by tapping numbers into computer keyboards. That's it.
Money is a fiction of our imaginations facilitated by the process of double-entry bookkeeping, managed by banks through the use of computer keyboards to keep the world going around.
If you think it's anything else, you really are wrong.
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I have a mischievous question, but with a serious purpose – it’s for the omnibus version of the TWR 2024 that I’m compiling in my head.
What happens to the numbers in the Brinksmatt (bullion, diamonds) robbery or in a common or garden wages snatch (notes) or when money is laundered in our local “vape & sweetie” shop (incidentally right opposite the cop shop!) – or anywhere in “black economy” transactions. Save the answer for a quiet day (but not at the expense of birding!)
Does one of the double entry figures get lost for a while? Presumably somewhere a little while later, a credit balance appears somewhere in a vape shop(?) without a linked debit entry, and spotting those is what a forensic accountant gets paid for? (not that a forensic accountant ever gets near a vape shop)
Seriously though, answering those sort of odd questions often helps we amateurs in understanding the basic theory behind money – and its the sort of thing that non-economics people do ask during omnibus discussions.
Now here’s the thing: there is more than one setb of books.
Those transactions are there all right. Double entry aopplies to then. After all, the shadow economy is just business. It’s just it is recorded in he black ledger, not the red one used for legitimate transactions. So when money disappears in the red ledegr is is debit black hole and when it re-emerges it is credit the black hole (unlike anything else, money can escape the black hole).
The goal for much of my work for twenty years was to shrink the black ledger – by making companies accountable, forcing information exhcaqnge form tax havens, and creating country-by-country reporting worldwide. And funding tax authorities, of course.
I might need to explore this some more.
And briding has happened – tired feet now, with tea beside me.
Thank you!
Crime fiction always has the cop hunting for the black ledger!
It’s good to know that crooks understand double-double entry book-keeping.
🙂
Agreed basically. But a few observations if I may…….
Money is elusive in nature to me – it relies on things like trust to inform its legitimacy. And is subject to other sentiment such as greed or generosity.
The trust we have in the pound is reinforced by the Bank of England.
The thing is, whose trust in the pound is considered more important to (say) the Labour government – the markets or the man/woman in the street?
One thing I have observed about money though is this: it’s existence has corporeal outcomes – it makes things happen, it is a form of power that can be granted or denied. it manifests itself through what it is used for.
And it also makes itself known when things do not happen – like well fed children.
Money is both nowhere and everywhere.
And we allocate it very poorly.
Much to agree with and to muse on whilst hinting warblers this morning.
I am working on the money series and the weirdness of standard assumptions on money are becoming ever more apparent to me.
I’d say the nature of money is not so elusive. In the UK you have to have sterling to pay tax (dollars won’t do). And if you don’t have sterling and don’t pay your taxes ultimately aggressive men with weapons will pay a visit and it won’t be pleasant.
The rest follows from this. Since we all need money to pay tax then it is convenient to use sterling. That’s why we use sterling in the UK. We could use dollars, but that would be really inconvenient when it comes to paying tax.
And, as an aside, this indicates that cryptocurrency is not money. Ultimately a currency needs a government with a police force (and ultimately army) to enforce payment of tax in its currency. Without that the currency is meaningless.
Much to agree with
HMRC accept payment in Euros. In cheque or direct bank transfer. It’s on their website.
No they don’t
They accept euros equivalent to your sterling liability. That is not the same thing at all. You have to sell your euros and buy sterling to make the payment then, even if they will act as your broker to do that.
Ways of expressing mistrust in official money for omnibus passengers –
Cash in hand, barter ( of goods or labour), charity donation with Gift Aid, tax avoidance.
Theft, money-laundering, tax evasion.
Then getting a bit more complicated…
Cryptocurrency both created and spent on the dark web, possibly never being turned into cash. If it can be created, bought and delivered on line via the dark web, it need never involve official government money (software, games, gambling, videos, fungible thingumajigs, porn, cybersex). But not so easy, food, clothes etc.
By definition that’s hard to quantify.
I hope I’m not giving anyone ideas…
I have done quite a lot of work about this recently….
All relevant.
But this morning as I was doing some gardening, I was reflecting on how money is used as a short term way to get rich by making money out of money or turning socially productive assets into liquidity.
