money: store of value / unit of account / medium of exchange

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pages: 275 words: 84,980

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives) by David Birch

agricultural Revolution, Airbnb, bank run, banks create money, bitcoin, blockchain, Bretton Woods, British Empire, Broken windows theory, Burning Man, capital controls, cashless society, Clayton Christensen, clockwork universe, creative destruction, credit crunch, cross-subsidies, crowdsourcing, cryptocurrency, David Graeber, dematerialisation, Diane Coyle, distributed ledger, double entry bookkeeping, ethereum blockchain, facts on the ground, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, index card, informal economy, Internet of things, invention of the printing press, invention of the telegraph, invention of the telephone, invisible hand, Irish bank strikes, Isaac Newton, Jane Jacobs, Kenneth Rogoff, knowledge economy, Kuwabatake Sanjuro: assassination market, large denomination, M-Pesa, market clearing, market fundamentalism, Marshall McLuhan, Martin Wolf, mobile money, money: store of value / unit of account / medium of exchange, new economy, Northern Rock, Pingit, prediction markets, price stability, QR code, quantitative easing, railway mania, Ralph Waldo Emerson, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social graph, special drawing rights, technoutopianism, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, wage slave, Washington Consensus, wikimedia commons

There are hundreds of good books about the history of money and I have no intention of attempting to compete with them, or even summarize them here, but I do want to draw out a specific thread around the historical impact of technology on money, and that is about the way in which technology allows for the ‘moneyfication’ of debt (Graeber 2011a), converting a store of value into a mechanism for deferred payment and then a medium of exchange that can in turn become a unit of account. Moneyfication is a horrible word, but I hope you will come to see why I use it to start the story of money’s past. The functions of money The usual place to begin in an examination of the impact of technology on something – and I am nothing if not conservative in this respect – is to consider what that thing does. What does money do? Since a great deal of the discussion about money is confused because of a lack of understanding about the nature of money, let me begin by being clear on this topic. As most texts about money begin by stating, money has four basic functions. It is a unit of account. The unit of account does not, of course, have to have any physical reality.

Brazil’s transition from the cruzeiro to the real began by establishing ‘units of real value’ as market-based units of account, and gradually adding other functions as the currency moved to have status as a legal tender. It is an acceptable medium of exchange. Whether it is packets of data or packets of Marlboro, money is useless as a medium of exchange unless it is acceptable to both parties to a transaction. It is a store of value. Unfortunately, inflation can erode the value of stored money no matter what medium is chosen! It is a means for deferred payment. For a society to function, it must support contracts between parties that include provision for future payment even when the store of value is subject to inflation or other changes. Each of these functions may be implemented in a different way.

Evans goes on to make an interesting comment that I think illustrates a very fundamental point about the interplay between technology and money, identifying a line of thought that the historical functions of money – medium of exchange, store of value, unit of account and measure of value – can be separated and that each function can be performed by different means. This defines my thinking too. One of the first things I ever wrote for a client on the topic of electronic money, a couple of decades ago, included the observation that technology would allow us to separate these functions from one another and implement each in a different way – another example of the ‘back to the future’ dynamic of a more interconnected world. While we might therefore find it odd to use London Loot as a medium of exchange and Islamic e-Gold as a store of value and US dollars as a mechanism for deferred payment, our phones will not. To return to Mervyn King’s point about money being a ‘particular historical institution’ (King 2016b), there is no reason why money should continue to work the way it does in response to continuing technological change, and no reasonable person would expect it to.

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

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3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, happiness index / gross national happiness, job satisfaction, liberation theology, Marshall McLuhan, microcredit, mobile money, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

THE MISSING PIECE Though each respective school of economics and its thought leaders differ in fundamental ways on a broad range of economic issues, they do share a common oversight— each fails to look at money itself. This blind spot is not a mere coincidence but, rather, endemic to the discipline. Economics textbooks, for example, define money by what it does, as discussed earlier—a store of value, a medium of exchange, a unit of account—rather than what it is. More important, never questioned is the assumption that the same monetary tool is needed to play all three roles. This disregards the fact that some of these roles may operate at cross-purposes. For example, a medium of exchange functions optimally when it is available and circulates, but a store of value can result in a currency’s effective removal from circulation. Traditional economics has never decoupled monetary architecture into its constituent parts. To do so would give rise to a very different reality, as will be shown.

Humanity exists in an unrelenting flurry of monetary transactions that seem as natural and inscrutable to us as how one might imagine a fish to understand its aqueous environment—it’s taken totally for granted. In the case of money, its 1 2 INTRODUCTION dynamics and distinctions are obfuscated or forgotten over time, and further complicated by the fact that the professionals in the field, economists, never actually define what money is; they just describe what it does: how it plays the role of a unit of account, a store of value, a medium of exchange. At present, our unexamined money system perpetuates scarcity and breeds competition. Are you aware that money is created out of nothing, as bank debt? And how that particular process of creation breeds systematic competition among its users? Did you know that the prevailing money system generates several other harmful consequences, including short-termism, compulsory growth pressure, cyclical recessions, unrelenting concentration of wealth, and erosion of social and physical or natural capital?

These currencies are used automatically, as a means of entering into an assumed and unspoken contract. There is, however, a broader context of what money is, as money can be found outside the narrow parameters of legal tender. As shown earlier, contemporary national currencies are all interest-bearing fiat currencies, debt based, created through the fractional banking system. They are designed to facilitate transactions (i.e., as a medium of exchange), used both as units of account and as savings (i.e., as temporary stores of value), and are particularly well adapted for business and industrial applications and settings. As already seen, the use of interest, especially compound interest, has very precise outcomes that do not necessarily benefit society at large. However, money can also be architected in other ways. There are thousands of new monetary pacts operating within communities in the United States and beyond that are not conducted solely with legal tender, leading to some very different outcomes.

The Future of Money by Bernard Lietaer

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agricultural Revolution, banks create money, barriers to entry, Bretton Woods, clean water, complexity theory, corporate raider, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, Lao Tzu, Mahatma Gandhi, means of production, microcredit, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, reserve currency, Ronald Reagan, seigniorage, Silicon Valley, South Sea Bubble, The Future of Employment, the market place, the payments system, trade route, transaction costs, trickle-down economics, working poor

What is proposed is simply transferring these existing costs to the bearer of the Terra, thereby giving them the useful social function of a sustainability fee. Economic tech talk Economic textbooks define money in terms of its functions, me three most important of which are: Standard of Value, Medium of Exchange and Store of Value (definitions in Appendix A). Since 1971, there has been no international standard of value in this sense, a GAC simply restores that function far those who choose to use it as a contractual currency. The role of medium of exchange would be played by either the GRC or conventional national currencies at the choice of me parties - just as today's decision of which national currency is to be used for an international payment. Finally, the store of value function would not be played by the GRC. It could be played by instruments in conventional national currencies, or by new specialised financial products which would create liquidity, from investments in productive assets.

APPENDIX A Other functions of money The functions of today's money system - other than as a medium of exchange or payment - are recalled here to complete the descriptions of the Primer and Chapter 2. National currencies today fulfil functions in addition to the one of medium of exchange. The most important of these other functions are a standard of measure, a store of value, an instrument for speculation, and in some cases a tool of empire. Standard of Measure: The value of the proverbial apples and oranges can be compared by expressing each of them in the same standard, typically dollars for Americans, euros for Europeans, etc. Historically, many cultures have had standards of measure different from the medium of exchange. For instance, one important unit of measure in ancient Europe used to be cattle Homer (8th century BC) would invariably express values in oxen for example.

For instance, one important unit of measure in ancient Europe used to be cattle Homer (8th century BC) would invariably express values in oxen for example. However, payments were often made in a more practical medium of exchange such as bronze artefacts, gold or silver bars and later coins. Store of Value: Currency was not the preferred store of value in most civilisations. For example, the word capital derives from the Latin capus, capitis, which means head. This referred to heads of cattle just as in Homer, and still happens today in Texas or among the Watutsi in Africa -'He is worth one thousand head'. In the Western world, from Egyptian times through the Middle Ages and until the late 18th century, wealth was stored mainly in land and its improvements (irrigation’s, plantations, etc.). Instrument of Speculation: Most economic textbooks will not mention instrument of speculation as a function of today's money.


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

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Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, liquidity trap, lump of labour, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

But just because no one can form reserves of money, no reserves are needed. For the circulation of money is regular and uninterrupted. —Silvio Gesell The equivalent in modern economics of “universal means” and “universal end” are “medium of exchange” and “store of value.” One way to understand the effect of negative interest is that it splits these two functions. This is a profound shift. Most economists consider medium of exchange and store of value to be defining functions of money. But combining these two functions into a single object begs trouble because a medium of exchange needs to circulate to be useful, while a store of value is kept (stored) away from circulation. This contradiction has, for centuries or more, created a tension between the wealth of the individual and the wealth of society. The tension between the wealth of the individual and the wealth of society reflects the atomistic conception of the self that has risen to dominance in our time.

That is why, when a crisis of money strikes, it seems that the fabric of reality is unraveling, too—that the very world is falling apart. Yet this is also cause for great optimism, because money is a social construction that we have the power to change. What new kinds of perceptions, and what new kinds of collective actions, would accompany a new kind of money? Here we are on Chapter 3, and I have not even defined “money” yet! Most economists define money by its functions, such as medium of exchange, unit of account, and store of value. Accordingly, they put a very early date on the origin of money, perhaps five thousand years ago with the emergence of standard commodities such as grain, oil, cattle, or gold that served these functions. But when I speak of money, I am talking about something quite different, something that first appeared in Greece in the seventh century BCE. That was arguably the first time that money transcended mere commodity to become a distinct category of being.

The only thing that has changed is our perceptions. We can therefore see the bailouts, quantitative easing, and the other financial measures to save the economy as further exercises in perception management, but on a deeper, less conscious level. Because what is money, anyway? Money is merely a social agreement, a story that assigns meaning and roles. The classical definition of money—a medium of exchange, a store of value, a unit of account—describes what money does, but not what it is. Physically, it is now next to nothing. Socially, it is next to everything: the primary agent for the coordination of human activity and the focusing of collective human intention. The government’s deployment of trillions of dollars in money is little different from its earlier deployment of empty words. Both are nothing but the manipulation of various types of symbols, and both have failed for an identical reason: the story they are trying to perpetuate has run its course.


pages: 275 words: 77,017

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society by David Wolman

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Bay Area Rapid Transit, Berlin Wall, Bernie Madoff, bitcoin, Bretton Woods, carbon footprint, cashless society, central bank independence, collateralized debt obligation, corporate social responsibility, credit crunch, cross-subsidies, Diane Coyle, fiat currency, financial innovation, floating exchange rates, German hyperinflation, greed is good, Isaac Newton, M-Pesa, Mahatma Gandhi, mental accounting, mobile money, money: store of value / unit of account / medium of exchange, offshore financial centre, Peter Thiel, place-making, placebo effect, Ponzi scheme, Ronald Reagan, seigniorage, Silicon Valley, special drawing rights, Steven Levy, the payments system, transaction costs

But cash we think we know. It’s real, at least real enough that you can hold it, smell it, and want to wash your hands after handling it. Paper notes and metal coins are the treasures of our childhoods, tucked under pillows by tooth fairies, delivered in secret by doting grannies, and stashed safely in colorful lock boxes as we saved up for a new toy. Despite money’s dull textbook definition—medium of exchange, unit of account, store of value, and method of deferred payment—it is by way of cash that we first come to have any understanding of or relationship to this civilization-powering invention. When the word money reaches the ears, even Wall Streeters who hawk collateralized debt obligations will, at some level, picture a pile of Benjamins. (The language of money, by the way, is easily garbled. You may stop at the ATM to get some cash, but when you read in the Wall Street Journal that Intel or Boeing has a lot of cash, that obviously doesn’t mean physical notes and coins.

