Kinds of Money

[lpetrich]

That thread about Millennials refusing to purchase got sidetracked into definitions of money. So I'll review kinds of money and alternatives to money.

Barter is the simplest sort of exchange. A has X and wants Y and B has Y and wants X. A gives X to B and B gives Y to A. This has the problem of the "coincidence of wants".

Next up is a gift economy. A gives X to B, and B remembers that gift and later gives Y to A. This can work in a small-scale society, but it does not scale very well.

Then we get to having a medium of exchange: money. A gives X to B and receives money M from B, and then B gives Y to A and receives M from A. Money is a convenient abstraction of value, to the point that some people make acquiring it an end in itself.

The simplest kind of money is commodity money, some item traded on its non-monetary value. Numerous sorts of commodity money have been used: gold, silver, copper, salt, peppercorns, tea, large stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes, cannabis, candy, cocoa beans, cowries and barley (Wikipedia). Such money is sometimes not very portable, it must be noted.

The next kind is representative money, something traded at more than its non-monetary value. Paper money is the best-known kind, though coins often also qualify. Much of that sort of money is nowadays entries in banks' databases, and cryptographic currencies like Bitcoin may also qualify.

Such money can take the form of IOU's for commodities like gold, and that's what gold-standard supporters want money to be.

It can also be fiat money, money decreed into existence (Latin fiat, let (it) be made). This can be done by running the printing presses or some electronic counterpart. Some people distrust fiat money because it seems that governments can recklessly print it, causing galloping inflation and making the money worthless.

Some forms of fiat money are monetary fraud, like debased coins and counterfeit money. In fact, some people consider all fiat money to be monetary fraud.

I hope that I've covered the territory. Is the gold standard a good way to keep money valuable? Or is it an economic superstition?

 

[bilby]

That thread about Millennials refusing to purchase got sidetracked into definitions of money. So I'll review kinds of money and alternatives to money.

Barter is the simplest sort of exchange. A has X and wants Y and B has Y and wants X. A gives X to B and B gives Y to A. This has the problem of the "coincidence of wants".

Next up is a gift economy. A gives X to B, and B remembers that gift and later gives Y to A. This can work in a small-scale society, but it does not scale very well.

Then we get to having a medium of exchange: money. A gives X to B and receives money M from B, and then B gives Y to A and receives M from A. Money is a convenient abstraction of value, to the point that some people make acquiring it an end in itself.

The simplest kind of money is commodity money, some item traded on its non-monetary value. Numerous sorts of commodity money have been used: gold, silver, copper, salt, peppercorns, tea, large stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes, cannabis, candy, cocoa beans, cowries and barley (Wikipedia). Such money is sometimes not very portable, it must be noted.

The next kind is representative money, something traded at more than its non-monetary value. Paper money is the best-known kind, though coins often also qualify. Much of that sort of money is nowadays entries in banks' databases, and cryptographic currencies like Bitcoin may also qualify.

Such money can take the form of IOU's for commodities like gold, and that's what gold-standard supporters want money to be.

It can also be fiat money, money decreed into existence (Latin fiat, let (it) be made). This can be done by running the printing presses or some electronic counterpart. Some people distrust fiat money because it seems that governments can recklessly print it, causing galloping inflation and making the money worthless.

Some forms of fiat money are monetary fraud, like debased coins and counterfeit money. In fact, some people consider all fiat money to be monetary fraud.

I hope that I've covered the territory. Is the gold standard a good way to keep money valuable? Or is it an economic superstition?

Gold is effectively fiat money - its value is mostly due to the fact that people say it is valuable. A banknote is not intrinsically valueless, and nor is a gold bar, but their main value comes from the widespread belief that they are valuable.

If you look at a "genuinely valuable", ie a usable, commodity - from platinum to toilet paper - you find that stockpiles are small, relative to the total amount in use, and are subject to rapid turnover. Gold isn't like that - Stockpiles are large (a large fraction of the gold ever mined is in vaults that are rarely opened - its owners don't even look at the stuff, much less use it for anything), and move slowly (a large fraction of the gold in Fort Knox has been there ever since it opened in 1936).

