What is Money? What Should Money Be?

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Dlaw
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Joined: January 7th, 2014, 1:56 pm

What is Money? What Should Money Be?

Post by Dlaw »

This was a topic when I was here years ago and it was pretty good. Since that time, though, money has changed A LOT. Knowledge about what money is has increased enormously and ideas about what money should be are behind some of the hottest stories in the news today.

I've been obsessed with what money is ever since my undergraduate course when I noticed supply and demand charts had a quantity of widgets on one axis and, inevitably, a quantity of money on the other. So, I asked the teaching assistant how much money there was in the economy and he replied in broken english "M2 or M3 but you don't need to know this yet".

I don't know about you but the one response to a question that I can't stand is "you don't need to know this yet".

So, I looked considerably farther ahead in the text and I found an "explanation" of what M2 and M3 are. Their role in supply and demand got a lot of handwaving. I dropped the course.

Let's call it ten years later the Internet was invented. I looked up the quantity of money. Still nothing but gibberish.

Let's call it ten years after that I was at my old friend Murph's house. He was moving up in his career as a banker. I asked him how much money there was. He said "it doesn't matter". I said "well you're a banker, can you at least tell me where money comes from?" He paused to think a moment and he said, simply, "me".

So was my banker friend right? Can he be right? Is bank money more real than Federal Reserve money but less real than crypto-money? Is there a better banking system than the one we have? Should we have banks at all?

To me, money is almost as much a philosophical question as it is an economic one.
N693
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Re: What is Money? What Should Money Be?

Post by N693 »

What is money? Votes on the direction of human endeavor. Prices tell entrepreneurs how to allocate resources and is irreducibly subjective because every individual creates himself through his own efforts. Demand is the aggregate of his efforts and desires.

Even command economies admit this: the labor theory of value grounds value in "socially necessary" labor. What "socially necessary" means just moves the same problem up one level ad infinitum.
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LuckyR
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Re: What is Money? What Should Money Be?

Post by LuckyR »

Money is just an agreement between individuals to the point of being between large groups of people (societies). It doesn't actually exist physically, it's an idea.
"As usual... it depends."
Good_Egg
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Re: What is Money? What Should Money Be?

Post by Good_Egg »

Money is when a commodity has value because it can be traded for other resources.

If you write an IOU then you have created money, but it's only money amongst those who will accept it because they trust you to redeem it. Which is why the total quantity of money is unknowable and doesn't matter. We don't know how many people are writing IOUs (or equivalent) at this moment.

In stories of POW camps, I've read of packs of cigarettes being used as money. If you trade for cigarettes with the intention of smoking them yourself, that's just barter. But if you accept cigarettes in trade because you know that you can trade them on to somebody else then those cigarettes are acting as money.

So the answer to where money comes from is "trust".

And I think it follows that a good banking system is one that creates and preserves and earns trust.
"Opinions are fiercest.. ..when the evidence to support or refute them is weakest" - Druin Burch
N693
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Re: What is Money? What Should Money Be?

Post by N693 »

Good Egg,

I agree, but there are different senses of "trust". I can engage in a monetary exchange with you and not trust you one bit. What I "trust" in is that you will pursue your self-interests. And self-interests are what increases the efficiency of the aggregate system (and why socialism will always fail).
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LuckyR
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Re: What is Money? What Should Money Be?

Post by LuckyR »

N693 wrote: December 4th, 2022, 11:06 am Good Egg,

I agree, but there are different senses of "trust". I can engage in a monetary exchange with you and not trust you one bit. What I "trust" in is that you will pursue your self-interests. And self-interests are what increases the efficiency of the aggregate system (and why socialism will always fail).
The trust required is in the overall monetary system, not individuals who happen to possess money.
"As usual... it depends."
Dlaw
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Joined: January 7th, 2014, 1:56 pm

Re: What is Money? What Should Money Be?

Post by Dlaw »

Wow, I don't know how the system didn't alert me to the great responses here. I have been fascinated by money for decades. The 2008 financial crisis fascinated me so much that I quit my job basically to spend more time researching it. My triumph was when I beat all but one blogger in figuring out how the bankruptcy of the American bank Indymac took place. I'm not showing off. I don't have a business degree so why I was so obsessed that I pored over multiple 10-K reports and other documents, I don't know. I went to my doctor and he prescribed something.

With the FTX story I may have to ask my doctor for more tablets.

Thus I have a lot to say but I'll try to go one topic at a time.

Barter:

A lot of people talk about barter when it comes to the question of money. This is totally and completely wrong for a simple reason: liquidity. Whether it's cigarettes in a prison camp or net bags and arrow heads in a neolithic tribe in New Guinea, barter tokens create a money supply that is far smaller than is necessary. In barter economies there is far more broadly-defined commerce that wants to take place than tokens to value that commerce.

What barter is trying to do is settle debts. If you look, for example at the records from a colonial American town, you see a huge network of obligations - fourteen bales of hay, two pigs, a pound of sugar, logging rights to 10 acres. In the wills you see that it was impossible to settle these obligations before one of the parties died. The American colonies were tragically short of money even though they were extremely rich in resources.

But the story goes back much farther. Basically (and I'm leaving a lot out) the Italian banks (Medici) came up with a precise system of assets and debts. They held gold in their vaults but what was needed was a way to create credit in between communities. How to let an Italian trader go to Bruges and buy cloth with credit rather than physical gold.

At some point later, money BECAME credit. There was no longer any theoretical difference between the two. Defining credit is really the
central problem of money.
amorphos_ii
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Joined: October 2nd, 2022, 1:19 am

Re: What is Money? What Should Money Be?

Post by amorphos_ii »

I think money should be fully digitalised, like with swipe cards and not notes n coin. Then you get rid of the black markets or a high percentage of them.

The reason why they don’t is possibly due to that vast amount of corruption in capitalism, and at all levels. Also hackers, - another and very long argument - it could be resolved easily if there was the political will and no corruption involved.
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Pattern-chaser
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Re: What is Money? What Should Money Be?

Post by Pattern-chaser »

Money is a temporary 'placeholder' for value, that enables barter to become trade. If I want your tomatoes, but you need potatoes and I have none, we use money to 'smooth over' our bartering, and thus it becomes trade. This simple view of money has become complicated. The only reason for this complication, that I can see, is that some people spotted the chance to acquire money without doing anything to earn it, and thus interest, and 'futures' came into being. Now, we have reached a point where we have built our entire world based on money. I leave it to the reader to decide how good this is for all of us...
Pattern-chaser

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Sculptor1
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Re: What is Money? What Should Money Be?

Post by Sculptor1 »

Taxation is not required for public spending.
Tax is not the source of public funding and the myth that it is has helped to create the worst example of inequality since the invention of money.
Tax is effectively a means of economic engineering and bears no relationship to the amount required by public spending.
Tax is a deletion of money
Public spending is a creation of money.
What is known as the "deficit", is of no particular interest.
What is important is WHAT you spend as a government and less about how much.
Any government can destroy an economy by spending badly within the deficit.
And a good government can improve an economy by spending wisely regardless of exceeding the deficit.
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