Over the past few decades, Norway, Denmark, and Sweden eliminated all coins of value less than fifty øre (like fifty cents), and last year, Sweden’s fifty øre was the latest to get the axe. It’s an odd thing: killing money to save money. But that’s exactly what’s happening. Pennies, nickels, and dimes can barely be described as money anymore. Legally they are, sure, but they don’t exactly circulate. A store of value? Practically nil. Medium of exchange? Only if you have a boatload of them, which won’t exactly endear you to whomever you’re transacting with. A unit of account? Technically, but I don’t know anyone who uses the hundredths place in his mental accounting. Marketing types will be quick to tell you that consumers treat $2.99 differently from $3.00, but that’s because of the hypnotic power of the left digit. No one cares about the right one anymore. It’s no wonder then that people so willingly pay the usurious 8.9 percent fee to use one of Coinstar’s 20,000 kiosks to convert unwieldy jarfuls of metal into paper money.14 In the United States, the question of killing at least the penny and nickel surfaces whenever the price of metals spikes.

“It requires more talent to sign another man’s name than one’s own and the counterfeiter does at least his work in the dark, while the suspenders of specie payments brazen in the face of day, and laugh at the victims and dupes, who have put faith in their promises.”19 Back then, of course, there wasn’t a single clearly defined national currency. Yet today’s efforts to defend against counterfeiters are vestiges of bygone eras of confusions about banknotes’ authenticity and suspicion about the alchemy of money creation. Through this prism, Kim Jong Il is merely adding a few million drops into the ocean that is the money supply. Depending on how finely you slice it, supernotes are real money—medium of exchange, store of value, unit of account, and so on. Illicit, sure, and they do hurt the Little Guy if he accepts one and then loses money because of it. But they can be traded for goods and services. The only thing that neutralizes the value of confiscated supernotes is that they’re stuck in a filing cabinet somewhere at the headquarters of the U.S. Secret Service. Wander down this alley far enough, and you’ll eventually bump into two questions that share an answer: What is real?


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

To sum up: money is no longer gold, or silver, or indeed anything that has any intrinsic value. Nor indeed, with the exception of dictatorships like North Korea, is it necessarily what the government claims it to be. Money is a medium of exchange and a store of value. In its former role, money is almost infinitely flexible; it is simply the form of payment that someone will accept for goods and services. Air miles are a good example. They are not accounted for in any of the central bank definitions of money supply. But as they can be exchanged for a flight, they certainly qualify as a medium of exchange. If there is not enough official money to go round, but people want to trade, new forms of money will be invented; cigarettes and petrol in times of war, ration books in years of austerity, and so on. An analogous process occurs in the financial sector; if there is a demand for financial assets, new ones will be invented, as with all those complex products created during the sub-prime housing boom.

Two of these monetary roles – the means of exchange and the store of value – lie at the heart of the struggle between creditors and debtors. Treat money mainly as a means of exchange and it seems obvious that we should want more of it. The more exchange (trade) we have, the wealthier we get. ‘Bank notes are simply the small change of credit,’ said one nineteenth-century observer. ‘If you lend to borrowers with good credit, then the money will return to the bank when it is repaid.’9 But treat money as a store of value, and we want to restrict its supply. Indeed, part of the reason for the enduring appeal of precious metals as money is that there is so little of them to go around. If money is simply created at will, it eventually becomes worthless. And, of course, if it is worthless, it loses all value as both a unit of account and medium of exchange.

Not wishing to end up with unwanted Icelandic krona, I took along some euros in the hope they would be accepted for cash deals (buying coffees, newspapers and the like). Shopkeepers would indeed accept the euros, but they would return krona, not euro, coins as change. The euro had a ‘real’ value, which made them want to hoard it. The krona they were happy to get rid of. In other words, the krona was acceptable as a medium of exchange but the euro was seen as the store of value. The idea that precious metals were the only real wealth led to the doctrine of mercantilism, an economic policy followed by states in the late Middle Ages and early modern period. Governments were determined to hang on to as much money as possible, by prohibiting the export of precious metals, and by promoting exports and prohibiting imports. The flaws in this strategy, a precursor of protectionism, are many and varied.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

We’ll also see that those two things are essential for the creation of true money, defined as a single instrument that simultaneously functions as a medium of exchange, a store of value, and a numeraire or standard of value. Economists tend to emphasize the first two but we had token money and commodity money as mediums of exchange, and bulk metal as a store of value, for thousands of years before true money added the numeraire function and caused an explosion in value creation. We have many things that function as partial money today, credit cards as mediums of exchange, financial securities as stores of value, special drawing rights (a unit of account for transactions between central banks that is defined by reference to a basket of currencies) and consumer price indexes (a unit of account used by economists that is defined by reference to a basket of goods) as numeraires; but the forms of money that stimulate the economy are those that equate constraints and goals of important risk-taking activities.

We witnessed uncontrollable inflation and hyperinflation. Tax laws were complex and changed frequently, and the marginal rates were often very high. Governments were imposing wage and price controls and rationing many commodities—or forbidding buying or selling altogether. There were alternative currencies and abstract numeraires (a numeraire is a unit of account that assigns relative values to a set of items without necessarily being a medium of exchange or a store of value; an example is inflation-adjusted dollars), of course, but none were perfect. Therefore, we rejected the idea of a fully defined probability distribution that covered all possible future events. Our probability distributions might cover 95 percent or 99 percent of possible events, but would leave 5 percent or 1 percent as undefined outcomes, states of the world in which money was worthless, or in which outcomes were dominated by considerations that could not be priced.

The variety of products available in derivatives, and the population of traders, is growing very rapidly and even expanding into retail transactions. Derivatives are the medium of exchange that drives the economy now, and will to an increasing extent in the future. The next function of money is to be a store of value. This has to do with the role of money in between clearing transactions, while it is circulating. There are three reasons to hold money. The first is for transactional convenience, which relates to money’s function as a medium of exchange. The second reason is for hedging. You don’t know what the future will bring, so you want your wealth in a form you can convert into whatever you need. The last reason is for speculation. You think the money will buy more in the future than in the present. Precious metal money is an expensive way to get a store of value, since you actually have to lock up the value.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, distributed ledger, Edward Snowden, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

THE BIRTH OF PAPER CURRENCY IN CHINA For all its flaws, including ones that Goethe highlighted in Faust, there are very good reasons why, over the years, paper money has mopped the floor with its competitors all over the world. Paper money delivers portability, homogeneity, security, durability, and convenience. It serves perfectly well as a unit of account and a medium of exchange, and during periods of low inflation, it also serves well as a store of value. The story of how money developed in China holds some interesting lessons, which we draw on later in chapter 7. There I argue that as paper currency is gradually phased out, eventually even the remaining small notes should be replaced with moderately substantial coins, to make it even more difficult to carry large quantities of currency. The Chinese appear to have developed coinage independently of Western civilization, though there is naturally a debate over who came first.

The answer is certainly yes, Bitcoin (or perhaps one of its present or future competitors) can fulfill many of the basic functions of currency, including unit of account and medium of exchange, with or without government adherence.3 In fact, digital currencies in some ways offer the capacity for much more complex kinds of transactions and contracts than traditional paper currency offers, precisely because the former embed so much information, including the history of transactions. Already, markets are forming to exploit this capacity, for example, in applications surrounding Ethereum.4 That distributed-ledger technology could in theory someday produce a superior currency, however, hardly means that the world is already there in practice. One problem is that the value of Bitcoin 1.0 fluctuates wildly (figure 14.1), so it hardly fulfills the function of a stable store of value. In principle, it could become more stable if it gained more widespread monetary acceptance.

Of course, a great deal of illegal trade involves the exchange of dollar notes, but legal trade can as well. In some developing countries, for example, the banking system is so weak that it is difficult to procure the kind of short-term credits that are the lifeblood of global trade, so instead deals often take place in cash.12 In countries with a large underground economy (tax evading or otherwise criminal), the dollar is used both as medium of exchange and as a store of value. Measurement of these phenomena, however, is fraught with difficulty. It is extremely hard to say with any great precision how much paper currency leaks out of the United States unofficially, or conversely, what percentage of currency the Federal Reserve ships abroad subsequently crosses back into the United States undetected. True, most countries require international travelers to report large amounts of currency entering or leaving the country.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

“Gold and silver are acceptable by law only because they are acceptable in practice; and they are acceptable in practice because the present organization of production needs a universal medium of exchange” (Marx 2005b: 63). Marx also disagrees with the argument that money evolved simply through barter. Exchanges mediated by money (commodity–money–commodity, or C–M–C) are different in kind from those involving barter (commodity–commodity, or C–C); indeed, this difference explains money’s function as a store of value and also explains the destabilizing effect of hoarding. In other words, money is not only, and not primarily, a medium of exchange. It is by virtue of fundamental differences between barter exchange and money that the acquisition of money (as opposed to any other commodity) can become an end in itself.

Credit money, as we have seen, “springs” from this. But for Marx, credit money is not money; or rather, it answers only one requirement of money. Hence the proliferation of monies in modern capitalism—commodities, paper, coins, and various forms of credit, derivatives, collateralized debt obligations, and so on—has been driven by the attempt to reconcile the desire for a quality store of value with the requirement for a frictionless medium of exchange. Periodically, fixity inevitably comes into conflict with flow. There are two important points to be taken out of this discussion of Marx’s theory of money and credit. The first point concerns the connection between money and the real economy. Marx insists that though money does not act as the sole cause of capitalism’s major contradictions, it does play a unique role in their reproduction, serving initially to neutralize and disguise them by appearing to operate independently, and subsequently to exacerbate them during periodic episodes of overaccumulation.

Contrary to monetary theorists such as Ingham and Wray who maintain that these different forms of money are essentially part of the same generic monetary system—defined by the unit of account that a government declares it will accept in payment of taxes—Douthwaite insists that these are distinct monetary forms that meet different needs and therefore fulfill different social functions. He identifies four such needs in particular (Douthwaite 2000: ch. 4): first, an international currency is required that can play the role that used to be performed by gold; second, there is a need for a national or regional currency that is related to the international currency; third, localized monies are required, which are voluntarily created by their users to mobilize resources left untapped by national or regional systems (these are like Zelizer’s circuits of commerce); and fourth, a secure long-term store of value is needed by those who want to hold their savings in a liquid form.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

Most people respond that a dollar is money, something they make, spend, or save. That raises another question: What is money? Experts recite the three-part definition of money as a medium of exchange, a store of value, and a unit of account. The unit of account part of the definition is useful but almost trivial. Bottle caps can be a unit of account; so can knots on a string. A unit of account is merely a way of adding or subtracting perceived value. Medium of exchange also refers indirectly to value, since each party to an exchange must perceive value in the unit being exchanged for goods or services. Two of the three parts of the definition implicitly reference value. The entire standard definition can thus be collapsed into the one remaining part, the store of value. If, then, money is value, what is value? At this point, the analysis becomes philosophical and moral.

Its annual report contains the following disclosures: The SDR may be allocated by the IMF, as a supplement to existing reserve assets. . . . Its value as a reserve asset derives from the commitments of participants to hold and accept SDRs. . . . The SDR is also used by a number of international and regional organizations as a unit of account. . . . Participants and prescribed holders can use and receive SDRs in transactions . . . among themselves. As money is classically defined as having three essential qualities—store of value, unit of account, and medium of exchange—this disclosure clinches the case for the SDR as money. The IMF itself says the SDR has value, is a unit of account, and can be used as a medium of exchange in transactions among designated holders. The three-part money definition is satisfied in full. The amount of SDRs in circulation is minuscule compared to national and regional currencies such as the dollar and euro.

