{"id":7852,"date":"2018-02-19T10:31:06","date_gmt":"2018-02-19T18:31:06","guid":{"rendered":"http:\/\/occupysf.net\/?p=7852"},"modified":"2018-02-19T10:31:37","modified_gmt":"2018-02-19T18:31:37","slug":"modern-monetary-systems-understanding-mechanics-money-value","status":"publish","type":"post","link":"https:\/\/occupysf.net\/index.php\/2018\/02\/19\/modern-monetary-systems-understanding-mechanics-money-value\/","title":{"rendered":"Modern Monetary Systems: Understanding the Mechanics of Money & Value"},"content":{"rendered":"
February 18, 2018 (johnlaurits.com)<\/div>\n
\n
\n
\n
<\/div>\n<\/div>\n<\/div>\n

\"Modern<\/a><\/p>\n

Modern money is a strange thing. To most of us, money appears as something continuously given to landlords and businesses to secure a place to live, food to eat, and all the little parts to make that thing called \u201ca living.\u201d Since a living is made of money-giving, it must be regularly collected \u2014 or, to put it another way, money is gathered by people who need to \u201cun-gather\u201d it. For the working majority whose only access to money is to labor under an employer for wages, money is a full-time job and whole lives are revised, re-written, or canceled just to make ends meet, leaving us too little time to ask how a monetary system works \u2014\u00a0or even what money is<\/em>.<\/p>\n

The Evolution of Money & Currency:
\nA Brief History of Value, Exchange, Gold, Paper<\/em><\/h2>\n

Somewhere in the mist of prehistory, humans lived with no permanent settlements, agriculture, or industry and each person had identical job-titles as\u00a0hunter-gatherers<\/em>. Since everyone produced the same thing, exchange was unnecessary. As farming techniques developed, groups settled to protect and improve the most productive soil. Division of labor occurred gradually as individuals specialized in crafts like pottery and weaving that became recognized as valid professions. As goods increased in diversity, patterns of exchange arose to distribute them more usefully.<\/p>\n

Value, Exchange, & Currency<\/strong><\/em><\/h3>\n

\"History<\/a>To manage complex arrays of goods, people had to compare quantities, record past exchanges, and invent measures of\u00a0value<\/em>\u00a0to inform group-decisions like whether to raise more sheep or grow more barley. Trade-relations formed and new questions, such as\u00a0\u2018is a bushel of grain as good as a log of salt?\u2019<\/em>or\u00a0\u2018is a jar of oil equal to two sacks of wool?\u2019<\/em>\u00a0led to establishing ratios of equal value for quantities of differing goods. Over time, goods that gained broad acceptance became used as a medium of exchange or\u00a0currency<\/em>.\u00a0(from the Latin\u00a0currens<\/em>,<\/strong><\/a>\u00a0meaning \u2018flow or circulation\u2019)<\/p>\n

Metal Coinage & the Definition of Money<\/em><\/strong><\/h3>\n

Cast or engraved to identify weight and purity, metal weights, bars, and rings began to circulate as currencies in the Bronze Age. While grain and livestock were useful, metals held value in relatively small sizes with a basically infinite shelf-life, which made it particularly handy for trading over long-distances.\u00a0True coins<\/strong><\/a>\u00a0appeared by about 650 B.C., often bearing images of animals, rulers, mythic heroes, or religious symbols.<\/p>\n

\"Roman<\/a>Grain, cattle, cigarettes, bitcoin \u2014 anything can be currency but\u00a0money<\/em><\/strong><\/a>\u00a0must be a\u00a0unit of account<\/em>\u00a0and\u00a0store of value<\/em>. Since coins represent equal values, they act as a unit of account \u2014 a 10\u00a2 coin is equal to two 5\u00a2 coins because \u2018cents\u2019 are identical units. Both scarce and hard to fake, the intrinsic value of coins tend to be fairly stable and thus a store of value. Issued by the mints of states and empires, coinage \u2014 from electrum, bronze, or copper to silver and gold \u2014 was one of the dominant forms of money for the past few thousand years\u2026<\/p>\n

Reserves, Paper, & Fiat Money<\/em><\/strong><\/h3>\n

Paper money<\/strong><\/a>\u00a0evolved from promissory notes issued by banks for money-deposits that enabled merchants to do business without lugging chests of gold around. Banknotes originally functioned on the same principle as coinage \u2014 instead of minting coins for circulation, notes were issued to represent the intrinsic value of metals held in reserves. By the modern era, monetary institutions in most industrialized nations were organized as reserve systems with a central bank authorized by the state to issue the national currency.<\/p>\n

