Back of Envelope Monetary Theory

Note: This was caused by me having three arguments about community currencies in as many days. I figured I ought have a better (and more respectful) objection than "fluffy".

Money is a flow system. We only use money for transferable value. A pile of gold in a cave is not money, it's just a hoard. Money is fungible transferable material goodness. (If you mint the gold, it's money.)

Moneiness is relative and contextual. A certain balance of money can only be transferred within a certain system. It is more significant whether my money balance is within the Visa system, than whether it is held in dollars or Yen.

Normal money transfers are sanctioned money-laundering. Because money transfers are legal, the whole process of placing value into the economy and passing it down through businesses can be outsourced to a bank. Illegal money moves in a similar way, it just feels different (presumably) because you have to do it yourself.

Useful monetary systems have a value, a way to put that value in, pass it around, and take it out again. Or more formally :-

1. Definition of Value
A specification for the delivery of goods of uniform value. The Chicago commodity exchange contract for wheat, or the mint stamp on a gold coin.

2. Origination of Title
Credible transferable commitment to honour a contract for value. (In practice, by pledging collateral, preferably the goods subject to the contract.)

3. Conveyancing
Transfer of title to a commitment to deliver value. A SWIFT bank wire between accounts, or the reassignment of a treasury bond.

4. Settlement
Delivery of a real good to extinguish claims to value. Melting gold coin to jewellery, or the settlement of a government debt with a bank note.

In most Western countries, government sets the value definition [£, $, EUR, Y, etc] and varies it within policy limits [CPI, RPI, etc]. Licensed banks originate currency as debt against liquid assets under government supervision. Private-sector banks manage the flow of bank credits through the economy, and are obligated to accept them to settle debts.

(In this framework, Keynesianism make some sense. For the system to clear, private actors need to be able to reliably "pawn" stuff into the monetary system at fair value. Otherwise money will spike in value as it becomes artificially scarce. Governments are (by choice) responsible for regulating their own national currency, so would need to extend their own credit, by loans or purchases, to stabilise its value.)

We have more currencies than we usually suppose. Arguably, within a few square miles of London and New York, even derivatives would qualify. In Africa, mobile phone minutes are currency. (We could do that here, but we don't. It is just a social difference.)

An entity may perform one or more functions in a money system. Visa only transfers money between its member banks. Citibank does everything (everywhere). Some industrial banks have no retail depositors. So in my world, it is more important for a developing country to integrate to SWIFT/Visa than the EUR/USD.

(An interesting implication of which could be the hollowing out of the universal bank as communications and data processing approach free.)

Some worked examples :-

  1. Bullion banks - [gold, assay, good delivery chain, disbailment] - PASS
  2. Beer Vouchers - [%+EU, brewery vouchers, sneaker net, brewer's pubs] - (near) PASS
  3. Classic Bank Fiat - [fiat+RPI, gov. spending + bank loans, state licensed banks, HMRC + bank repayments] - PASS!
  4. Brixton Bucks (generic local currency) - [£ peg, ?, by hand, Sad ] - FAIL

All of which have some interesting implications for fiat money and currency pegs. A central bank like Kuwait's, with a $ pegged currency, is committing itself to deliver US consumer goods, but only has the ability to tax oil. In the UK, money is mostly backed by residential property, but entitles the bearer to value defined by shop prices. You have to wonder what happens in either case when everyone decided to head for the exit.