U.S. financial sanctions aimed at Syria caused the Syrian pound to lose 66 percent of its value in the twelve months from July 2012 to July 2013. Inflation in Syria spiked to an annual rate of 200 percent as a result. The Syrian government was forced to conduct business in the currencies of its three principal allies—Iranian rials, Russian rubles, and Chinese yuan—because the Syrian pound had practically ceased to function as a medium of exchange. By late 2013, the financial damage in Iran led to an agreement between President Obama and Iranian president Hassan Rouhani, which eased U.S. financial attacks in exchange for Iranian concessions on its uranium enrichment programs. Iran had suffered from the sanctions, but it had not collapsed, and now it had met the United States at the negotiating table. In particular, sanctions on gold purchases by Iran were removed, enabling Iran to stockpile gold using the dollar proceeds from oil sales.


pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

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3D printing, Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cryptocurrency, David Graeber, disintermediation, Edward Snowden, Elon Musk, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, underbanked, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

The first step will be for them to be accepted widely as viable money; that is, to become trusted themselves as a means of expanding exchange and prosperity. One familiar benchmark says that for a currency to become money it must function as a medium of exchange, a unit of account, and a store of value. Dollars can be used to buy things all around the world; they are used to measure the value of pretty much anything; and most, if not all, people believe their savings will be more or less protected over time if they are denominated in dollars. While bitcoin is currently used as a medium of exchange by various people to buy and sell things, few use it as a unit of account. Merchants that accept bitcoins invariably list their products’ prices in the national currency of the country in which they are based. As for a store of value, the speculators who’ve bought bitcoin in the hope of future gains certainly believe it has this feature, but for most people its volatility precludes it.

Having said that, let’s start with the two scenarios alluded to in that same question—whether bitcoin gets to dominate the world or joins Betamax on the trash heap of history. From there we’ll go on to look at possibilities in between those two contradictory conclusions as well as some completely different tangents on which cryptocurrency could take society. The “No” Case Money has three broad characteristics: it’s a unit of account, a medium of exchange, and a store of value. For bitcoin, or any cryptocurrency, to achieve all three, that whole concept is going to need broad-based support—if not from consumers then from businesses that will use the technology to cut costs. It may fail to earn that support even if the product is technically solid. To this day, you can find people who will explain why the Betamax videocassette recorder was technically a better product than the VHS.

Until we live in a bitcoin-based economy, where the digital currency is the unit of account in which prices are quoted, this exchange-rate fluctuation will be unavoidable in everyday life for bitcoin-using payers and payees. Let’s compare the average U.S. price of a gallon of gasoline in dollars to that of bitcoin over the seven-month period between September 2013 and the end of March 2014. In the first three months of that period you would have seen your gas bill plunge 90 percent, only to see it jump by 50 percent over the following four months. By contrast, the price of gasoline dropped and rose by no more than 12 percent in dollar terms over the same period. Extrapolating from the three-part textbook definition of “money” that we referenced in chapter 2, a currency must exhibit price stability if it is to function properly as a medium of exchange—in addition to proving itself a reliable store of value and an accepted unit of account.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

There are, therefore, no further transactions once life starts. Everything has been settled during the initial auction, and all people have to do is to deliver the services, such as employment, for which they have contracted and take delivery of the goods and services that they purchased in the auction. There is no need for something called money to act as either a medium of exchange (the ‘double coincidence of wants’ problem is circumvented by the auction), a store of value (there is no requirement for a reserve of savings), or indeed an absolute standard of value (consumers bidding in the auction need only know the relative prices of different goods and services, including labour). Money has no place in an economy with the grand auction. Central to the Arrow–Debreu view of the world is a special way of dealing with uncertainty about the future.

Radical uncertainty means, however, that there will always be a demand for liquidity as a reserve of future purchasing power, and the ultimate source of liquidity is the central bank. Moreover, there is one additional role for a public body that it makes sense to give to the central bank – the regulation of the unit of account. Even if money disappears as a means of payment, we will always need a stable unit of account to price goods and services.41 There is an enormous advantage in all of us agreeing to use the same unit of account determined centrally rather than allowing a profusion of different monies. We rely on weights and measures inspectors to ensure that retailers who use yards (or metres) and pounds (or kilograms) as the units of length and weight define them in exactly the same way. It would be a great inconvenience if what was meant by a ‘yard’ was different in New York than in San Francisco or London.

Network externalities make it difficult for competing currencies to emerge.44 A single unit of account requires collective decisions as to the definition and management of that unit. Unlike measures of length and weight, where a physical definition is determined and monitored by inspectors of weights and measures, the value of money requires a degree of discretionary management to avoid the costs of excessive volatility in output and employment. It is pre-eminently a task for a central bank given a mandate to meet an inflation target over the long term, as explored in Chapter 5. Whatever happens to money as a way of buying ‘stuff’, it will always have a future as the only true form of liquidity. There will always be a demand for the liabilities of the central bank and for a stable unit of account. And so central banks will retain their ability to set interest rates and the size of their balance sheet.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

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asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

They should have included all dollar-denominated credit instruments in their definition of money. Or, put differently, they should have replaced money with credit in the equation of exchange, because by the 1980s there was less and less difference between the two. Now there is essentially none. Money, it is said, must meet three criteria. It must be (1) a medium of exchange, (2) a store of value, and (3) a unit of account. And, in order to serve as a medium of exchange, money needs to be liquid, or in other words, easily accessible and transferable. Before 1968, there was a clear difference between money and credit. Until then, dollars were backed by gold, so the dollars in circulation represented a claim on a commodity with intrinsic value. Credit, by contrast, was merely an obligation to repay a certain amount of money.

Today, if a person attempts to redeem a dollar by presenting it to the Treasury Department, the government has no obligation to give that person anything other than another dollar. Dollars now, therefore, are simply credit instruments that do not pay interest. Meanwhile, because of financial innovation, credit has become more like money. Most credit instruments have long met the three criteria that define money. They can serve as a medium of exchange, they are a store of value, and they are a unit of account. In the past, however, they were not liquid. Now they are. The repo market makes them liquid. The repurchase market allows the owner of any credit instrument to obtain cash immediately by agreeing to repurchase that asset at a specified date in the future. Treasury bonds, municipal bonds, corporate bonds, GSE debt, and asset-backed securities are all now completely liquid.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

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Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, labour mobility, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

After all, individual citizens can’t obtain them, and if you walk into a liquor store and try paying for a few bottles of wine with SDRs, you will not get very far. However, SDRs do satisfy the traditional definition of money in many respects. SDRs are a store of value because nations maintain part of their reserves in SDR-denominated assets. They are a medium of exchange because nations that run trade deficits or surpluses can settle their local currency trade balances with other nations in SDR-denominated instruments. Finally, SDRs are a unit of account because the IMF keeps its books and records, its assets and liabilities in SDR units. What is different about SDRs is that citizens and corporations in private transactions cannot yet use them. But plans are already afoot inside the IMF to create just such a private market.

This interim plan would stop the immediate crash in the Treasury bond market by freezing most holders in place and mandating future purchases by the banks. It would not offer a permanent solution and would at most buy a few weeks’ time within which to develop more lasting solutions. At this point policy makers would recognize that the paper dollar as currently understood had outlived its usefulness. Its claim to be a store of value had collapsed due to a total lack of trust and confidence, and as a result its other functions as a medium of exchange and unit of account have evaporated. A new currency is now required. More of the same would be unacceptable; therefore, the new currency would certainly have to be gold backed. Now the hidden strength of the U.S. financial position would be revealed. By confiscating foreign official and most private gold on U.S. soil, the Treasury would now possess over seventeen thousand tons of gold, equal to 57 percent of all official gold reserves in the world.

In the first case, shown in Table 1 below, the bands are divided from the lowest critical thresholds to the highest as follows:Table 1: HYPOTHETICAL CRITICAL THRESHOLDS (T) FOR DOLLAR REPUDIATION IN U.S. POPULATION The test case begins by asking what would happen if one hundred people suddenly repudiated the dollar. Repudiation means an individual rejects the dollar’s traditional functions as a medium of exchange, store of value and reliable way to set prices and perform other counting functions. These one hundred people would not willingly hold dollars and would consistently convert any dollars they obtained into hard assets such as precious metals, land, buildings and art. They would not rely on their ability to reconvert these hard assets into dollars in the future and would look only to the intrinsic value of the assets.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

As early as the Shang civilization, China developed a monetary society quite independently, but, in similar fashion to the civilizations of Greece and Rome, money ultimately played an important role in governance and the economy. Chapter 3 described how Mesopotamians used silver as a medium of exchange—they paid taxes in silver, made contracts, and even recorded commodity prices in silver weights. Silver fits most of the classic definitions of money: a medium of exchange, store of value, and standard of worth. However, the cowrie shells in Fu Hao’s tomb are the telltale sign of a step beyond the Mesopotamian money system—away from a medium of exchange with intrinsic value toward a symbolic system of exchange. Chapter 6 noted that the first coins known in the Mediterranean world were electrum pellets minted in Lydia sometime in the sixth century BCE. The first bronze coins in China date from perhaps a century earlier or later, although the question of precisely which came first has not clearly been settled.

While we tend to think of precious metals as “luxury goods” and perhaps dismiss them as prestige items of the upper class, it is the seemingly arbitrary assignment of prestige to silver and gold that rendered them useful as currency. Silver’s particular utility as a currency or unit of account is that it was accepted widely in the ancient Near East as money. Its value was global, not local. It allowed distant cities—even adversaries—to interact economically. Grain was the “coin of the realm” within a household system that produced and distributed subsistence goods locally to its members. In contrast, silver was the medium of exchange that connected Mesopotamian cities with the broader world. The focus of this chapter has been the remarkable institutional development of financial technology in the second millennium BCE. The survival of an immense amount of rich documentary material, some of it in good archaeological context, allows a detailed understanding of Mesopotamia’s financial architecture.

It is a beautiful, malleable metal, but it has little practical use. Yet in Mesopotamia it was borrowed, lent, invested, used in payment, and collected as taxes. The ancient Mesopotamians regarded it as vital as any other good that they consumed or used in manufacture; however, silver’s value was abstract. It was valuable because it was valuable.5 Van De Mieroop argues that silver developed as a unit of value and medium of exchange in Mesopotamia because the political structure up until the late second millennium was fragmented into city-states that had to trade with one another and had to trade externally to obtain key goods. Silver was important because it was a broadly accepted currency beyond the relatively limited borders of the early Near Eastern polities. What is particularly interesting is that, while silver was used as a currency, it often may have played this role in a virtual sense as opposed to a concrete one.


pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

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bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, Lao Tzu, margin call, market bubble, McMansion, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Gathered together in one place, all the gold in the world, all the gold in coins, in teeth, in jewelry, and in works of art, all the gold buried in backyards, in banks, and in government vaults could be consolidated into a cube a mere twenty-two yards on a side. Gold is universally desirable. It is recognized and prized everywhere around the globe and has been for centuries. While salt’s desirability as a medium of exchange declines in places where it is mined or reclaimed, the desirability of gold has nothing to do with location or geography. It is valued as highly in the gold mining areas of South Africa as it is in the financial centers of Europe or the remote jungles of South America. In fact gold’s desirability is so universal that it would be easier to specify those who don’t recognize its unique allure and function.

Robert Mugabe, Zimbabwe’s president, has to keep the paper money flowing to pay off the militias and thugs who keep him in office. The lesson that arms us for the future is this: ultimately the survival of the government and the governing classes (at least in the reckoning of those in charge) trumps the resilience of the economy and the well-being of the people. CHAPTER SIX American Money A Superior Sleight of Hand Government finance and the nation’s medium of exchange have in the future to be two separate things. —Ludwig von Mises The real secret of magic lies in the performance. —David Copperfield Inflation in the United States We have come a long way from the days of old when kings clipped coins as they came through the counting houses, or debased the coinage by diluting its precious metals content with base metals. It is true that this time-worn debauchery of the coinage is still honored today in the clad sandwich coins of the U.S.

Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Von Mises is clear that in “the crack-up boom” a critical mass has been reached in which the monetary authorities, short of collapse, are incapable of containing runaway prices. In a period of rapid inflation, the money loses value faster than its supply has been increased, and gold rises higher than the quantity of money would suggest.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

We will shortly look at each of the four functions described above, showing what happens in the accounts and on the balance sheet, in order to show how the current monetary system works. But first, we need to look at the other key element of the modern banking system – the central bank. Box 2.A - Money: What it is and what it's for What is money for? Textbooks tend to assign money four functions: A store of value: Money should preserve its purchasing power – a unit of currency should be able to purchase the same amount of goods tomorrow as it does today. A medium of exchange: Money is accepted in all circumstances in exchange for goods and services. A unit of account: Money is the yardstick against which all other goods and services are measured. A means of final settlement or payment: Once money has been transferred the transaction between two parties is complete. This is important as it distinguishes money from credit, which involves a future obligation.