Though reserve systems and banknotes had practical advantages over coinage, both of them \u2014 paper representing metals and metal money itself \u2014 are designed to function on the same basic principle. Modern money, however, is different.\u00a0Most currencies ditched the gold standard after the US jumped ship in 1971 but these worthless bits of paper, aka \u2018fiat money,\u2019 are still pretty good at being money.<\/p>\n

But how can this value-less money work?<\/p>\n

The State Theory of Money
\n<\/em><\/h2>\n

After observing banknotes\u2019 relation to reserves, Georg Friedrich Knapp proposed that money\u2019s value did not result from any intrinsic value in metals but from the state\u2019s ability to impose taxes. While the idea that money\u2019s value comes from intrinsic value in its material seems to be common sense,\u00a0it simply never added up to the observable reality<\/em>\u00a0and the\u00a0state theory of money<\/strong><\/a>\u00a0is able to explain why. Metal has intrinsic value on its own, of course \u2014 but this value isn\u2019t worth a lot if your taxes must be paid in a different currency and that means the state has the last word about value inside its borders. If the state only accepts taxes in Roman coinage, having tons of gold or Swiss Francs is irrelevant because the options are (A) buy the state\u2019s money, (B) move away, or (C) spark a protracted people\u2019s war to topple the regime so you can change its legal tender.<\/p>\n

The power to issue money has pretty much always been an exclusive privilege of the state and\u00a0coins were frequently produced to fund the armies<\/strong><\/a>\u00a0needed to expand a state\u2019s borders \u2014 \u2018money is power,\u2019 as they say. Imperialist states routinely banned coins minted in conquered territories and imposed taxes that could only be paid in imperial coin.\u00a0To Rome<\/strong><\/a>, for example, imposing taxes in its territories meant more coin to pay more armies to conquer more people to loot treasuries to mint more coins and gain more territories to tax and so on\u00a0ad infinitum<\/em>.<\/p>\n

Modern Monetary Systems &\u00a0MMT<\/h2>\n

Under today\u2019s capitalist systems, money plays a larger role in human societies than ever but this greater intimacy with money\u2019s form is contradicted by broad uncertainty about its substance and how it works overall. On a daily basis, nearly everyone handles fiat money and, despite knowing it literally has no intrinsic value, it is accepted as if it were gold itself, which it clearly is not. The root of the confusion, however, is not that fiat is treated like gold but that we expect it to behave like gold \u2014\u00a0but modern money isn\u2019t gold.<\/em><\/p>\n

And modern monetary systems do not function in the same way that metal trinkets and reserve-backed currencies do.<\/p>\n

How Modern Money Works<\/em><\/strong><\/h3>\n

The first thing to understand is\u00a0monetary sovereignty<\/em><\/strong><\/a>\u00a0\u2014 a nation is monetarily sovereign if it has exclusive and unlimited authority to issue its currency. Since fiat money issued by a monetarily sovereign state isn\u2019t fixed to the value of anything else, its government cannot run out of money because it creates money from nothing by spending it into circulation. Full stop. This does not mean the government\u00a0should<\/em>\u00a0spend infinite amounts of its money \u2014\u00a0but it technically can<\/em>.<\/p>\n

\"#LearnMMT,<\/a>Just as modern money is created from nothing by spending it into circulation, money is destroyed through taxation. The \u2018taxpayer dollar\u2019 funds nothing \u2014 it is deleted from the money supply, nothing more.\u00a0Taxes do not fund spending<\/em>\u00a0because it is impossible for a monetarily sovereign government to need its citizens\u2019 fiat paper to alter numbers in a spreadsheet.\u00a0Taxation\u2019s most important function is to generate a base-level of demand for the currency by ensuring those who benefit from participating in the nation\u2019s economic production or commerce must also use some of its currency. Since taxation removes currency from circulation, taxation is also a lever to fine-tune inflation.<\/p>\n

Why Balancing the Budget Is a Silly Idea<\/strong><\/em><\/h3>\n
\"Modern<\/a>
Note: the + end also includes positive trade balance and private debt, while the \u2013 end also includes gov\u2019t debt securities<\/figcaption><\/figure>\n

Spending creates money and taxation destroys it, then spending creates it again. Modern money is like a circuit \u2014 money is spent into circulation and taxed back out. A balanced budget means that the amounts entering and exiting are equal. Deficit spending \u2014 more money being spent than being taxed \u2014 means the non-government, aka the people at large, must gain wealth. A surplus \u2014 more money being taxed than spent \u2014 means the people at large must lose wealth. If the goal is to create jobs, increase the production of economic value, or develop resources, then a budget surplus is clearly the worst strategy possible and even a balanced budget is unhelpful at best.<\/p>\n

