
What is Money? (1913) - hapnin
http://moslereconomics.com/mandatory-readings/what-is-money/
======
devinhelton
_But throughout the whole range of history, not only is there no evidence of
the existence of a metallic standard of value to which the commercial monetary
denomination, the “money of account” as it is usually called, corresponds, but
there is overwhelming evidence that there never was, a monetary unit which
depended on the value of coin or on a weight of metal; that there never was,
until quite modern days, any fixed relationship between the monetary unit and
any metal; that, in fact, there never was such a thing as a metallic standard
of value._

This is a very slippery argument. The overall point of the essay is to show
that basing one's currency on a metallic standard is silly and destructive. In
this quote, the author is correct in that rarely in history has the monetary
unit been permanently and inalterably fixed to an exact weight of metal. But
-- it has been the norm in history to have a substantial precious metal
content in money, with that content being fixed in the short term, and any
lessening of the amount leading to charges of debasement, and possibly even
the refusal to accept the currency.

The reason why precious metals have been an important part of money is trust
-- an issue which the author fails to address. It takes a very strong
government to make its subjects accept fiat currency. If the sovereign pays
his soldiers in fiat currency, the soldiers know that the sovereign can
infinitely dilute the currency, making the currency worthless. Whereas if the
sovereign pays in coin containing precious metal, the soldier knows the
precious metal is likely to be of value in many markets, no matter what the
sovereign does. And by requiring money to be made from previous metals, it
slows down the rate at which the sovereign can debase the currency (although
of course the sovereign can and does slowly reduce the metal content).

If you trust your a particular government (or organization, or corporation)
completely, then the author's arguments make sense, and you can accept the
scrip of that government as currency. But if you don't trust that government
completely... then you need a more complete assessment of the pros and cons of
different monetary arrangements.

~~~
adrianratnapala
Yes, and the fact that we have successfully used fiat money for several
decades is a testament to how well trusted modern governments are. It's a sign
that things are going well. Though we can argue about what to expect in the
future.

~~~
skookumchuck
Overlooking that the value of the dollar stayed about the same from 1800 to
1914, and is now 1/25th of that value:

[http://www.usinflationcalculator.com/](http://www.usinflationcalculator.com/)

There's also all the relentless propaganda saying that inflation is a good
thing, and if it isn't, it's caused by speculators & greed, not the
government.

I don't invest in anything denoted in dollars (such as bonds).

~~~
colanderman
Who cares that the dollar gradually declines in value? Only fools literally
invest long-term in the dollar itself (the "under the mattress" approach). And
if you're investing in any productive asset of actual value, inflation doesn't
matter. (I can understand being leery of non-inflation-adjusted bonds.)

All that really matters is that the dollar doesn't significantly lose value
between payday and tax time – which by definition, it doesn't, since tax rates
are fixed in dollars a year ahead of time anyway.

I won't bother to argue the virtues of inflation with you, since it seems
clear you've made up your mind about that "propaganda". But to claim that
controlled inflation is inherently a "bad" thing – for no reason other than
that it causes a thing with no inherent value to decrease in perceived value –
belies a misunderstanding of value.

~~~
tobmlt
The ill which inflation brings does not manifest itself in the short run.
Inflation is a hidden transfer of wealth from everyone to first receivers, and
first users of the new money. When the money is loaned into existance, the
first recipients of the new money get to make purchases based on the old price
point. By the time the money spreads throughout the system to everyone else,
it manifests as mere (generalized) price increase. This is a slow and steady
siphon which in practical effect takes wealth from the "have nots" and gives
it to the "haves".

To argue pro inflation based only on the short run view is missing the point.

~~~
colanderman
> Inflation is a hidden transfer of wealth from everyone to first receivers,
> and first users of the new money.

It's funny, that's exactly what I was going to say about deflation. I hear Mr.
Nakamoto is worth a lot these days.

The rest of your argument doesn't make sense to me, as the only effect
inflation has on anyone is the price increase in a good between the time you
_receive_ the money and the time you spend it. Not the price increase since
the money first came into existence. It doesn't matter when I get money, so
long (a) I am paid according to the current worth of the currency (i.e., in
real terms) and (b) as I spend (or invest) it quickly.

I mentioned in another comment that inflation _does_ have the negative effect
of masking wage stagnation, which causes exactly condition (a) above to be
violated. This is ultimately a problem with people's understanding of money.
It would be great if employers were forced to announce a lack of yearly pay
increase as a pay cut in real terms.

Condition (b) on the other hand. That's more a problem for the wealthy.
Personally (as an upper-middle class tech worker) I'd love it if I could just
shove my savings under a mattress and have it increase in value. It's those
living paycheck to paycheck – which, if I recall correctly, is the vast
majority of Americans – who don't have to worry about spending their cash
before inflation gets to it.