This is pure craziness – as the government obviously withdraws from supporting the public sector it created and casting us into the treacherous seas that are markets and leaving them to allocate resources, the markets obviously want to suck out value where it can and allocates money to that function. This is their only goal it seems to me.
This explains why there is this addiction in the UK to just not investing. If you cannot see a return – either timely (instant) enough or in cash value, apparently its not worth it. And they call this ‘investment’ – an abuse of language for sure, because it is just buying to sell.
To borrow from another misfunctioning phenomenon (dog ownership), Money is for life, not just for Christmas. And how many Christmases has the City had since Thatcher?
Money is a commitment – a long term one. We just don’t operate like that anymore. We are obsessed with returns, extraction. That is why everything is about what we can’t do, not what we can.
Government has been co-opted into this short termism, and blames everyone else as the same nonsensical results are achieved again and again. People and assets have been squandered for the few at the top of the market food chain.
It’s totally reprehensible and needs to be made accountable.
Money is for life, not just for Christmas.
That is brilliant. A book title.
A great comment.
Thank you.
I hope that you get mote than a ‘hint’ of your warblers though and that we have some nice photos later.
Thomas has my birding lenses in Wales….
I was thinking about money (yes I’m one of those weird geeks) and specifically about gold and how it differs from fiat currency.
Fiat currency has no intrinsic value but is valuable to pay taxes.
But then again, gold has little intrinsic value, though it is pretty and has uses in electronics. You can’t eat gold, or burn it to warm your house, though I guess a large enough lump might make a good door stop.
Fiat currency is supposed to be different because it is easy to create, whereas gold has a fixed supply. But that’s not true, at least historically. More gold could be obtain by mining, or maybe stealing it from South America (where it was not used as money). So it was possible to get more gold, it’s just that it was difficult and expensive.
The differences between gold standard and fiat currency is first that fiat is easier to create and secondly that gold production was never completely under government control. Governments could set up their own mining companies (perhaps some did, I m not an historian), but otherwise they had to tax to get gold (perhaps the origin of “tax is theft”).
It is often implied that gold standard and fiat money are fundamentally different. But I think it a question of degree rather than kind. In the modern age fiat money is far easier to create and manage than gold ever was.
So I completely agree with Richard that money is just made up. Furthermore I think it always was!
As an aside, this line of thinking highlights the nonsense of cryptocurrency. The proponents think that that because it is difficult/expensive to create (hence Bitcoin mining) like gold, and because it is in limited supply like gold, it has the properties of money. It does not. Difficult production and limited supply were practical disadvantages of gold, not fundamental properties. Crypto isn’t money; it a Ponzi scheme.
Tim
You seem to be miving closer to my thinking 🙂
Richard
I regard that as a happy state of affairs:-)
Taking this further though – it is WHO makes money up.
Then we get to the origination issue, and that for me is a sovereignty issue and part of the law of the land, itself related to the origins of political order. That sovereignty is being mis-used at the moment and may well have been mis-appropriated as it is being put to work for too few of the population.
I like that
So the important questions (once someone, whether on an omnibus, or on a trading floor, or working at a DWP Counter, or in the House of Commons, or providing healthcare, or emptying bins, for a newspaper, or serving coffee, or retired or sick, rich or poor, has grasped the basics of what money “is” or perhaps “isn’t”, & where it really comes from, and “doesn’t”) – once that has been grasped, the important questions are:
What is money FOR?
WHO is money for?
What SHOULD money be doing (in a moral universe – I wonder if it would/will even be necessary)?
What IS it doing (in our immoral society/culture/politics/economy)?
What should/could I be DOING about that? (that no one else but ME is uniquely equipped to do, because of my particular experiences, knowledge, networks, personality, abilities, responsibilities, and yes, even my disabilities, past failures or present pain?
To answer those questions I DON’T need to be an economist, just a human being with a functioning conscience and working eyes and ears.
Which may be where we say, misquoting Apollo 13, “Houston (or rather, Westminster), we have a problem…”)
Today, 400+ Labour MPs who just had their weekends messed about, may be particularly receptive to a reminder that their Dear Leader and his Irish controllers, McSweeney & McFadden, aren’t up to the task of running the country, however good they might have been at destroying the Labour Party. Surely SOME of them must have some vestige of a moral sense?
I have noted that list