Spending deficits are equal to the people\u2019s surplus<\/em>.<\/p>\n

\"Spending<\/a><\/p>\n

MODERN MONEY VS. DEBASEMENT & DEVALUATION<\/strong><\/em><\/h4>\n

If a government issues commodity-money, such as gold coins or notes backed by gold, then an increase in quantity by mint or by print will result debasement or devaluation unless more gold is added. In that case, the government has to either produce or borrow gold or impose new taxes to siphon some money back to its treasury before it can spend without devaluing or debasing it. But modern money \u2014 currency issued at a flexible exchange-rate by a monetarily sovereign government \u2014 is not the same thing as commodity money. Devaluation happens if a currency\u2019s fixed exchange-rate (its relation to gold or whatever) is lowered by issuing too much of it \u2014 but modern money\u00a0isn\u2019t fixed to gold or anything else<\/em>.<\/p>\n

Spending Modern Money & Inflation<\/strong><\/em><\/h3>\n

Inflation happens to prices, not money, and it is caused by markets, not by money. Whether the money is gold or paper, if the total that people are spending is more than the total goods and services available to buy, the result is inflation and it happens because demand is greater than what is available. Whatever the currency, spending more money than production can handle will inflate market-prices.<\/p>\n

SPENDING IS ULTIMATELY RESTRAINED ONLY
\nBY THE IDLE LABOR & RESOURCES AVAILABLE<\/em><\/h4>\n

If a government continuously spent money into the system without doing anything else, it would result in inflation because the total economic value in the system is unchanged but with a higher total buying power. One of the cool things about money, however, is that it can convince people to do and make things and it is also able to buy materials and tools that people do and make things\u00a0with<\/em>. That means, if idle labor and resources are available, money can be spent without much inflation so long as spending activates that idle labor and resources to add economic value to the society.<\/p>\n

In other words, there is no reason to fear deficit spending if that spending employs people who were jobless or provides capital to workers to employ themselves with develop its value because, when money\u00a0and value are added simultaneously, inflation does not result. Public infrastructure projects, universal healthcare, a workers\u2019 self-managed jobs guarantee, and tuition free public universities \u2014 programs like these could be tomorrow\u2019s reality.<\/p>\n

Knowledge, Not Money, Is Power<\/u><\/b><\/h3>\n

\"Ancient<\/a>Ancient thinkers developed a cosmological model called the Ptolemaic Model \u2014 it envisioned earth as the center of a series of nested, interlocking spheres that rotated the sun, stars, and planets across the sky and [spoiler alert<\/em>] it turned out to be incorrect. Despite being wrong, the model is still a solid way to calculate seasons, motion, speed, and position of planets, and when constellations appear \u2014 but new models emerged that did all that\u00a0and more<\/em>. Those models took humanity to the moon, not because it was impossible before, but because the old model could not account for its possibility.<\/p>\n

The way that we are taught to understand money is rooted in an outdated model that developed when virtually all money was metal and this model cannot account for the reality of money today. Money is not gold. The truth is \u2014 and always was \u2014 that money is a way to distribute access to the actual value of real goods and services and the material forces and resources used to produce them. The fact that the state accepts taxes in fiat paper and enforces its status as legal tender is enough to establish it as the society\u2019s medium of exchange, despite its intrinsic valuelessness. In fact, this worthlessness is what makes modern money more useful than gold ever was \u2014 money can be as abundant as the people need it to be but gold cannot reflect that.<\/p>\n

Most of the time, it has been true that \u2018money is power\u2019 but no inanimate object has power until people give it power and forget they did. And knowing that takes its power away and returns it to its original treasury, which is where real power is.<\/p>\n

In solidarity,
\nJohn Laurits<\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

February 18, 2018 (johnlaurits.com) Modern money is a strange thing. To most of us, money appears as something continuously given to landlords and businesses to secure a place to live, food to eat, and all the little parts to make that thing called \u201ca living.\u201d Since a living is made… Continue reading → <\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/7852"}],"collection":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/comments?post=7852"}],"version-history":[{"count":2,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/7852\/revisions"}],"predecessor-version":[{"id":7854,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/7852\/revisions\/7854"}],"wp:attachment":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/media?parent=7852"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/categories?post=7852"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/tags?post=7852"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}