~~~
tobmlt
About bitcoin I would hazard to say that different assets change in value for
different reasons... Bitcoin is a mostly speculative vehicle, right now, and
goes up and down according to expectations. I want to stay away from it to
avoid muddying the waters of the discussion but I will say that I don't think
bitcoin in and of itself is exploitative, and Nakamoto is worth a lot because
he had an idea that resonated with a lot of people who had various related
ideas about it. But what do I know, and I don't have a dog in that fight. (I
assume a lot of people have a lot of strong opinions about bitcoin, and I
don't really have time to think about it)

I would rather talk about our apparently opposing perspectives on inflation as
I think that's the interesting bit. (I think our perspectives are only
different in that one looks at things on a short small tempro/local human
scale, and the other is more economy wide/slow moving in view - and one needs
both)

> the only effect inflation has on anyone is the price increase in a good
> between the time you receive the money and the time you spend it. Not the
> price increase since the money first came into existence. It doesn't matter
> when I get money, so long (a) I am paid according to the current worth of
> the currency (i.e., in real terms) and (b) as I spend (or invest) it
> quickly.

I claim that there is another effect that is only visible when looking at
large scales - of both people and time. What you claim is true when looking
only at an individual actor, or some small scale. There, sure, an individual
can receive and spend money and generally get equal to what one gives for
things. This is the short term perspective on inflation. What I claim is true
only shows up when looking at the economy more holistically, and over time.

Let's say that I am a government defense contractor. Let's say that The
government loans into existence a huge sum of money and promptly disburses it
to me to pay for some new defense widget. Meanwhile, the rest of the economy
is buying and selling stuff at the old price point, oblivious to this new cash
influx. (I am ignoring expectations at the moment - but I do not intend to
always ignore them! --spoiler, I will just claim that they don't entirely
spoil my defense contracting party)

I can merrily build a widget army, inking large contracts at the present price
point, which has not yet increased in response to this influx of cash (since I
am holding all of it). The difference in price, between what I pay and what
stuff will be worth once the cash is entirely diffused, amounts to a subsidy
paid to me, in the amount that inflation will devalue the currency once it has
fully circulated. I experience the benefit in that I have more wealth,
encapsulated within the stuff I just bought, than someone down the line could
purchase with the same amount of cash. So the next contractor down the line
benefits a little less than me, so on and so forth until the money trickles
down to everyone, and they just see a general rise in prices. The fundamental
mechanism is that I get to buy at the old price point, while in fact already
experiencing the increase in supply of money. If money distributed equally, I
would see a fair price. Instead, I see an artificially low price, given the
true supply of money now.

I claim that this subsidy to me really has made "the little people" a tiny bit
poorer, and me a little bit richer. (and that this is a machine running day
and night for years on end... )

Now expectations - here is where the objections to "my" theory hold their
ground. It is claimed that because the various contractors down the line
expect general inflation they can price it into their contracts, they can
charge me a bit more than the current price level would suggest is right, due
to expected changes in the value of money relative to their widget components
from now and delivery time.

People make such forecasts all the time. Forecasting is difficult. The economy
swings on the actions of the fed.. The fed knows this... and so on. I can't
fully answer this. The trail of logic runs cold. Who is winning the
expectation battle? Who is getting rich?

My great forecast/bet/wager, (which I cannot prove!) is that even with
rational expectations of inflation, people in power have found it useful to
continue to inflate to pay their cronies, to continue to enrich themselves
year in and out via this mechanism.