The problems arising from the lack of a medium of exchange were exacerbated by the South Sea Bubble bursting in 1720, which caused a financial crisis and a wave of bankruptcies (as those who had borrowed to invest lost more than their initial investment). With Britain (and some parts of America) in recession and prices deflating, people began hoarding their money. This had three effects on Pennsylvania. Firstly, the lower demand for goods negatively affected Pennsylvania’s exports to Britain. Secondly, imports from Great Britain to Pennsylvania (which included a variety of commodities that had not been manufactured in the colonies because of the underdevelopment of its infrastructure and division of labour) began to fall. Thirdly, the hoarding of currency led to further scarcity in an already scarce medium of exchange. The combination of these three factors led to a sharp fall in the availability of a currency to make transactions: “When British purchases fell off and the colonies shipped less than would pay for their imports, sterling bills became scarce and expensive, and people sought hard money to make payments abroad.”

Ratios between various commodities were thus established to measure whether a gift or grievance had been adequately compensated, and over time, gifts and counter-gifts became quantifiable as credits and debts. In a sense this created money as a unit of account (although it didn’t exist in physical form). This directly contradicts the orthodox story, which states that money emerged from barter, which itself was driven by market forces. Similar evidence is presented by economist and historian Michael Hudson, who traces the emergence of money as a unit of account to the Mesopotamian temple and palace administrations in 3500 BC: “It did not occur ... to Aristotle ... that specialization developed mainly within single large households of chieftains in tribally organised communities ... Such households supported non-agricultural labor with rations rather than obliging each profession to market its output in exchange for food, clothing and other basic necessities.


The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

It is part of the 11th Parachute Brigade and part of the spearhead of the French rapid reaction force. 2 Part of Brown University. 1 2 Chapter 1 ■ Debt-based Economy: The Intricate Dance of Money and Debt If a certain kind of money is to exist, then it needs perform three functions: it needs to be a store of value, a unit of account, and a means of transfer. These three attributes manifest themselves in the form of a currency which is a physical representation of trust within a society. You do not need to trust a person to accept his money or vice versa. What allows trade to function in a modern-day economy is the fact that we trust the medium of exchange, be it dollars, euros, or anything else. Currencies in general have always been in a gradual state of evolution, with its format varying as economies evolve. Early money was more a commodity rather than a currency and had an intrinsic value in itself.

The changing value of cryptocurrencies still is a subject of concern, as it undermines their purchasing power ability and ability to function as long-term savings instruments. Figure 3-3. Comparison of BTC/USD and USD/EUR volatility over the past five years Source: The bitcoin volatility index (https://btcvol.info/). Accessed September 2016 The three functions of money: i) medium of exchange (money is used as a trade intermediary to avoid the inconveniences of a barter system); ii) store of value (money can be saved and retrieved in the future); and iii) unit of account (money acts as a standard numerical unit for the measurement of value and costs of goods, services, assets, and liabilities). Source: (ECB, 2015). 14 131 Chapter 3 ■ Innovating Capitalism Figure 3-4. Bitcoin price surge soon after the Brexit announcement (June 23, 2016) Source : CoinDesk (http://www.coindesk.com/bitcoin-brexit-ether-pricerollercoaster/).

Of the two types of broad money, bank deposits make up between 97%–98% of the amount currently in circulation. Only 2%–3% is in the form of notes and liabilities of the government (McLeay et al., 2014). How much debt commercial banks issue and how that debt is utilized are therefore topics of great importance. Rather than exchanging currency, most consumers use their bank deposits as a store of value and as the medium of exchange. Once a bank creates money by issuing debt, most people use that money to make and receive payments via their deposits rather than currency, especially as transactions today are mostly digital. That money is then swapped from account to account as consumers make payments via the interbank clearing system. As a result, once money is created, it is almost sure to rest in the banking system with very little being extracted to be used in the form of cash.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

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3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, post-oil, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, working poor, zero-sum game

Along the road from the gift economy to the trade economy there were several important landmarks. Of these, the invention of money was clearly the most important. Money is a tool used to facilitate trade. People invented it because they needed a medium of exchange to make trading easier, simpler, and more flexible. Once money came into use, the exchange process was freed to grow and to insert itself into aspects of life where it had never been permitted previously. Money simultaneously began to serve other functions as well — principally, as a measure and store of value. Today we take money for granted. But until fairly recent times it was an oddity, something only merchants used on a daily basis. Some complex societies, including the Inca civilization, managed to do almost completely without it; even in the US, until the mid-20th century, many rural families used money only for occasional trips into town to buy nails, boots, glass, or other items they couldn’t grow or make for themselves on the farm.

Bernard Lietaer cites as examples credit-clearing systems such as the Commercial Credit Circuits (“C3”) in Brazil that enable small businesses to bypass banks for short-term financing; he points out that Uruguay allows payment of taxes in C3 currency.19 Greco goes on to offer a regional development plan based on credit clearing as well as suggestions for a complete web-based credit-clearing trade platform.20 The unit of account used in credit-clearing exchange systems can vary. Greco notes possibilities including a basket of commodities, a unit of energy (such as the kilowatt hour), an existing currency unit (the US dollar), or a labor standard (a statistical unit of labor productivity). Even gold or silver could be used as a unit of account — though this would not require stockpiling of metals or actual payment of accounts in coin. There would be a considerable advantage to using the same unit of account globally so as to facilitate trade, but currencies themselves would work best as nested, diverse systems — with local, regional, and national currencies in simultaneous use.

When this happens, paper and electronic currency systems based on money creation through fractional reserve banking will produce results somewhat similar to those of a collapsing Ponzi scheme: the vast majority of those involved will lose much or all of what they thought they had. BOX 1.1 Why Was Usury Banned? In his book Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence, Tim Parks writes: “Usury changes things. With interest rates, money is no longer a simple and stable commodity that just happens to have been chosen as a medium of exchange. Projected through time, it multiplies, and this without any toil on the part of the usurer. Everything becomes more fluid. A man can borrow money, buy a loom, sell his wool at a high price, change his station in life. Another man can borrow money, buy the first man’s wool, ship it abroad, and sell it at an even higher price. He moves up the social scale. Or if he is unlucky, or foolish, he is ruined.


pages: 410 words: 119,823

Radical Technologies: The Design of Everyday Life by Adam Greenfield

3D printing, Airbnb, augmented reality, autonomous vehicles, bank run, barriers to entry, basic income, bitcoin, blockchain, business intelligence, business process, call centre, cellular automata, centralized clearinghouse, centre right, Chuck Templeton: OpenTable, cloud computing, collective bargaining, combinatorial explosion, Computer Numeric Control, computer vision, Conway's Game of Life, cryptocurrency, David Graeber, dematerialisation, digital map, distributed ledger, drone strike, Elon Musk, ethereum blockchain, facts on the ground, fiat currency, global supply chain, global village, Google Glasses, IBM and the Holocaust, industrial robot, informal economy, information retrieval, Internet of things, James Watt: steam engine, Jane Jacobs, Jeff Bezos, job automation, John Conway, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Kevin Kelly, Kickstarter, late capitalism, license plate recognition, lifelogging, M-Pesa, Mark Zuckerberg, means of production, megacity, megastructure, minimum viable product, money: store of value / unit of account / medium of exchange, natural language processing, Network effects, New Urbanism, Occupy movement, Oculus Rift, Pareto efficiency, pattern recognition, Pearl River Delta, performance metric, Peter Eisenman, Peter Thiel, planetary scale, Ponzi scheme, post scarcity, RAND corporation, recommendation engine, RFID, rolodex, Satoshi Nakamoto, self-driving car, sentiment analysis, shareholder value, sharing economy, Silicon Valley, smart cities, smart contracts, sorting algorithm, special economic zone, speech recognition, stakhanovite, statistical model, stem cell, technoutopianism, Tesla Model S, the built environment, The Death and Life of Great American Cities, The Future of Employment, transaction costs, Uber for X, universal basic income, urban planning, urban sprawl, Whole Earth Review, WikiLeaks, women in the workforce

Which is to say: how well does it function practically as a medium of exchange, as a unit of account and as a store of value? As a unit of account, relatively few products and services are natively denominated in BTC—the kind of thing you’d have found for sale on the Silk Road exchange, perhaps, or elsewhere on the darknet—and I’ve never yet met anyone who intuitively reckons prices this way. People who use Bitcoin therefore need to consult realtime apps like ZeroBlock to measure their holdings against the US dollar or the euro to see how much they are worth; often such a ticker is the first and most prominent thing you see on enthusiast websites. Nor has the currency worked particularly well as a stable and reliable store of value, dismaying those many investors who want it to sustain or appreciate in worth.

But other than that, and despite sporadic and fruitless investigations in the mass media, his identity remains a total cipher to this day. From the rather modest way in which he first characterized his innovation (“a peer-to-peer electronic cash system”), we can reasonably infer that Satoshi wasn’t proposing something intended to function as a long-term store of value, nor even as a unit of account in its own right. But it was clearly very carefully designed to work as an effective medium of exchange,4 between parties who would presumably continue to hold the bulk of their assets in some other currency. Perhaps we could think of Bitcoin in this sense as analogous to a trade pidgin or auxiliary language: the Esperanto of currencies. As Satoshi described it, Bitcoin was to be a cryptocurrency—that is to say, a purely digital currency, founded on computational code breaking.

At present, only a very tiny number of people truly grasp how Bitcoin and its underlying technologies work to create and mediate the transmission of value. If cryptocurrencies, blockchains and distributed ledgers1 more generally are to be the crux of the networked, postnational global economy of the remaining century, though, it’s vitally important that we, all of us, grasp at least the basic outlines of how they work and what it is they propose to achieve. At its core, Bitcoin is a digital medium of exchange that has been designed to act like cash in all the ways we might appreciate, and none of the ways we don’t. Before 2008, of course, there had been plenty of attempts at developing new forms of digital currency. All the pieces necessary to achieve this ambition seemed to be in place. Just about every adult on Earth carried on their person at all times a computational device eminently suitable for use as a transaction platform.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

First, it serves as a means of exchange, so that I might enjoy pork chops for dinner tonight even though the butcher has no interest in buying this book. Second, it serves as a unit of account, so that the cost of all kinds of goods and services can be measured and compared using one scale. (Imagine life without a unit of account: The Gap is selling jeans for three chickens a pair while Tommy Hilfiger has similar pants on sale for eleven beaver pelts. Which pants cost more?) Third, money must be portable and durable. Neither bowling balls nor rose petals would serve the purpose. Last, money must be relatively scarce so that it can serve as a store of value. Clever people will always find a medium of exchange that works. Cigarettes long served as the medium of exchange in prisons, where cash is banned. (It doesn’t matter whether you smoke; cigarettes have value as long as enough other inmates smoke.)

Wealth consists of all things that have value—houses, cars, commodities, human capital. Money, a tiny subset of that wealth, is merely a medium of exchange, something that facilitates trade and commerce. In theory, money is not even necessary. A simple economy could get along through barter alone. In a basic agricultural society, it’s easy enough to swap five chickens for a new dress or to pay a schoolteacher with a goat and three sacks of rice. Barter works less well in a more advanced economy. The logistical challenges of using chickens to buy books at Amazon would be formidable. In nearly every society, some kind of money has evolved to make trade easier. (The word “salary” comes from the wages paid to Roman soldiers, who were paid in sacks of sal—salt.) Any medium of exchange—whether it is a gold coin, a whale tooth, or an American dollar—serves the same basic purposes.

