Tuesday, January 25, 2011

Money and the conversations

I hope this is not another rant. But, it feels like one!

I am constantly confused by conversations that come from very wise people around money. The differences between a "currency", a "unit of account" and a "measure of value" are critical. Most people focus on the conversation of "currency". So, they talk about banks printing currency, or communities issuing currency etc. Who issues the currency is of critical importance, that I am certain of. However, a currency only has value because the unit of account is considered a reliable measure of value. So, if everyone is printing currency using the same unit of account - this may be a dollar or a pound, it may be an Ithaca Dollar or a Time Dollar or whatever you want to name your currency - they are going to need to establish a reliable measure of value via a unit of account. Some communities may come up with their own unit of account but almost always they link it or establish it in a relationship with an established unit of account. So Ithaca may have its own unit called an Ithaca, but they will almost invariably give it an exchange value, often fixed, with the established US dollar unit. So maybe 10 Ithaca's are worth 1 US dollar.

This is critical. The establishment of a unit of account requires the creation of trust as to its ability to reliably measure value. Part of this trust is established through the fact that it can be trusted that it won't be overissued and therefore cause an inflationary devaluation of that currency. This was the problem that went on in the USA during the height of free-banking. People were issuing currencies in units but their reliance, or ability to consistently measure value, were greatly limited and unreliable. So, the assumption that a community can issue a currency may be true but it still reliant on the value of its relationship to the chosen unit of account and its ability to reliably measure the value of an exchange.

My concern is this level of money, something that Keynes talked about, is often not spoken about by many of todays alternative money theorists.

The big question, is how do you establish a new measure of value, represented by a unit of account, that is then actualized in a currency (be it paper, gold, silver or digital bytes). You need to establish new measures of value, and these require concrete relationships of trust.

It can not be overlooked that any attempt at creating a multitude of currencies will invariably lead to a devaluation or threat to the reliability of that unit if they are over issued in aggregate. You can not maintain a fixed relationship between units of account - this has been very clearly illustrated through massive amounts of economic research. The crash of the Gold Standard and fixed currency regimes (the conversation around the Chinese Yuan is an contemporary example). This is true if a central bank continues to print (issue) money or if a hundred communities issue their own currencies. The value of something as it approaches infinity in terms of being able to measure an exchange will head to zero.

The challenge then is not about who issues new currencies (though this is important) it is about creating new measures of value that are reliable and are not directly related to an already existing unit of account. Part of the reason I believe that we have historically put all currencies into a relationship with each other is the homogenization of value measures. As countries align and attempt to measure the same sorts of exchanges in the same sorts of ways the can align the value of their currencies. However, if you are measuring things with your currency that no other economy sees as important it is next to impossible to establish a relationship between the two. The point is that exchanges are being measured and therefore what is measured and what is considered important to measure can and will shift over time.

It is not about creating new currencies it is about creating new units of account that measure exchanges and their values in new and unique ways. And, this is a far harder question to tackle because it is not about a technical solution, it is about a social solution. It is about a revolution in systems of value.

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