I suspect this comes back around to your condition (a) violation above -
people's understanding of money, sometimes predicated on faith in things like
rational expectations, sometimes predicated on flat out not "getting" that pay
stagnation is pay decrease, is the final underlying driver that causes
rational expectations to loose out, and "my" defense contracting pseudo self
to "win" out.

I hope I didn't come off rude. If I did I sincerely apologize. I probably did.
I probably came off like a long winded ass. Again I am sorry. Lots of things
going on at the moment. The short of it is that it might take me a while to
get back to you tonight should you read this monstrous wall of text but I will
do my best.

Cheers

------
rockyleal
The first 2 lines of the article are these:

"The fundamental theories on which the modern science of political economy is
based are these:

    
    
        That under primitive conditions men lived and live by barter"
    

The basic premise, that barter was (and is) by which 'primitive' (whatever
that is) live, has been thoroughly debunked by contemporary anthropologists of
money. David Graeber's 'Debt: The first 5000 years" is a must read for anyone
interested in the topic of theory of money from the anthroological (i.e.,
empirical) perspective:

[https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years](https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years)

~~~
ucaetano
That's actually quite a poor book. It essentially defines debt as any,
absolutely any, sense of liability towards another being. When you define it
like that, it isn't only true that debt predate money, it's obvious.

Besides that, the book is a collection of anecdotes carefully selected to try
to paint a coherent picture. It is clearly written by someone who doesn't
understand economics, to a public that doesn't understand economics.

It is so full of basic mistakes that it is hard to decide if the problem is
ignorance, laziness or malice.

But it sells well!

~~~
joosters
Can you give a few examples of the basic mistakes in the book, please?

~~~
ucaetano
Sure:

 _" Apple Computers is a famous example: it was founded by (mostly Republican)
computer engineers who broke from IBM in Silicon Valley in the 1980s"_

The level of stupidity in this quote is unbearable. Basic fact checking for 5
seconds on Google would have been enough...

Now take that and apply the Murray Gell-Mann Amnesia Effect.

And that's before we get into ignominious phrasing such as _" I would like to
end, then, by putting in a word for the non-industrious poor. At least they
aren't hurting anyone."_

Debt is a book written backwards. It starts with and idea: capitalism is bad
and debt is the instrument of capitalism. It then piles up and links selected
- but vague and frequently unsourced - anecdotes to try to create a logic
supporting that idea.

From an economics perspective, it isn't even wrong. But it does sound
appealing to anyone who has debt or dislikes capitalism. Therefore, I expect a
lot of downvotes.

[Edit: typos]

------
bwestergard
The author of this piece mentions classical political economy, but not Marx,
its most trenchant critic.

Marx's most interesting and compelling contribution - until recently seldom
understood in the English-language literature - was his theory of the "value
form" and money as the "necessary form of appearance of value". This
contribution is further masked by the common practice of identifying "the
labor theory of value" (there is no such singular theory) as Marx's principal
contribution. In fact, he was a critic of the many (contradictory and
inconsistent) "labor theor[ies] of value" in circulation at the time.

"According to Marx, value and money are inseparable yet not identical: without
money there can be no value, yet money is not value. Marx’s thesis of the
inseparability of value and money overturns the classical theories of value
and money and establishes new concepts governing the theory of price. These
new concepts rule out the ordinary assumption of price theory, namely, that
value is the independent variable that explains the behavior of price, which
is conceived to be the dependent variable." \- Patrick Murray
([https://www.mtholyoke.edu/courses/fmoseley/conference/murray...](https://www.mtholyoke.edu/courses/fmoseley/conference/murray1.pdf))

------
220V_USKettle
Medium of exchange, store of value, and a unit of account, right?

~~~
dredmorbius
And by some claims: a standard of deferred payment.

------
neilwilson
We all create money all the time. We exchange a debt we owe for a debt we own.
That's it.

And underlying it all is a simple 'proof of burn' concept. Every person has a
finite amount of time available to them. When you put some of that 'out of
use' by serving others you gain credit from others.

