Representing all value?

8–11 and


The discussion on What Do They Know which I took part in last week, continued after that. Jake, also known as Jac, commented. I have mentioned him before here, and he’s on Twitter as Jac (Twitter).

Below are some quotes, followed by comments by me.


Jake wrote:


I did look into your preposterous article(s)...Money

My questions to Jake:

OK, if you think my bank-supermarket analogy is stupid and ridiculous, you can probably explain why it’s wrong, what is wrong about it. What in your view is the fundamental difference between a supermarket, redistributing food products between producers and consumers, and a bank, redistributing money between savers and borrowers?

If your answer is ‘money creation’, you are wrong: money creation exists, but still a bank granting a credit, redistributes money contributed by its clients.

Money representing something else

Basic idea from quotes

First some quotes, which all seem to express a view on what money essentially is – a view that I think is wrong. Jake, representing Holland for MPE (“Mathematically Perfected Economy”) wrote:

Most people can’t give you a good definition of money — a definition which holds; and a definition which serves them.

Well, there is a simple definition of ‘money’, which all economists agree on: Money is coins, and claims of households and companies on banks. That’s the definition I used in my article series, in particular in the numbers 1, 10, 11, 16 and 19.

More quotes:

Yet if we ask the questions which develop a fully accountable answer, we readily arrive at a fact that the only definition of money which can inflict no offense whatever, is a currency which comprises immutable tokens of value.


Both to tokenize value and to immutably tokenize value nonetheless are only TO REPRESENT not only however many different products, but necessarily, to likewise represent the volumes of such products, or we fail to keep the ostensible 1:1 relationship between circulatory volume and remaining value of all products, which is necessary to immutable value.

The only way to immutably tokenize value therefore is if the units of value of the circulation are immutably linked to the remaining value of ALL represented property (not just to one or several of MANY products); and thus likewise, the remaining volume of units of circulation must at all times equal the volume of remaining value of all the products which the circulation is intended to represent, or we fail to keep these principles. In fact then, the only way to maintain these equal volumes is to pay the value of the represented property out of circulation as the value of the property is perceived to be consumed, or to depreciate. The only way you can do this of course, is if we pay monetary obligations comprised only of principal, at the rate of depreciation or consumption of all represented properties.

Volume of circulation must likewise equal remaining volume of all represented property. [...]


The only circulation which sustains all these necessary objects therefore is a volume of circulation which is at all times equal to the remaining value of all property.

From all these quotes, the fundamental idea emerges that money should represent the value of products. One step further: that money should represent the value of all products, valuable objects and services present in the economy.

Money itself has value

I think that idea is wrong. I think money does not represent the value of something else, but it itself has a value, independent of the value of anything else.

We can see that by looking at the function of money as a medium of exchange – probably the oldest or one of the oldest of its functions.


Let’s look at ancient times when money was only beginning to be used – most trade was still barter trade. Weekly or monthly fairs were held in villages, where travelling traders would come and offer their products. There were local buyers, but also farmers and craftsmen offering their products and trying to buy what they needed. The traders also bought things, to sell them in the subsequent villages they would visit.

Barter trade means a seller has to find someone willing to buy his product, who can pay for that with something the first seller happens to need. A match must be made each time, in terms of quantities, value, moment of availability, moment of need.

Such matches are hard to make. A farmer wanting to sell one cow, which is worth quite a bit, who himself wants several less valuable products and services, in smaller quantities, like bread, fruits, vegetables, tools, repairs, clothing, would need to find several different sellers willing to accept that single cow as payment collectively.

Clearly that doesn’t work well. It isn’t a very practical and effective way of trading.

Yet, now, in the 2000s and 2010s, several people quite seriously propose the re-introduction of local barter trade as a solution to today’s financial problems. Don’t they see the very serious practical problems of bartering?

Money was invented to overcome exactly those problems. Money first existed as coins. Coins make values divisible. You can sell a cow for a large amount of money, consisting of many coins in varying denominations. In different combinations, those coins can make smaller amounts, and thus be used to pay for several products and services all cheaper than a cow.

