Blockchains, Tokens, Africa -Money

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A lot has happened in the last several months since the US Federal Reserve started increasing rates to fight inflation in the US. The crypto markets have crashed, and the whole ecosystem is now in a crypto winter.

As I journey through this space, I have decided to go back to the basics and see if I can understand Money.

Most of us go through life without understanding Money and how it works. I have come across a fascinating account of the topic in the book titled; The Essence of Money Argentarius: Letters of a Bank Director to his son (1921 to 1923). Which has illuminated to me some interesting nuggets that are worth sharing.

Most people cannot wrap their heads around the nature of Money because they interact with it daily through buying and paying. Our use of language also reinforces that Money is nothing other than the thing that serves as a means of payment. This can be paper money, coins or bitcoin. It doesn’t matter.

The book argues that to understand Money in the real sense, one has to look beyond the actual instrument and focus on the underlying traffic being facilitated by Money. The underlying traffic that is being facilitated by Money is just barter traffic. Countless objects are being produced daily for consumption and exchanged between producers, traders and consumers.

Whoever sells a good or service is interested in receiving other goods and services in return. For example, looking at your neighbour, you will see what they have exchanged and collected for decades of work. You will see houses, cars, furniture, and objects of daily use like clothing and food. All these things are equivalent to the goods they have sold and their work.

With some people, you will see intangible objects, such as shares and bonds. These assets do not differ from concrete objects. Every share, every bond represents concrete machines, property and equipment located somewhere that form the equivalent of goods sold or work done by a shareholder or bondholder. The only difference is that these machines, property, and equipment are not in the shareholder’s or bondholder’s physical possession. A third party manages them and has a corresponding claim, evidenced by the shares and bonds.

In business, we call such a claim ‘Capital’, and the annual payment that the administrator or the manager must pay for the such surrender of the property, plant and equipment is known as return on capital or ‘interest’. This interest, for convenience, is usually expressed in Money.

At the bottom of it, regardless of which country you go to, you will find that goods and services are given away to exchange other goods and services for them. Like that of the earliest days, our economy is based on barter.

Money as a Claim To Goods.

Money embodies a claim to goods arising because someone has performed a service but has not yet received the consideration. The Bank director writing to his son in the early 1920s in this book opined that this sentence is the be-all and end-all of the entire theory of Money.

Claim against the Employer

An example that articulates this well is that a worker who does work for $200 has, in essence, acquired a claim of goods against the employer worth $ 200. He has this claim exclusively against the employer until payday. Of note is that every worker grants their employer credit up to payday. When the employer pays the worker the $ 200, the claim against him ceases to exist. The two are even. However, this does not mean the claim ceases to exist. The claim is embodied in Money, an entire amount of $ 200.

Claim against the Market

Only now, the claim is not directed towards the employer but the totality of the market. The worker can now collect the consideration promised to him for his work in whatever form he wants. He can buy food from the supermarket, shoes from the shoe store, and beer from his favourite sports bar.

Only when he does this is his claim to property extinguished. Only then is the purpose of the exchange fulfilled, which the worker had undertaken with the employer.

He exchanged his work for food, shoes and beer. The receipt of Money is only an intermediate stage, which was necessary because the employer did not have the goods the worker wished to receive.

In this relationship, a couple of things are apparent.

  1. Before the worker is paid, he has a claim against the employer.
  2. When the worker is paid, he has a claim on the whole market, which must supply him with the goods he desires for up to $200.
  3. As long as the worker has a claim on the employer or, simply put, if a person has a claim over another on service rendered, the relationship between the two is a credit relationship.
  4. When the worker received his pay, nothing changed hands except purchasing power. This purchasing power is expressed in Money.
  5. At this point, a credit relationship still exists. The recipient of the Money still has a claim, only that he no longer has a claim on the individual but on the totality of the market.
  6. Money is a right to goods in the market. With every purchase, his right to goods decreases.

Credit as a Close Relative of Money.

The Bank Director argues in the book that credit is an essential part of the economy and a close relative of Money. Credit is as old as human economic intercourse.

If you analyze a pre-money society where barter trade is the only means of exchange, you will note that a farmer will grow food, and a Shepard will rare cattle and sheep. The Shepard requires wheat for bread, whilst the farmer needs milk and meat. The question is, how would the Shepard exchange his cattle for getting these food items? An outright exchange of a cow for some grain is not viable, as the cow is worth much more time than a bag of grain. Additionally, the farmer may not have bags of wheat worth the cow, and the Shepard may not have a way to store the grain even if the farmer had the grain to exchange for the cow.

This exchange type can only occur if one of the parties defers payment. For example. This can happen when the farmer agrees to deliver to the Shepard bags of grain without consideration until the bags of grain are equal to the value of the cow. At such a time, the Shepard provides the cow to the farmer. Conversely, the Shepard can agree to deliver the cow to the farmer, and the farmer agrees to provide bags of grain until the corresponding value of a cow is attained.

Of note is that in modern economies, only very rarely will two exchanging parties own equivalent goods. Even in the rare case of equality of value, goods to be exchanged will not be available simultaneously. As such, one party will have to grant credit to another. Where such credit is refused in principle, economic transactions cannot arise.

In economic transactions, one service is, without exception, exchanged for another. However, only one performance takes place in the present. The other takes place in the future. Until a future point in time, a credit relationship exists, namely a claim of one party (the seller) to the still due consideration of the other party(the buyer).

The Money provisionally takes the place of the outstanding consideration, whether as a pledge or an instruction. How the Money is constituted and how it is spent is irrelevant.

Only one thing matters: Money completely fulfils its task of securing a claim to goods. This claim is secured by a transaction instrument called Money.

Part two of this blog about Money will continue to explore ideas in this book. Feel free to get the book for yourself.

References:

- The Essence of Money: Argentarius: Letters from a bank director to his son.

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digital money design.

digital money design.

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Fintech, Banking, Financial Services, Decentralised Finance, Technology.....