About 200,000 tonnes of gold have been refined by humans, of which about 170,000 tonnes have a known whereabouts (most of the rest having been lost in antiquity); A bit less than half of that is in use as jewelery, about 12% is in industrial use, and the rest is in various vaults and repositories, in the form of bars that do nothing except gather dust.

Of course, value is entirely artificial, even for useful commodities; Gold is valuable only because people agree that it is, and the same is true of dollar bills, and of baked beans. Of course, a starving man will place a higher value on the beans than on the bullion or the banknote; But there's really no more reason to accept his opinion than there is to accept the opinion of the businessman, banker or politician, to whom beans are of little value.

If civilization collapses, tins of beans and rolls of toilet paper will be far more valuable than banknotes or bullion - but as long as civilization persists, these things continue to be more valuable, because you can reasonably expect to be able to swap a gold bar for many tins of beans.

The gold standard is a shithouse way to keep money valuable; but it's no worse than any other. Ultimately we all just rely on everyone else continuing to believe. And we assume they will, simply because they always have.

 

[braces_for_impact]

Professor Yuval Noah Harari goes through this a bit in Sapiens: A Brief History of Humankind. ​Money is a lot like any LLC, it is a fiction made up by us to make life easier. It's a good trick, and it works pretty well.

 

[whichphilosophy]

Professor Yuval Noah Harari goes through this a bit in Sapiens: A Brief History of Humankind. ​Money is a lot like any LLC, it is a fiction made up by us to make life easier. It's a good trick, and it works pretty well.

It works well to represent the value of purchases, without bartering services or goods for services or goods. Today if someone paid for a flight at the airport with 30 water buffaloes and received 100 water melons change there would be practical difficulties to both buying a ticket and taking the change on board a flight.

 

[dismal]

Turns out we actually have people who study this sort of thing called "economists". The functions of money are usually taught more or less as this article suggests.

http://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm

 

[Jimmy Higgins]

Do we have a dual currency system in the US, hard cash and credit? I paid a bill online. My bank sent some ones and zeros to another bank, not cash. The result was a lower balance for me, a higher balance for the payee, but no cash ever changed hands. More like just a promise of cash.

 

[Elixir]

... if someone paid for a flight at the airport with 30 water buffaloes and received 100 water melons change there would be practical difficulties to both buying a ticket and taking the change on board a flight.

 

[Horatio Parker]

Gold is effectively fiat money - its value is mostly due to the fact that people say it is valuable. A banknote is not intrinsically valueless, and nor is a gold bar, but their main value comes from the widespread belief that they are valuable.

The critical difference between fiat and commodity currencies is the flexibility of the money supply.

Central bank balance sheet expansion of the the 2008 crash variety would be impossible in a commodity currency.

 

[dismal]

Do we have a dual currency system in the US, hard cash and credit? I paid a bill online. My bank sent some ones and zeros to another bank, not cash. The result was a lower balance for me, a higher balance for the payee, but no cash ever changed hands. More like just a promise of cash.

Credit cards are not something independent from money. They are a means to assign claims on money.

 

[Jimmy Higgins]

Do we have a dual currency system in the US, hard cash and credit? I paid a bill online. My bank sent some ones and zeros to another bank, not cash. The result was a lower balance for me, a higher balance for the payee, but no cash ever changed hands. More like just a promise of cash.

Credit cards are not something independent from money.

I'm talking about debit cards, not credit cards. Where not a single dollar bill changes hands, just 1's and 0's. If everyone went to their bank today to withdraw all of their money as cash, they wouldn't be able to do so. But if they all went online and spent every dime they had in their accounts, the bank could technically do that... and then close their doors.

That seems to imply that "credit" or "debit" is at least a layer of currency. IE, the store is told that you are good for the money even though, physically, that money does not exist.

 

[Malintent]

Professor Yuval Noah Harari goes through this a bit in Sapiens: A Brief History of Humankind. ​Money is a lot like any LLC, it is a fiction made up by us to make life easier. It's a good trick, and it works pretty well.

It works well to represent the value of purchases, without bartering services or goods for services or goods. Today if someone paid for a flight at the airport with 30 water buffaloes and received 100 water melons change there would be practical difficulties to both buying a ticket and taking the change on board a flight.

30 water buffaloes with 100 water melons in change? Where is this flight to, the moon?