(It doesn’t matter whether you smoke; cigarettes have value as long as enough other inmates smoke.) So what happened when smoking was banned in U.S. federal prisons? Inmates turned to another portable, durable store of value: cans of mackerel. According to the Wall Street Journal, a single can of mackerel, or “the mack” is the standard unit of currency behind bars. (Some prisons have moved from cans to plastic pouches, because the cans can be fashioned into weapons.) In a can or pouch, mackerel doesn’t spoil, it can be bought on account in the commissary, and it costs about a dollar, making the accounting easy. A haircut costs two macks in the Lompoc Federal Correctional Complex.2 For much of American history, commerce was conducted with paper currency backed by precious metals. Prior to the twentieth century, private banks issued their own money. In 1913, the U.S. government banned private money and became the sole provider of currency.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

Big businesses need accounts for internal control as well as external reporting. Money acts as medium of exchange, store of value, and unit of account. These functions dictate the characteristics of a good money. 12 Money must be well defined-there should be no room for argument about whether a debt has been paid or not. Money must be storable. And money must have high value relative to its volume and weight, otherwise it will be difficult to carry it around. Many objects met these criteria in traditional societies. Some tribes kept score in cowrie shells. { 100} John Kay But scarce and decorative metals-gold and silver-were usually found to meet these requirements best. In concentration camps, where none of these were available, cigarettes became the medium of exchange and the unit of account. 13 Long after money first emerged, it was realized that reliable promises to provide gold or silver-bank notes-were easier to carry than the metals themselves.

Yet all is not entirely well with this theory, and the self-confidence of its practitioners is diminishing. I return to this in chapter 20. Markets in Money Market economies trade flowers. They trade electricity. They trade risks. They also trade money itself Money is different from these other commodities because it has no intrinsic worth. Money is the unit of account in which we keep score and the medium of exchange by which we measure the price of everything else. But there are many different units of account and mediums of exchange: dollars and euros, Australian dollars and Singapore dollars, pesos and zlotys. So we trade one money against another-dollars for euros. Money is also a store ofvalue: we need money tomorrow as well as money today. We buy and sell different currencies in foreign exchange markets; we exchange money at different dates in money markets.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

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Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, Paul Samuelson, payday loans, Plutocrats, plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

But both Gould and Fisk reckoned their profits in greenbacks.31 The Panic of 1873 The gold market crisis of 1869 orchestrated by Gould and Fisk illustrated that paper money had become a powerful new market for speculation in gold, essentially another form of debt leveraged against the national banks, which in turn supported the state banks and the real economy’s need for liquidity. Gold remained the unit of account and store of value, but greenbacks were now accepted as a means of exchange by a growing portion of the population. With the passage of the National Bank Act in 1865, the connection between specie and paper money had in theory been stabilized. Yet as the gold market operation of Fisk and Gould four years later illustrates, speculating on changes in the paper value of gold had become a means to wager on the basic unit of account and therefore on the value of the U.S. economy. The year 1869 also marked the completion of the transcontinental railroad, a project championed by the railroad lawyer Lincoln, and with it a long period of capital expenditure.

There was great public outcry against the Act of 1873, not only because it dropped the use of silver for coins, but also because many people felt that the move contracted the nation’s money supply and worsened the economic crisis of that year. However, the law merely reflected the fact that silver coins had dropped out of favor as a medium of exchange. Although a ratio of 16 to 1 had existed between the price of silver and gold going back nearly a century, increased supply in the United States and a drop in demand around the world in nations such as India and the United Kingdom caused the ratio to slip to almost 30 to 1 in the free market by the 1870s.40 With silver prices falling, the metal was not seen as a particularly robust store of value, but the attraction of free silver coinage for some proponents remained very powerful. There were large deposits of the metal in the western United States and the farmers and ranchers of those states often owed money for purchases of land.

In addition to embracing a gospel of inflationism and easy money, the silverites were invariably in favor of prohibition, public schools and against parochial education, Catholics, Lutherans, and other non-Pentecostal faiths.10 The Cross of Silver Not surprisingly, none of the proponents of a bimetallic standard for money seemed able to grasp, much less to accept, that the falling demand for silver had robbed the metal of its role as a store of value or a unit of account. Nations around the world were ending their use of silver for monetary purposes, and demand from industry and for jewelry was likewise depressed. Since a majority of their fellow citizens clearly preferred paper money or gold to silver as a means of exchange, the position of the silverites was truly hopeless in economic terms, even though politically it remained very powerful. No matter how many objective lessons were visible in the marketplace to refute their adoration for the increasingly common metal, millions of Americans were convinced of the righteousness of the cause of silver.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, women in the workforce, yield curve

The dollar, therefore, became the key “intervention” currency of most nations, and in turn the main currency in which other economies held their reserves. Domestic Currency Characteristics From this brief historical sketch we can derive the essential characteristics of domestic and international currencies. The classical requirements for domestic money are that it should fulfill three functions: 1. Unit of account 2. Medium of exchange 3. Store of value But clearly an international reserve currency that is used outside its domestic market (for example, for trade invoicing, capital remittances, reserve holdings, or as an exchange rate anchor for other currencies) must fulfill more than these three functions. The additional attributes necessary for a currency to perform international functions are listed below. International Currency Requirements In order for a currency to be an international currency, it must clearly fulfill the three basic requirements listed above.

If the SDR were to become a truly international currency, it would need to become a vehicle of choice by private parties. The RMB as a Potential International Reserve Currency Turning to consider future possible reserve currencies, what would have to happen for the Chinese RMB to emerge as an international reserve currency? Viewed in terms of the nine criteria for an international reserve currency, China and the RMB currently meet only five (unit of account, medium of exchange, store of value, economic size, and creditor status), while the remaining four (availability beyond home borders, full convertibility, developed financial system, and network effects) have yet to be met. In terms of its government debt market, China’s government and central bank bond market combined is still relatively small, with approximately $1.4 trillion outstanding in 2008, of which about half (mainly the central bank’s sterilization issuance) was short term.

It is true, however, that the Hong Kong dollar is the currency to which the Macau pataca is pegged, and the Singapore dollar is the currency to which the Brunei dollar is pegged. Both currencies meet conditions 4 and 5, but these conditions are clearly not sufficient for international reserve status. International Reserve Currency Status To be not only an international currency, but also an international reserve currency, it must satisfy four additional requirements: 6. Creditor status. Creditor status is essentially an extension of the store-of-value concept, except that it is derived primarily from the strength or weakness of the management of the government’s fiscal accounts, as well as the economy’s net international balance of assets and liabilities, rather than from the monetary discipline of the central bank. Creditor status is arguably required for both international currency status and reserve currency status. However, there are numerous examples of currencies being used for long periods outside their own territory when the government’s creditor status was questionable, as was the case with the French franc and the Spanish peseta.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

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affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, altcoin, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, British Empire, Broken windows theory, Columbian Exchange, computer age, Corn Laws, cosmological constant, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, ethereum blockchain, facts on the ground, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Gunnar Myrdal, Henri Poincaré, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta analysis, meta-analysis, mobile money, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, rising living standards, road to serfdom, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, women in the workforce

During Kenya’s post-election violence in 2008, mobile-phone balances seemed a lot safer than cash, so the system gained further popularity. Soon it reached the critical mass where enough people were using M-Pesa that it made sense to join them, so as to be able to transact business with them. In Kenya people pay wages, purchase savings products and take out loans with M-Pesa cash. Money serves three main functions – a store of value, a medium of exchange and a unit of account. These are often in conflict: gold works well as a store of value, being scarce and non-rusting; but it is too scarce to be a practical medium of exchange. Cowrie shells once served as a form of money in some parts of the world, because they are so hard and so rare. The problem with commodity money is that it is vulnerable to inflation if the supply suddenly increases – the discovery of a new source of cowries, or a new goldmine. Conversely, an alternative use for the commodity used as money can suddenly create a money shortage.

Money began with collectibles – items like shells, bones and beads, valued for their lack of perishability – which early human beings are known to have gathered, then gradually came into its other role as a medium of exchange, so that barter could be generalised. Szabo showed special interest in his essay in the ideas of evolutionary psychology, citing many works on the topic. By the 2000s he was musing about something called bitgold, an imaginary software product that would mimic the properties of gold: it would be scarce and hard to acquire, but easy for others to verify, and thus could be trusted as a store of value. Clearly, he was trying to think how to recreate online the key steps in the evolution of real money. Some years went by. Then, on 18 August 2008, a month before the financial crisis broke in earnest, a new domain name was registered anonymously: bitcoin.org.

In a similar vein, in Iraq in the 1980s Saddam Hussein issued dinar notes printed in Britain and engraved in Switzerland. After the first Gulf War, sanctions cut him off from the supply of his currency. He started printing money in Iraq, but the quality was poor, counterfeiting was easy and the quantity was too high, causing inflation. However, the Swiss-made dinars remained in circulation, and began to diverge in value from the local ones. Since there were no more being made, people saw them as a store of value and they held their value against the dollar. And then came bitcoins. The implications of crypto-currencies, and their recent evolution, are profound; they go well beyond the subject of money. They give us a glimpse of the future evolution of the internet itself. 16 The Evolution of the Internet Nothing can be made from nothing – once we see that’s so, Already we are on the way to what we want to know: What can things be fashioned from?


pages: 725 words: 221,514

Debt: The First 5,000 Years by David Graeber

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Admiral Zheng, anti-communist, back-to-the-land, banks create money, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, colonial rule, commoditize, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, fixed income, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, Paul Samuelson, payday loans, place-making, Ponzi scheme, price stability, profit motive, reserve currency, Right to Buy, Ronald Reagan, seigniorage, sexual politics, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor, zero-sum game

The existence of credit and debt has always been something of a scandal for economists, since it’s almost impossible to pretend that those lending and borrowing money are acting on purely “economic” motivations (for instance, that a loan to a stranger is the same as a loan to one’s cousin); it seems important, therefore, to begin the story of money in an imaginary world from which credit and debt have been entirely erased. Before we can apply the tools of anthropology to reconstruct the real history of money, we need to understand what’s wrong with the conventional account. Economists generally speak of three functions of money: medium of exchange, unit of account, and store of value. All economic textbooks treat the first as primary. Here’s a fairly typical extract from Economics, by Case, Fair, Gärtner, and Heather (1996): Money is vital to the working of a market economy. Imagine what life would be like without it. The alternative to a monetary economy is barter, people exchanging goods and services for other goods and services directly instead of exchanging via the medium of money.

In a complex society with many goods, barter exchanges involve an intolerable amount of effort. Imagine trying to find people who offer for sale all the things you buy in a typical trip to the grocer’s, and who are willing to accept goods that you have to offer in exchange for their goods. Some agreed-upon medium of exchange (or means of payment) neatly eliminates the double coincidence of wants problem.2 It’s important to emphasize that this is not presented as something that actually happened, but as a purely imaginary exercise. “To see that society benefits from a medium of exchange” write Begg, Fischer and Dornbuch (Economics, 2005), “imagine a barter economy.” “Imagine the difficulty you would have today,” write Maunder, Myers, Wall, and Miller (Economics Explained, 1991), “if you had to exchange your labor directly for the fruits of someone else’s labor.”

