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Honest Money

August 15, 2015

Money has a representational role. In order to fulfill this role it has two values associated with it, a face value and a representational value. The face value is the stated value and the representational value, which if it exists is the same as the face value, is the single representation in money of the value of an exchangeable economic good.

Honest money is money where the face value is backed up by the value of a single exchanged economic good. Dishonest money is where the face value is not backed up by the value of a single exchanged economic good.

How do we ensure that money is honest?

Historically, in the days of adherence to the gold standard, which most countries, including ourselves, no longer do, this was ensured by the State enforcing a link between each unit of currency and a specific fraction of the State’s gold holding, which is an exchangeable good. This legal link ensured, from issuance, the reality of each unit’s representational value and thus its honesty.

But since the 1970‘s we have not adhered to the gold standard, our currency has become a fiat currency. This means that if the currency is to be honest then each unit of currency in circulation must singularly represent a specific fraction of the country’s total wealth. At present this simply cannot be achieved because the issuing of new currency is happening at one step removed from actual economic activity, the values of which exchanged items are supposed to be represented by the currency. As the State does not issue new money at the point of need it tries to control the volume of currency in circulation by controlling the rate of inflation. This is akin to trying to thread a darning needle with gloves on so it is not very successful in this endeavour.

How could this be fixed? Could we issue new currency at the times and places where economic activity is taking place?

To be able to answer this question unambiguously we need to fully comprehend exactly where new money could be introduced into economic acts and, recognised as such. For this we need to dis-sect economic acts into their component parts.

The Components of Economic Activity

Humans make voluntary exchanges of goods and services with one and other. These exchanges are economic activity. Some of these exchanges are also essential for the continued existence of the exchanging parties.

Before the invention of money these exchanges were perforce simple. After the invention of money this was no longer the case and complex voluntary exchanges became possible.

A Simple Voluntary Exchange

A completed simple voluntary exchange is comprised of the following components:

Physical:

– two parties A & B
– two items IA, belonging to A, and, IB, belonging to B
– two mirror image exchanges where A gives IA to B, and, B gives IB to A

Mental: [i.e. in the two parties’ heads]

– in A’s head two values, IAav for IA, and, IBav for IB, and IAav <= IBav
– in B’s head two values, IAbv for IA, and, IBbv for IB, and IBbv <= IAbv
Note: Whether (IAav = IBav) = (IBbv = IAbv) has no relevance for the completion
of the exchange.

A Complex Voluntary Exchange

A complex voluntary exchange is comprised of two independent components, a Purchase Component and a Sales Component which must both be completed for the exchange to be completed and this will only be the case if both components contain two elements which are the same throughout, i.e. one of the parties and the value of the money used.

NOTE: The age of the money used, i.e. whether it is newly issued or old, determines which of the components of the exchange comes first in time.

Purchase Component:

Physical:

– two parties A & B
– one item, IB, belonging to B
– one set of money, Ma, belonging to A
–  A purchases IB from B with Ma

Mental: [i.e. in the two parties’ heads]

– in A’s head one value, IBav for IB, and IBav = Ma
– in B’s head one value, IBbv for IB, and IBbv = Ma

Sales Component:

Physical:

– two parties A & C
– one item IA, belonging to A
– one set of money, Mc, belonging to C, where Mc = Ma
– A sells IA to C for Mc

Mental: [i.e. in the two parties’ heads]

– in A’s head two values, IAav for IA, and, IAav = Mc
– in C’s head two values, IAcv for IA, and, IAcv = Mc

The two elements that link the purchase and sales components are party A and the values of Ma and Mc, Ma must = Mc.

If A uses old money, Ma, in the Purchase Component then it means that A has already executed the Sales Component of a complex exchange thus the complex exchange is completed.

If A uses newly issued money, Ma, in the Purchase Component then it means that the Sales Component of the complex exchange has still to take place before the exchange can be regarded as complete.

Thus the following actions have to take place:

a) the Money System must issue A with  a new money debt of Ma to fund the Purchase Component of the complex exchange
b) A has to execute the Sales Component of the complex exchange
c) subsequent to the sale the Money System has to settle the new money debt Ma with Mc removing Mc from circulation as Ma has replaced it in representational value.

The complex exchange is now complete and new money has been accepted into circulation without debasing the value of the currency.

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