While writing this, I get this triviality feeling again. It’s not the first time, look here and here for example. But it seems I really must explain, because many people these days think barter trading is fun and propose to re-introduce it.

How much money is needed?

From the village marketplace example, we can see that the coins in circulation need not represent the total value of all the products on the market. There should only be enough money to bridge the time between the moment the farmer sells his cow, and the moments he buys all the other things he wanted to buy.

After the indirect matches between sale and purchases have been made, for the farmer the money loses its function as a medium of exchange. It continues playing that role in the market place, but now for different people: those who sold to the farmer the things he wanted, and got his money for it, will also want to make purchases, sooner of later, on this market or another one in a different village.

Store of value

In modern society, money isn’t only a medium of exchange, facilitating trade transactions. Money also functions as a store of value. People sometimes spend money years after they have earned it. In the meantime, they may keep it in an account, as savings.

Because of that extra function of money, in a modern economy, more money is required than would be needed just as a medium of exchange.

But it is still not necessary that the total value of all products and properties be represented as the value of money.

Banknotes and bank accounts

In the past, coins derived their value from that of the metals they were made of, like copper, silver or gold. Modern coins however, have a standardised money value, which is considerably higher than their actual metal content value. That is because the issuing authority, like a government’s treasury, guarantees the nominal value of those coins.

In addition to coins, we now have banknotes. The paper they are made of is essentially worthless (although the production costs of banknotes are not negligible). Banknotes derive their value from what they symbolically represent: a claim to an issuing central bank.

One step further in this development is towards bank accounts: just like a banknote represents a claim on a central bank, a bank account balance (of a checking account or a savings account) constitutes a claim on a non-central bank. I wrote about this earlier.

Money supply

The total amount of money in the economy need not be equal to the total value of all the tradable goods and services.

There must be enough money in circulation so it can properly perform its tasks. Enough money but not too much.

It should be up to politically independent central banks to control the money supply, to make it grow or shrink as needed. Central banks do that by giving non-central banks more or less room for money creation. Money creation is an automatic by-product of any form of credit granting.

Money creation should not be done directly by governments, nor should it be controlled by governments. That’s because governments would be tempted to create money by granting loans to itself, which would eventually lead to devaluation of the currency as a result of inflation.

Central banks are not directly accountable to voters and should not be. Their policy target is to keep inflation above zero but low. The ECB uses 2% per annum as the norm. Stability, a low inflation figure, that is what central banks are accountable for, independently of any political motives.

Evil effects of interest?

I think this misguided idea, that the total value of tradable goods and the total value of money in circulation should coincide, is one of the explanations why concepts such as MPE (“Mathematically Perfected Economy”) contain such a strong opposition to interest.

Their thinking is as follows: interest means more money is necessary than before. More money means more products. So interest means the people will have to work to produce goods, just to compensate the interest, to satisfy the greed of bankers – or ”banksters” as they are known in MPE-like circles, with an obvious wordplay to ‘gangsters’.


Interest not green?

The same misunderstanding, of a supposed direct link between the total value of money and the total value of products, leads to the idea that charging interest is hostile to the environment.

If more money automatically meant more products, 3% interest (money supply increasing interest, that is) would require an annual economic growth of 3%, possibly resulting in 3% more harm to the environment.

This too is untrue, for the reasons already outlined above.

Too much or too little money

I return to what Jake wrote and again quote some paragraphs:

If the circulation is to represent (tokenize) value, then if the circulation were ever to exceed the volume of the remaining value of all property, then someone would have received circulation for nothing.

If we look at money purely as a medium of exchange, there could only be more money in circulation if people prepaid for products not yet produced. Not very likely. If we also take savings into consideration (M1 plus M3), then this situation would occur if people hesitate to spend their money yet, although some products are on offer.

Such an excessive, “inflated” circulation however would be impossible, if in fact all promissory notes (of principal only) are legitimately collateralized.