By the way, I say “young” because elsewhere, when slaves are used as monetary units, the unit is assumed to be a slave about 18–20 years old. A cumal was considered the equivalent in value of three milch cows or six heifers. 4. On cumal see Nolan 1926, Einzig 1949:247–48, Gerriets 1978, 1981, 1985, Patterson 1982:168–69, Kelly 1998:112–13. Most merely emphasize that cumal were just used as units of account and we don’t know anything about earlier practices. It’s notable, though, that in the law codes, when several different commodities are used as units of account, they will include that country’s most significant exports, and trade currency (that’s why in Russian codes, the units were fur and silver). This would imply a significant trade in female slaves in the period just before written records. 5. So Bender 1996. 6. Here I am drawing on the detailed ethnographic survey work of Alain Testart (2000, 2001, 2002).


pages: 497 words: 153,755

The Power of Gold: The History of an Obsession by Peter L. Bernstein

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Albert Einstein, Atahualpa, Bretton Woods, British Empire, California gold rush, central bank independence, double entry bookkeeping, Edward Glaeser, falling living standards, financial innovation, floating exchange rates, Francisco Pizarro, German hyperinflation, Hernando de Soto, Isaac Newton, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, large denomination, liquidity trap, long peace, money: store of value / unit of account / medium of exchange, old-boy network, Paul Samuelson, price stability, profit motive, random walk, rising living standards, Ronald Reagan, seigniorage, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

Nevertheless, people like some tangible representation of the labor they have expended that can be accumulated as wealth. The medium of exchange, or, more properly, the store of value on Yap at that time was called fei. Fei consisted of thick stone wheels with diameters ranging from saucer-size pieces to twelve-foot millstones. The stones from which these fei had been fashioned came from limestone quarries found on the island of Babelthuap, one of the Pelao Islands about four hundred miles away, and brought to Yap long ago, piece by piece, in canoes and on rafts by some venturesome natives described by Furness "as persuasive as ... the most glib book-agent." The smaller and more portable fei served as a medium of exchange and were handed around in payment for fish or pigs. The larger fei, however, received different treatment.

Nobody issues a check denominated in a given number of specified gold coins or weight of gold bullion, any more than someone in the sixteenth century who drew a bill of exchange would denominate it in a number of coins or weight of bullion. Money in the private world had to be expressed in terms of a unit of account, such as dollars or euros, which was a convenient numeraire for defining the size of the transaction and the local money used by the parties to settle up. A unit of account is an abstract concept-you cannot see the dollars that a check transfers, nor can you feel them, bite into them, or weigh them. The only concern of the owner of private money is that the prince so regulate the supply of public money that the integrity of the unit of account is stable instead of withering away in the fires of inflation. If we extrapolate these developments through the centuries, they define much of the subsequent history of gold as money in Europe and the United States.

The members of Congress were fully aware that they were stimulating the demand for gold in their choice of 16:1. Two factors, both strongly political, determined the decision. The first was a desire to "do something for gold," because modest amounts had been discovered in Virginia, the Carolinas, and Georgia. Second, these decisions coincided with Andrew Jackson's war against the Second Bank of the United States-known as Biddle's Bank-whose banknotes were a favored medium of exchange at the time. The politicians hoped that a rising supply of gold coins would be a ready substitute for the banknotes and would weaken Biddle's position. The United States was now effectively on a gold standard, even though official legislation establishing the gold standard would not be enacted until 1900. Silver continued to function as subsidiary coinage, but gold was the major holding into which currency and bank deposits could be converted.27 These shifts were the inevitable consequence of using a commodity as a standard of value for the monetary system.

Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

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banking crisis, banks create money, barriers to entry, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, old-boy network, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce

Centro de Planificación y Estudios Sociales (World Bank Poverty Group) el Consejo de las Mujeres del Ecuador (National Council of Ecuadoran Women) debt-and-debt-service reduction Dirección Nacional de la Mujer (National Directory for Women, Ecuador) early childhood development Encuesta de Condiciones de Vida (Ecuador LSMS survey) economically active population European Union Fondo de Inversión Social de Emergencia (Emergency Social Investment Fund, Ecuador) gross domestic product Inter-American Development Bank Instituto Ecuatoriano de Seguro Social (Ecuadoran Social Security Institute) International Monetary Fund Instituto Nacional de Estadística y Censo (National Institute of Statistics and Census, Ecuador) Instituto Nacional del Niño y de la Familia (National Institute of the Child and the Family, Ecuador) London interbank offered rate Living Standards Measurement Study Mercado Común del Sur (Southern Common Market) National Center for Health Statistics, U.S. nongovernmental organization Organisation for Economic Co-operation and Development xi xii OPEC ORI PACMI PAHO PANN PDI PRONEPE SIISE SIMUJER STFS VAT WHO CRISIS AND DOLLARIZATION IN ECUADOR Organization of Petroleum Exporting Countries Operación Rescate Infantil (Child Rescue Program, Ecuador) Programa de Alimentación Complementaria Materno-Infantil (Maternal-Infant Nutrition Program, Ecuador) Pan American Health Organization Programa Nacional de Alimentación y Nutrición (Food and Nutrition Program that replaces PACMI in Ecuador) Programa de Desarrollo Infantil (Child Development Program, Ecuador) Alternativo Programa Nacional de la Educación Prescolar (National Alternative Preschool Education Program, Ecuador) Sistema Integrado de Indicadores Sociales del Ecuador (Integrated System of Social Indicators of Ecuador) Situation of Women and Gender Inequality Indicators database, Ecuador Secretaría Técnica del Frente Social (Technical Secretariat of the Social Front, Ecuador) value added tax World Health Organization 1 Crisis and Dollarization: An Overview Andrés Solimano Introduction On January 9, 2000, Ecuador decided to adopt the U.S. dollar as its national currency, its domestic medium of exchange, and its unit of account,1 thus becoming the first country to officially dollarize its economy in the 21st century. The purpose of this book is to analyze the context within which dollarization took place in Ecuador and some of its economic consequences. It describes the initial conditions, accompanying policies, and response of the economy to the official adoption of a foreign currency as the legal tender and the issues the still-new Ecuadoran experience with dollarization suggests for other countries considering the adoption of a new monetary regime.

Dollarization was implemented during 2000 according to the Economic Transformation Law, which the president signed into law in early March 2000 following approval by the Congress.5 The law provided that the Central Bank would repurchase the outstanding sucre money stock using its foreign-exchange holdings, and Ecuador would adopt the dollar as an official monetary unit, and for practical purposes the official mone- 96 CRISIS AND DOLLARIZATION IN ECUADOR tary unit.6 The law made the U.S. dollar the legal unit of account and medium of exchange, stipulating that all legal public and private accounting records would henceforth be maintained in dollars. Dollars or sucres could be used to settle contracts, but all foreign-trade transactions and taxes deriving from them would have to be settled in dollars. Over the course of 2000, the Central Bank repurchased almost the entire outstanding stock of sucres. In September 2000, six months after the law was approved, all bank accounts and other contractual relations were converted.

At a time when hyperinflation had abated in Latin America, the Ecuadoran case of extreme monetary instability was clearly a regional anomaly for the late 1990s. Most of the ingredients of high inflation and acute monetary instability were present: (a) a flight from national money and de-facto dollarization2 as nationals and foreigners in Ecuador lost all confidence in the capacity of the sucre to serve its store-of-value function, (b) large fiscal deficits, (c) a sharp contraction in real economic activity, and (d) a severe banking crisis.3 The increasingly cornered government, led by President Jamil Mahuad, a highly educated and intellectually sophisticated socialdemocrat, could not gather congressional support for passing crucial tax legislation and other measures to stabilize the economy. This situation, combined with the near paralysis of the international financial institutions based in Washington, helped bring about an economic meltdown manifested in very high inflation, a banking crisis, economic depression, and social disarray during most of 1999.


pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

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3D printing, altcoin, bank run, banking crisis, banks create money, barriers to entry, bitcoin, blockchain, capital controls, Chelsea Manning, cloud computing, computer age, cryptocurrency, disintermediation, ethereum blockchain, fiat currency, fixed income, friendly fire, game design, Isaac Newton, Julian Assange, land value tax, litecoin, M-Pesa, mobile money, money: store of value / unit of account / medium of exchange, Occupy movement, Peter Thiel, Ponzi scheme, prediction markets, price stability, QR code, quantitative easing, railway mania, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, Stephen Hawking, Steve Jobs, Ted Nelson, too big to fail, transaction costs, Turing complete, War on Poverty, web application, WikiLeaks

‘From an economic perspective I don’t like Bitcoin too much. I don’t think it’s a viable currency. Generally money has three components. It’s a store of value, a means of exchange and a unit of account. And you need all three for it to actually be real money. And then of course there are a lot of properties that you generally look at to determine if it’s high quality money or not. So you look at things like the visibility, ease of transferability, how the scarcity dynamics of the money work. You look at the range of products and services that you can acquire for that token. You also look at the groups of people who have control over the supply-and-demand dynamics. ‘From the perspective of being good money, Bitcoin fails the unit of account property because we don’t natively price products and services with Bitcoin. Rather we look to a fiat standard like the US dollar and we convert the value of the Bitcoin to actually price goods and services.

Great, so we go to Paris, we buy lunch and, assuming the restaurant accepts Bitcoin, we knock out some nasty thieves from Visa and MasterCard, great. I get that, but that’s not going to change the world. And if necessary Visa and MasterCard will drop their prices to compete so there could be a nice pressure – and about time. ‘Getting back to the basics of the argument, is Bitcoin a store of value or is it a means of exchange? And it’s trying to be both because, essentially, it’s a gold bar that you can email which is rather nice, because when I try to email a gold bar I struggle to get it into the socket. In that sense, cryptos really do work and very well. ‘But as a store of value you really wouldn’t want the volatility that it has. The average volatility over the last five years for Bitcoin has been 110% and higher for altcoins. For gold it’s 18%, for silver it’s 28% and for the stock market it’s about 15%. For the dollar it’s about 5%.

Ironically, this has, in a way, made Bitcoin centralized. These coins need to be disseminated somehow. Higher prices should fix that problem. There are still too many bad actors and too many opportunities for cons, hacks and other crimes. Its widespread usership in black markets could undermine it – and certainly increase the likelihood of government opposition. Then there is the theoretical question of what it is – a medium of exchange, a store of wealth or a new asset class? People still think in terms of dollars and pounds rather than bitcoins. They price things in dollars. They don’t think about how many bitcoins they’re going to own. They think about how many dollars they’re eventually going to get for their bitcoins. Bitcoin is a breakthrough tech. Now that the floodgates have been opened, it could quickly be undermined by something that is better.


pages: 142 words: 45,733

Utopia or Bust: A Guide to the Present Crisis by Benjamin Kunkel

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anti-communist, Bretton Woods, capital controls, Carmen Reinhart, creative destruction, David Graeber, declining real wages, full employment, Hyman Minsky, income inequality, late capitalism, liberal capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, mortgage debt, Occupy movement, peak oil, price stability, profit motive, savings glut, Slavoj Žižek, The Wealth of Nations by Adam Smith, transatlantic slave trade, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, zero-sum game

The first role of money (at least as an agent of commerce: Graeber will later discuss its truly aboriginal function) was not to grease exchange but to tabulate debts. Mesopotamian tablets dating from 3500 BC record rent, usually in the form of grain, owed by tenants of temple lands, and rations of barley due temple workers. These credits and debits may have been calculated in silver shekels, but coins hardly circulated at the time. In other words, of the three functions ascribed to money by economics textbooks—a medium of exchange, a unit of account, and a store of value—it was the second that came first. Coinage did not become widespread until several thousand years later. Graeber insists on the historical priority of debt to exchange in order to dispel the anthropological premise of modern economics: “the myth of barter.” Adam Smith supposed, as primers on economics complacently repeat, that economic life emerged from a propensity of the species to truck and barter.


pages: 364 words: 99,897

The Industries of the Future by Alec Ross

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23andMe, 3D printing, Airbnb, algorithmic trading, AltaVista, Anne Wojcicki, autonomous vehicles, banking crisis, barriers to entry, Bernie Madoff, bioinformatics, bitcoin, blockchain, Brian Krebs, British Empire, business intelligence, call centre, carbon footprint, cloud computing, collaborative consumption, connected car, corporate governance, Credit Default Swap, cryptocurrency, David Brooks, disintermediation, Dissolution of the Soviet Union, distributed ledger, Edward Glaeser, Edward Snowden, en.wikipedia.org, Erik Brynjolfsson, fiat currency, future of work, global supply chain, Google X / Alphabet X, industrial robot, Internet of things, invention of the printing press, Jaron Lanier, Jeff Bezos, job automation, John Markoff, knowledge economy, knowledge worker, lifelogging, litecoin, M-Pesa, Marc Andreessen, Mark Zuckerberg, Mikhail Gorbachev, mobile money, money: store of value / unit of account / medium of exchange, new economy, offshore financial centre, open economy, Parag Khanna, peer-to-peer, peer-to-peer lending, personalized medicine, Peter Thiel, precision agriculture, pre–internet, RAND corporation, Ray Kurzweil, recommendation engine, ride hailing / ride sharing, Rubik’s Cube, Satoshi Nakamoto, selective serotonin reuptake inhibitor (SSRI), self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart cities, social graph, software as a service, special economic zone, supply-chain management, supply-chain management software, technoutopianism, The Future of Employment, underbanked, Vernor Vinge, Watson beat the top human players on Jeopardy!, women in the workforce, Y Combinator, young professional

As he describes, the economic principles of Bitcoin contradict the economic theories of both Adam Smith and John Maynard Keynes and push us back to medieval times when precious metals were the dominant store of value. Prominent economist Nouriel Roubini sent out a string of tweets attacking the notion that Bitcoin is a currency. As Roubini tweeted: “Apart from a base 4 criminal activities, Bitcoin is not a currency as it is not a unit of account or a means of payments or store of value.” He went on to explain his rationale in further tweets: “Bitcoin is not a unit of account as no price of goods and services is set in Bitcoin unit nor it ever will. So it isn’t a currency.” “Bitcoin isn’t a store of value as little wealth is in Bitcoin and no assets in it. Also given price volatility it is a lousy store of value.” “Bitcoin isn’t means of payment as few transactions in Bitcoin. And given its volatility all who accept it convert it right back into $/€/¥.”