The monetary system is essentially a notarised system of time credits which we
exchange between ourselves.

~~~
romwell
I think this comment can be taken as a brief summary of the long article.

The article includes this passage, which mirrors this idea:

>It is by selling, I repeat, and by selling alone—whether it be by the sale of
property or the sale of the use of our talents or of our land—that we acquire
the credits by which we liberate ourselves from debt, and it is by his selling
power that a prudent banker estimates his client’s value as a debtor.

------
neom
Isn't this just describing variable attributed value exchange with a ledger
that isn't inherently reconciled? Maybe I'm mistaken but I thought that was
the point of fiat adoption based the realities of physical location?

------
simo7
It's a cheque that never gets cashed.

~~~
tensor_rank_0
contrariwise, it is infact already cash.

~~~
simo7
It is to say that money is in principle something only _quantitatively_
different from a loan.

In fact, you can see money as a credit towards an extremely trustworthy
debtor.

So trustworthy that everybody will accept that credit on its face value in
exchange for any sort of goods.

What's the characteristic of a risky loan, it comes with a very high interest
rate right?

So what happened when the risk is the lowest possible? The interest rates goes
to zero or even negative.

That's money, a government-bond of a very stable country with little debt is
quasi-money. The difference is only quantitative, makes sense?

~~~
tensor_rank_0
money is a medium of exchange, a unit of account, and a store of value. a loan
is an obligation. its a value with negative valence.

> So what happened when the risk is the lowest possible? The interest rates
> goes to zero or even negative. Makes sense?

the risk premium is not the same as the interest paid the lender by the debtor
for the privilege of having something now and paying it back later. in this
case, the interest rate is the price of money, denominated in money,
arbitraged over time.

look at it another way, why would anyone make a loan if they didn't stand to
gain anything? why would I loan you $5 in order to get $5 back at a later
date? I already have $5. now if you give me $5.05 back tomorrow, then I have
gained 1% for my sacrifice of letting you hold the money for a day.

~~~
simo7
> why would anyone make a loan if they didn't stand to gain anything?

Exactly. That's precisely the question.

If you lend money 1) you bear the risk of not seeing you're money back 2)
you're not able to spend that money during the loan period.

Even if you don't care about risk and don't want to spend that money 3) you'd
still be greedy enough to want something back, right?

So let's imagine all 3 points disappear:

1) There is practically no default risk. 2) You could still purchase something
by exchanging your credit with goods (and everybody would accept for its
nominal value without any discount). 3) This credit certificate you hold in
your hands turns out to be very convenient to use. It's so much easier to
trade and everybody accepts it and trusts it, why not to use this as "money"?
And why to ask something back when it's already providing me more utility then
"money" with no disadvantages?

So in reality you have a lot of "loans" that end up being called quasi-money
exactly for the reasons above.

Some countries issue government-bonds with negative interest rates, not only
because they are considered very safe investments but also because banks use
those type of bonds for their operations making them convenient to hold.

Like I've said, it's a quantitative difference not a qualitative one. Money =
loan with negative interest rate.

~~~
tensor_rank_0
money doesn't have a yield, so it can't have an interest rate. also consider
that the interest rate is denominated in a ratio of currency units. its
nonsensical to reify currency as a special case of a loan of itself.

~~~
simo7
If it helps read here:
[https://en.wikipedia.org/wiki/Near_money](https://en.wikipedia.org/wiki/Near_money)

Unfortunately this "nonsense" is the explanation that any economist would give
you.

Maybe you can be the first one to propose a revolutionary alternative theory,
but I haven't read it :)

~~~
tensor_rank_0
> If it helps read here:

that doesn't support your novel assertion.

> Unfortunately this "nonsense" is the explanation that any economist would
> give you.

lots of people running around hn espousing their own particular viewpoint as
mainstream econ. are you guys working together or is it just a few guys
attempting to take advantage on a non-econ crowd?

> Maybe you can be the first one to propose a revolutionary alternative
> theory, but I haven't read it :)

well you're obviously not very well read if you think commodity money is a
revolutionary alternative theory :). I'd suggest starting with introductory
econ textbooks and setting your own prejudices aside until you're better
informed.

------
stevenh
This is an astroturfing article meant to hypnotize the reader into thinking
fiat currency controlled by private banks is a good thing. Its purpose was to
normalize this idea of money and grease the tracks for the Federal Reserve Act
that would be rammed through congress a few months later.

------
ambernightcrush
Reading this a year ago changed my entire outlook on money and public debt for
the better.