This is based on a completely wrong idea of what collaterals are and what they are for. Money isn’t collateralized. Money is coins and claims of the public (households and companies) on banks. If such claims were collateralized, it would mean an account holder could force the bank to sell property if the bank failed to let that account holders make payments from his account, although the account has a credit balance.

First, banks don’t have many sellable properties: some buildings and computers, which they need to continue their operations, and maybe some investments in shares.

Second, such a collateralization was never agreed upon between bank and account holder. If it hasn’t been contractually agreed upon, it just isn’t there.

Collaterals do play a role with loans. With some loans, not all. Those to buy a house of car for example.

A loan means the borrower owes the bank money. So loans are not money in a monetary sense, they are not what MPE-people call circulation.

Using the house as a collateral doesn’t mean that the value of the house is represented by the loan. It means that in the unlikely and undesirable case that the borrower fails to make the agreed-upon periodic payments (interest and usually also redemption instalments), the bank is entitled to forcibly have the house sold to satisfy its claim. I wrote about this before in articles 5, 13 and 15.

To summarize: the notion of “promissory notes” that are “legitimately collateralized” is empty. It is the result of misunderstandings. Misunderstandings about what money is and about what collaterals are.

(By the way: in finance, the term ‘promissory note’ has a very specific meaning. But it is my impression that MPE adherents use it in a wider, more general sense. See this glossary, where ‘note’ is defined as “promise to pay or redeem, upon which any philosophy/science of monetization inherently depends.”)

Jake continued:

Likewise however, if the effective volume of circulation is ever less than the volume of represented property, then it is impossible to trade all property all at once; [...]

So what? Why would it be necessary to trade all property at once? Money as a medium of exchange (or “circulation” as Jake called it) is only needed to bridge the time between someone selling something (a product, labour, a service) for money, and that same person spending that money on something else. Just look at my cow example above.

Moreover, what “volume of represented property” exactly are we talking about? Everything in the world that has some value? Or only that part that is currently tradable?

Lots of houses, cars, paintings and what have you, are very valuable, but the owner is not willing to sell them. That means their values in terms of money are only estimates for hypothetical situations or for insurance or taxation purposes. There is no need for actual money to “represent” that value, because no trading will take place in the foreseeable future.

Part of that quote again and a little more of what Jake wrote:

[...] if the effective volume of circulation is ever less than the volume of represented property, then it is impossible to trade all property all at once; and someone will not have received and persisted in just reward for their production.

That doesn’t follow from it at all.

So, an “effective,” just circulation must at all times equal as close as possible the remaining value of all production (“products”).

No. That is never the case, nor is it ever desirable or necessary. The value of products and the value of money are two different things. Confusing the two only leads to, well, ehm, confusion. :)

Balance sheets

What may have contributed to this wrong idea, that money must always represent the value of something else, is that a balance sheet, as the name implies, is always balanced. That is, there is as much value on the debit side as on the credit side of any balance sheet. This applies to any company’s balance sheet, so also to that of banks, including central banks.

An important credit-side balance sheet item of any central bank is the total value of outstanding banknotes. This value must be counter-weighted by assets (possessions) on the debit site, such as gold, gold claims, foreign currency banknotes and claims, securities, loans to non-central banks. For real-life examples you can look at the published annual reports of the world’s central banks. With internet as ubiquitous as it now is, these annual reports are all on the world wide web.

This counter-value in gold, of part of the banknotes, may have lead to the idea that any money must have a counter-value in physical products or precious metals. But that is not the case.

Giral money for example, which is in ‘on demand’ bank accounts of the public (households and companies), is compensated on non-central banks’ balance sheets largely by outstanding loans. Non-central banks usually don’t have much gold or other physical assets. They do have financial assets. That’s their core business.

So remember: money does not represent the value of something else, it has a value of its own. Money is claims of the public on banks (in accounts with non-central banks, and as banknotes which are claims on the central banks), plus coins, which are claims on the country’s treasury.

Link 21 June 2013

See also this note about functions of money.

Copyright © 2013 R. Harmsen. All rights reserved.