And I think that for the rest of my lifetime, gold is going to be a better bet for people with that passion than Bitcoin.” Larry Summers is not a Luddite. He is on the boards of Square and LendingClub, a popular peer-to-peer lending platform that has processed more than $6 billion in loans. He is also an advisor to Marc Andreessen’s venture capital firm. Fast-forward 18 months, and Larry now sees the potential of the blockchain technology facilitating the “medium of exchange” property of money. He has even joined the advisory board for Xapo, the Bitcoin company Reid Hoffman funded with the underground vaults. After an initially hostile response, Wall Street is also warming to the potential of blockchain technology. In April 2015, Goldman Sachs and Chinese investment firm IDG invested $50 million in a Bitcoin company, specifically because they liked the technical innovation that made it easy to move money around the globe.

Bitcoin, as a global payment system anyone can use from anywhere at any time, can be a powerful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.” Charlie Songhurst argues that “the strength of a government’s monetary system ultimately is a function of the strength of the rule of law in that country. Low-quality governments will have low-quality monetary systems. These will be the countries where Bitcoin is most likely to thrive. In the US/EU/Japan, the official currency is a fairly safe store of value (at least on a day-to-day basis) and the value of an alternative ledger system is minimal. In Argentina, Iraq, Venezuela, et al., this is not true. In those countries bitcoins will act like black-market dollars (much more useful than the official currency). But unlike black-market dollars, they can be used internationally—i.e., you can cross a border and email bitcoins to yourself, whereas dollars would get confiscated at the border.”


pages: 331 words: 60,536

The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State by James Dale Davidson, Rees Mogg

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affirmative action, agricultural Revolution, bank run, barriers to entry, Berlin Wall, borderless world, British Empire, California gold rush, clean water, colonial rule, Columbine, compound rate of return, creative destruction, Danny Hillis, debt deflation, ending welfare as we know it, epigenetics, Fall of the Berlin Wall, falling living standards, feminist movement, financial independence, Francis Fukuyama: the end of history, full employment, George Gilder, Hernando de Soto, illegal immigration, income inequality, informal economy, information retrieval, Isaac Newton, Kevin Kelly, market clearing, Martin Wolf, Menlo Park, money: store of value / unit of account / medium of exchange, new economy, New Urbanism, offshore financial centre, Parkinson's law, pattern recognition, phenotype, price mechanism, profit maximization, rent-seeking, reserve currency, road to serfdom, Ronald Coase, school vouchers, seigniorage, Silicon Valley, spice trade, statistical model, telepresence, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade route, transaction costs, Turing machine, union organizing, very high income, Vilfredo Pareto

The odds of finding someone with exactly reciprocal desires to yours increase dramatically when you can sort instantly across the entire world rather than drawing on only those whom you might meet locally. Not Subject to Counterfeiting While paper money will no doubt remain in circulation as a residual medium of exchange for the poor and computer-illiterate, money for high-value transactions will be privatized. Cybermoney will no longer be denominated only in national units like the paper money of the industrial period. It probably will be defined in terms of grams or ounces of gold, as finely divisible as gold itself, Or it may be defined in terms of other real stores of value. Even where different pricing measures are used, or certain transactions continue to be denominated in national currencies, cybermoney will serve the consumers far better than nationalized money ever did. Rapidly advancing computational capacity will 161 diminish the difficulties of adjusting prices to various media of exchange to the vanishing point.

Other than the serial numbers, all the receipts looked alike, a fact that appealed to counterfeiters as well as politicians and bankers seeking to profit from inflating the supply of money. Cybermoney will be all but impossible to counterfeit in this way, officially or unofficially. The verifiability of the digital receipts rules out this classic expedient for expropriating wealth through inflation. The new digital money of the Information Age will return control over the medium of exchange to the owners of wealth, who wish to preserve it, rather than to nation-states that wish to spirit it away. The Transaction Cost of "Free" Currency Use of this new cybermoney will substantially free you from the power of the state. Earlier, we cited the dreary record of the world's nation-states in maintaining the value of their currencies over the past half century. No currency has suffered a smaller loss from inflation since World War II than the German mark.

An In-group with tens of millions or even hundreds of millions (or in the case of the Chinese, more than a billion members) became so gigantic as to dilute the inclusive fitness effect of any sacrifice or benefit conveyed to the scale of a spit in the ocean. In strict logic, therefore, the modern nationalist, unlike the hunter-gatherer of the Stone Age, could not reasonably expect any gesture of sacrifice or helping for his "in-group" to enhance the survival prospects for his family in a meaningful way. Notwithstanding the fact that national economies became the fundamental units of account in which well-being was measured in the modern era, the largest obstacle to the talented individual's success, and therefore to that of his kin, became the burdens imposed in the name of the nation, the in-group itself This, at least, was true for those primarily engaged in reciprocal rather than coercive sociality-to revisit Van Den Berghe's categories of human behavior. 68 The logic of the nation-state suggests that the ultimate price of citizenship is sacrifice and death.


pages: 710 words: 164,527

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

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activist fund / activist shareholder / activist investor, Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, capital controls, currency manipulation / currency intervention, currency peg, deindustrialization, European colonialism, facts on the ground, fiat currency, financial independence, floating exchange rates, full employment, global reserve currency, imperial preference, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, Paul Samuelson, Potemkin village, price mechanism, price stability, psychological pricing, reserve currency, road to serfdom, seigniorage, South China Sea, special drawing rights, The Great Moderation, the market place, trade liberalization, Works Progress Administration

Even though we are still far from having a close and reliable relationship within or between nations, the trend is undoubtedly in that direction.”14 “But until that millennium arrives,” White clarified, bringing his argument back to contemporary political reality, “gold will continue to be sought by various governments because gold serves better than anything else as a combination war chest and protective cushion against the shocks of international change.”15 At another point in his essay, however, he characterized such a millennium as a distinctly dark one: “[W]ere all important countries to adopt a completely totalitarian form of government and barter their exports for imports so that there would be no balance due either of the trading countries, gold could be dispensed with,” suggesting that the end of gold money meant the end of liberal democracy itself.16 “When the day comes when one nation will have conquered all others (or all others except one or two) and will impose restrictions on the monetary behavior of the conquered countries—then gold is doomed. But when that catastrophe occurs many other institutions infinitely more valuable than monetary instruments will likewise be doomed.”17 White asked whether the U.S. dollar could ever come to supplant gold as the international medium of exchange and store of value. His answer was that it could do so only to the extent the United States were ultimately willing and able to redeem those dollars for fixed measures of the cold, hard metal. “There are some who believe that a universally accepted currency not redeemable in gold … is compatible with the existence of national sovereignties,” White observed, consciously or unconsciously encompassing Keynes.

Could the fund not adopt, Ohio Republican Frederick Smith asked, “bancor” or “unitas” in the place of gold and dollars? “What is a ‘bancor’ or ‘unitas’?” White responded in badly feigned innocence. “There is no such currency.” “Well, you ought to know,” Smith shot back. “You had that in your.…” “I had a suggestion that something of that kind might be adopted as an international unit of account,” White interrupted, “but, as you know, before the Bretton Woods Conference, that was dropped.…” “You would have to have a name for that unit of account, would you not?” Smith put back to him. “It is because we had to have a name that we used the alternative ‘U.S. dollar.’ We think that is a pretty good name,” White ventured. “We were glad the other countries accepted the phrase, ‘gold or dollars.’” This was, of course, a great stretching of the truth. White had substituted dollars for “gold-convertible currency” behind the backs of the other conference delegates precisely because he knew many would have fought it, as Keynes had in the years leading to the conference.

Now he ventured that “a candid appraisal of the contributions which [the Fund and the Bank] have so far made toward the stated objectives would force us to the conclusion that achievement has been much less than anticipated.” This “would be much less disturbing if there were any substantial hopes that in the next few years the situation would change. But there is no such hope.” White now believed that the IMF needed to increase its monetary firepower dramatically. Remarkably, he now proposed “an international medium of exchange,” something he had steadfastly opposed when Keynes had championed it, “to supplement IMF resources.” The British loan had helped tremendously (though White had denied before the Senate Banking Committee in June 1945 that Britain even needed any special transitional assistance); the Marshall Plan had helped as well. “[B]ut these efforts are not enough to compensate for the losses sustained by the world because of the split of One World into at least two.”59 White’s hopes for a postwar Soviet-American alliance, outlined in an earlier sharply worded unpublished essay condemning American and Western hypocrisy toward Russia, were by this time in tatters.60 “I doubt if any responsible official of the member governments [of the IMF] in the spring of 1944 believed that by 1948—only three years after the cessation of hostilities—the tensions between certain of the major powers would have been so pronounced and that the world, instead of drawing together during these years, would have moved so precipitously toward a split,” he wrote.61 Disillusioned with a “Democratic Party [that] can no longer fight for peace and a better America,” he placed his hopes for a reversal of growing Soviet-American hostility in Henry Wallace, whom he passionately supported, as he had Bob La Follette in 1924, as the Progressive Party presidential candidate.62 For his part, Wallace—whose campaign was, in his own words, “dedicated to the proposition that the Russians earnestly wanted peace”—intended to bring White back to political life as his Treasury Secretary.63 Kennan later remarked scathingly, presumably with White in mind, that “nowhere in Washington had the hopes entertained for postwar collaboration with Russia been more elaborate, more naive, or more tenaciously (one might say almost ferociously) pursued than in the Treasury Department.”64 In August 1947, White was interviewed by the FBI for two hours regarding his relationship with Greg and Helen Silvermaster, George Silverman, Lud Ullmann, William Taylor, Harold Glasser, Sol Adler, Sonya Gold, and Lauchlin Currie.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

Economic textbooks often introduce the subject of money with a mantra: they declare that money is used as “a medium of exchange, a store of value, and a unit of account.” The first two parts of this mantra have been analyzed to death by economists; they lie at the heart of what economists call “the demand for money,” which relates how much money people want to hold to both their income and the prevailing interest rate. But economists have paid scant attention to the role of money as a unit of account. Its use as a unit of account means that people think in terms of money. It means that contracts are denominated in money terms. Likewise, accounting is conducted in nominal terms. And many legal provisions, including those underlying tax collection, are also phrased in terms of money. In each of these cases people could adjust nominal quantities so that the use of money as a unit of account had no effect.


pages: 265 words: 15,515

Nomad Citizenship: Free-Market Communism and the Slow-Motion General Strike by Eugene W. Holland