I'm certain no domestic flight could possibly cost more than 1 water buffalo (or 4 deer and 4 chickens - aka a 4x4)... and why would anyone give 100 water melons in change?? That would be like paying 6 virgins for 2 husbands, and getting 1,000 shells in return... LOL!

 

[dismal]

Credit cards are not something independent from money.

I'm talking about debit cards, not credit cards. Where not a single dollar bill changes hands, just 1's and 0's. If everyone went to their bank today to withdraw all of their money as cash, they wouldn't be able to do so. But if they all went online and spent every dime they had in their accounts, the bank could technically do that... and then close their doors.

That seems to imply that "credit" or "debit" is at least a layer of currency. IE, the store is told that you are good for the money even though, physically, that money does not exist.

Money in your checking account is generally considered part of the money supply.

It's part of "M1" which is one of the least expansive and most commonly cited definitions of money.

M0: The total of all physical currency including coinage. M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.
MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits
M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits
M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
MZM: 'Money Zero Maturity' is one of the most popular aggregates in use by the Fed because its velocity has historically been the most accurate predictor of inflation. It is M2 – time deposits + money market funds
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
M4-: M3 + Commercial Paper
M4: M4- + T-Bills (or M3 + Commercial Paper + T-Bills)

https://en.wikipedia.org/wiki/Money_supply

 

[Loren Pechtel]

I hope that I've covered the territory. Is the gold standard a good way to keep money valuable? Or is it an economic superstition?

There are two basic problems with the gold standard:

1) Mining doesn't keep up with the growth in the economy. This causes a slow deflation.

2) Gold strikes can really mess up your economy. Economy-upsetting strikes are not likely in the current situation but that could change once we get to space. What happens when someone sends a mining expedition to 16 Psyche? Or, even worse, the Caloris Basin. Chances are that somewhere deep under it there's a layer of solid gold. The delta-v cost of getting there is very high and the environment is very inhospitable and the gold is probably very deep but eventually those limitations will be overcome and someone will mine it.

Or consider the cavatron. It can separate out elements very very effectively. It's Achilles heel is the vast power requirements (they tried it in the Manhattan project, it worked well but slow and lost out to other methods of uranium enrichment)--but solar power is cheap in space and in zero-g you can build big--I strongly suspect the power consumption would be a lot less.

 

[bilby]

Do we have a dual currency system in the US, hard cash and credit? I paid a bill online. My bank sent some ones and zeros to another bank, not cash. The result was a lower balance for me, a higher balance for the payee, but no cash ever changed hands. More like just a promise of cash.

Nah, it's all just numbers. You can keep track of numbers in many different ways, but the basic concepts remain the same.

Banknotes are tokens; the banks could keep track of your balance by having a box with your name on it, filled with banknotes (or IOUs if you are overdrawn); but it's easier for them to just store the numbers on a computer.

The reason the banks can do this, but you can't, is the same reason that (some) banks are allowed to print banknotes, but the general public aren't - to make it difficult to cheat and just add more to your wallet without a balancing transaction.

A modern bank is basically a secure computer system; physical vaults are expensive to build, defend and maintain; secure computer systems are too - but they are far more scalable, so when you have a lot of money to store, computers are the way to go.

 

[bilby]

Credit cards are not something independent from money.

I'm talking about debit cards, not credit cards. Where not a single dollar bill changes hands, just 1's and 0's. If everyone went to their bank today to withdraw all of their money as cash, they wouldn't be able to do so. But if they all went online and spent every dime they had in their accounts, the bank could technically do that... and then close their doors.

That seems to imply that "credit" or "debit" is at least a layer of currency. IE, the store is told that you are good for the money even though, physically, that money does not exist.

And electronic run on a bank would be just as impossible for the bank to manage as would a cash run - the bank is not able to issue more money than it has, whether what it has is in a vault in the form of paper, or in a computer in the form of records. The limit in both cases is how much the bank is required to hold in reserves.

No modern bank branch carries anywhere close to its reserves in banknotes; in the event of high demand for cash, the manager can simply arrange for more notes to be delivered for issue - until he hits the limit of how much he is allowed to order (which is the same limit, whether the money he issued is paper, electronic, or a combination of both).