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capital controls, cognitive dissonance, Colonization of Mars, complexity theory, continuation of politics by other means, deskilling, Firefox, Frederick Winslow Taylor, full employment, informal economy, invisible hand, Jane Jacobs, means of production, microcredit, money: store of value / unit of account / medium of exchange, Naomi Klein, New Urbanism, peak oil, price mechanism, Richard Stallman, Ronald Coase, slashdot, The Death and Life of Great American Cities, The Wisdom of Crowds, transaction costs, Upton Sinclair, urban renewal, wage slave, working poor

Toward the end of the Grundrisse, Marx muses th at once “the w orkers . . . themselves appropriate their own surplus labour . . . the measure of w ealth is then not any longer, in any way, labour time, but rather disposable tim e” (see M arx and Engels, Collected Works, vol. 28, 708). 131. There are generally understood to be three functions of money: medium of exchange, unit of accounting, and store of value. Inasm uch as money stores value, it enables comm odity exchange to develop from barter into true markets. At this point, it becomes a unit of accounting, inasmuch as goods are no longer evaluated directly in terms of other goods but in terms of m onetary units instead. The key distinction is w hether the value of money as u n it of accounting needs to be grounded in some external standard, such as gold or socially necessary labor tim e, or rem ains im m anent to the exchange process, as reflected in the value of the goods w hose exchange it mediates.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, women in the workforce

‘The plan,’ said Trotsky, ‘is checked and, to a considerable degree, realized through the market.’21 To make even the crudest adjustment requires realtime information feedback. But in a heavily bureaucratic society, where to dissent was to invite a one-way ticket to the gulag, such feedback was strangled. Hence Trotsky’s emphasis on reviving workplace democracy. You needed a rolling plan: a combination of plan and market, with money used as both a medium of exchange and store of value. And you needed workers’ democracy. Money, said Preobrazhensky, would function normally in those sectors you could not plan, while in the planned sector of the economy, money would start to function as a technical accounting device. And while the aim is for the plan to swamp the market, the market could be expected to constantly ‘pollute’ the plan. In a memorable passage, whose relevance to the twenty-first century will be clear, Trotsky wrote: If a universal mind existed … that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest.22 The absence of such a ‘universal mind’, he said, requires instead the promotion of workers’ democracy – which had been abolished.

Long, complicated versions are available but for the purpose of understanding how postcapitalism might work, only the basics are needed. A commodity’s value is determined by the average amount of labour hours needed to produce it.12 It is not the actual number of hours worked that sets the value but the ‘socially necessary’ hours of work established across each industry or economy. So the basic unit of account here can be summed up as ‘hours of socially necessary labour time’. If we know what an hour of basic labour costs – in Bangladesh the minimum wage pays about 28 US cents an hour – we can express it in money. Here I will just stick to hours. Two things contribute to the value of a commodity: (a) the work done in the production process (which includes marketing, research, design, etc.) and (b) everything else (machinery, plant, raw materials, etc.).


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

It’s sort of comforting, or at least I find it sort of comforting, to reflect on the fact that inflation is mysterious in its essence as well as in disconcerting practical manifestations like the price of this drink. As for money itself, that’s a subject of immense difficulty, again not just on the practical level but in its essence and nature. There’s a standard definition of money in economics, or at least of the uses of money, as serving a triple function: a store of value, a medium of exchange, and a unit of account. But the real uses of money are more mysterious than this makes them sound, and its evolution is more mysterious too. There are sometimes arguments in science about whether specific breakthroughs are better defined as discoveries or as inventions: are the findings of mathematics discoveries of entities that preexist, or are they creations of the human imagination? Or both?


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Despite its thin air and harsh climate, Potosí rapidly became one of the principal cities of the Spanish Empire, with a population at its zenith of between 160,000 and 200,000 people, larger than most European cities at that time. Valer un potosí, ‘to be worth a potosí’, is still a Spanish expression meaning to be worth a fortune. Pizarro’s conquest, it seemed, had made the Spanish crown rich beyond the dreams of avarice. Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account, which facilitates valuation and calculation; and a store of value, which allows economic transactions to be conducted over long periods as well as geographical distances. To perform all these functions optimally, money has to be available, affordable, durable, fungible, portable and reliable. Because they fulfil most of these criteria, metals such as gold, silver and bronze were for millennia regarded as the ideal monetary raw material.

When an Indian named Diego Gualpa discovered its five great seams of silver in 1545, he changed the economic history of the world.9 The Incas could not understand the insatiable lust for gold and silver that seemed to grip Europeans. ‘Even if all the snow in the Andes turned to gold, still they would not be satisfied,’ complained Manco Capac.10 The Incas could not appreciate that, for Pizarro and his men, silver was more than shiny, decorative metal. It could be made into money: a unit of account, a store of value - portable power. To work the mines, the Spaniards at first relied on paying wages to the inhabitants of nearby villages. But conditions were so harsh that from the late sixteenth century a system of forced labour (la mita) had to be introduced, whereby men aged between 18 and 50 from the sixteen highland provinces were conscripted for seventeen weeks a year.11 Mortality among the miners was horrendous, not least because of constant exposure to the mercury fumes generated by the patio process of refinement, whereby ground-up silver ore was trampled into an amalgam with mercury, washed and then heated to burn off the mercury.12 The air down the mineshafts was (and remains) noxious and miners had to descend seven-hundred-foot shafts on the most primitive of steps, clambering back up after long hours of digging with sacks of ore tied to their backs.

A clay tablet from second millennium BC Mesopotamia, front (above) and rear (opposite). The inscription states that Amil-mirra will pay 330 measures of barley to the bearer of the tablet at harvest time. Today, despite the fact that the purchasing power of the dollar has declined appreciably over the past fifty years, we remain more or less content with paper money - not to mention coins that are literally made from junk. Stores of value these are not. Even more amazingly, we are happy with money we cannot even see. Today’s electronic money can be moved from our employer, to our bank account, to our favourite retail outlets without ever physically materializing. It is this ‘virtual’ money that now dominates what economists call the money supply. Cash in the hands of ordinary Americans accounts for just 11 per cent of the monetary measure known as M2.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

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affirmative action, Albert Einstein, Bernie Madoff, British Empire, capital controls, cleantech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

The supply-side movement, on the other hand, by focusing on the processes of production and innovation, turns the equation inside out. Rather than stressing aggregate demand for goods and services, they stress the dynamic supply of new ones. Rather than emphasizing control over the supply of money, they emphasize the generation of demand for money through the production of goods: the supplies that create the need for a store of value and a medium of exchange. Rather than dwelling on the quantity of money, they stress the quality of it: its anticipated worth in goods and services, or in gold. The desirability of holding money, after all, depends most fundamentally on acts of savings and investment that will provide new objects for purchase in the future. No monetary policy can stop people from bidding up the real prices of a declining store of goods in an economy that is running down or that has lost its faith in the future.

If the purpose of lowering interest is to enhance the inducement to invest, an appropriate Keynesian policy is not to cut interest rates annually, but to cut taxes. High tax rates on income and capital presently play a greater role in deterring investment than did interest rates in the past, when government and taxation were often relatively small. Inflation steadily erodes the attractions of money as a store of value and liquidity. Keynes’ flirtation with a system by which all cash would have to be validated from one period to another by the purchase of stamps—government interest on its issues of cash—is now virtual reality. Inflation exacts a penalty on the hoarder just as regular and sure as any stamping system. As a result, the hoarders are once again turning to real estate, gold, and jewelry. But the most important sump of investment and purchasing power—the new Keynesian sink toward the end of the seventies—was manifestly government: federal, state, and local, in the United States and throughout the West.

The fate of Midas, whose touch turned all to gold until he had nothing to eat—like the fate of Spain, whose fleet delivered an El Dorado on the doorsteps of Cadiz—demonstrates that unrequited saving can be as barren and fruitless as unrequited love. At present, individual Saudi Arabians can buy stock in productive facilities in other countries, and they can purchase gold, yachts, Rolls Royces, jewels, art, and other presumptive stores of value. The government can buy guns and planes and port facilities. But Saudi Arabia itself can only become a truly rich nation if it can transform the transitory streams of income from oil into capital goods at home, with a yield for the future. Material resources become durable wealth only when mixed with other resources in profitable combinations. One problem of the Saudis is that such combinations are extremely perishable; factories do not age or travel well.


pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liberal capitalism, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

In another work published in 2011, James Rickards, a former banker, noted that, ‘[t]ime and again paper money currencies have collapsed’.42 One book, of the hundreds spawned by the crisis of 2008, was even entitled Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown. In this tirade against paper money, Detlev Schlichter, a London-based former trader, lamented that today people lived ‘in a world of “paper money”’. ‘Today, money is nowhere a commodity. It is everywhere an irredeemable piece of paper that is not backed by anything.’ Schlichter observed that it was ‘simply a historic fact that commodity money has always provided a reasonably stable medium of exchange, while the entire history of state paper money has been an unmitigated disaster when judged on the basis of price level stability’.43 It was the explosion of credit, easy money and excessive loans which created a world that was financially unstable. From the point of view of some of the themes of this book, war, notably commitments in Afghanistan and Iraq, had put pressure on US government spending.

The ‘inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat [paper] currencies’.52 This was palpably true. The average price of gold was $1,227 an ounce during 2010, the year in which he wrote the article, more than four times the average price of $279 in 2000.53 There were undoubtedly other issues driving the gold price, but one of the significant factors had been a loss of confidence in paper money as a store of value. Paul Krugman and other liberal commentators took a more optimistic view of the prospects of American indebtedness. To Krugman, the ‘deficit obsession’ was even more dangerous than the deficit itself.54 In an article in the New York Times on New Year’s Day 2012 entitled ‘Nobody Understands Debt’, the American economist spoke of the ‘allegedly urgent issue of reducing the budget deficit’. He regarded this as a ‘misplaced focus’.

The fateful month of September arrived with no improvement in sterling’s position. The storm which swept the foreign exchange markets was unforeseen by most of the British officials whose policy it destroyed. Lamont, rarely for a politician, admitted that he ‘did not in any way foresee the scale of what was to happen’.25 On 3 September, the British government announced that the Bank of England would borrow 10 billion ecus (the European currency unit, the unit of account for the ERM), equivalent to £7.25 billion, and sell them for sterling. In effect, the Bank of England would use the borrowed money to buy pounds, to prop up sterling within its prescribed range in the ERM. After this announcement, sterling ‘did rise quickly above DM 2.80 for the first time in two weeks’.26 The range in which sterling could trade without a devaluation in the ERM was within 6 per cent either side of DM 2.95 to one pound.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

Yet it was precisely the fact that the dollar and New York as a financial center still lacked such status internationally that indicated the limitations of the American imperial role before World War I. In spite of the international prominence of US industry by this time—accounting for a third of world production, with exports surpassing Germany and France and matching those of the UK—“the US was the only major industrial nation whose currency did not function as an international medium of exchange, unit of account or store of value.”72 This was only partly a legacy of its past reliance on the City of London to finance foreign trade; it also reflected the long tradition of farmer populism that had blocked the creation of a central bank and the emergence of a more centralized inter-state branch banking system. Whereas European central banking had its roots in “haute finance” far removed from the popular classes, the dependence of American small farmers on credit had made them hostile to a central bank that they recognized would serve bankers’ interests.

The full achievement of the central role that would ultimately be played in global capitalism by US Treasury bonds depended on the removal of exchange and capital controls abroad, but it depended first of all on the growth of US domestic financial markets. The liquidity of the Treasury bond market was used to extend the geographical and institutional reach of the money market, and also had the subsequent effect of enabling the large banks to invent new financial instruments, such as certificates of deposit, which competed directly with Treasury bills.22 The American dollar’s role as an internationally secure store of value made “Yankee” bonds (foreign bonds issued in dollars in New York) especially attractive assets—so much so that between 1955 and 1962 they totaled one-and-a-half times the amount of foreign bonds issued in the principal European countries combined. This was a key factor in turning what had been an American dollar shortage in Europe into a dollar glut by the early 1960s.23 Amid a wave of takeovers and mergers, US banks built on the development of certificates of deposit to establish the securitization of commercial banking—in other words, to encourage customers to shift from depositing money in a bank to buying a tradable financial asset from it.