Yes, credit can be a medium of exchange, and that is really good

Introduction

Hayek wrote, in what we interpret as a prefiguring of crypto currencies, that he found "more helpful for the explanation of monetary phenomena if 'money' were an adjective describing a property that different things could possess to varying degrees...Machlup for this reason speaks occasionally….of 'moneyness' and 'near-moneyness.'"*

Moneyness Example 

Therefore, we must ask: if the nature of mediums of exchage is about degrees of moneyness, what kind of economic goods have the property of moneyness at a very high degree? Let's use the following example to answer that question. 

Say I lend you 100 silver coins because your promises are solid.

1. You spend the coins on production/capital goods.

2. At the same time, I can go and spend your promise in consumer goods at a grocery store. I transfer your promise to the grocery store owner and I can take consumer goods as I see appropriate. Now you owe the 100 coins to the grocery store, not to me. No one should have a problem with that. I hope.

1.1 The capital goods seller spends the coins on new inventory.

2.1 The grocery store spends your promise on new inventory, by transferring the promise to a consumer goods producer.

1.2 The producer of capital goods spends the 100 coins on buying parts.

2.2 The consumer goods producer spends your promise on machinery/capital goods to produce more consumer goods....

See where it's going?

This is about trust. Your promises are as good as money. That's why I lend you the coins to begin with in our example.

The moneyness of credit is backed by present goods

We all use your promise above as money because you are producing goods and services that we need. Therefore, you are helping all that process. Your promise is as good as money, or near money.

If you were slacking off, no one would accept your promises to begin with. So the above process would not even get off the ground. The goods and services you continually produce back the moneyness of your promises. The moneyness of credit is backed by present and continually produced goods, not just by base money.

In a free-market situation, commercial banks that make productive loans do exactly this. However, commercial banks that make mortgage loans to unemployed borrowers, for example, cannot do that.

Conclusion

We should see by now that credit is transferable; therefore spendable and very high on moneyness. The reason why this is not a problem is because, absent an imposition by the bureacratic-state, the promises and credit that contain high degrees of moneyness are the promises from productive economic agents; not from random weak and new banks.

References

*Denationalization of Money

https://fee.org/resources/denationalization-of-money/

Why is fractional reserve banking moral and a net economic positive for society?

Fractional reserve banking has been wrongly labeled as fraud because it has been thought as if commercial banks create multiple titles to a small pool of money. However, our checking accounts are not property titles but credit, a promise to make our payments. We lend the commercial banks our money today and we get goods & services as we use our checking account balance. In fact, fractional reserve banking (FRB) is beneficial for society because it coordinates over time our purchases with the investment companies make to have inventories ready for us.

Commercial banks coordinate our purchases

The main way the commercial banks cover their promises is by the goods & services depositors get every week. Please follow the time-structure example:

1. Monday we deposit 100 coins, we get 100 debit balance.

2. Tuesday the bank lends those 100 coins to the grocery store.

3. Wednesday the grocery store uses the 100 coins to buy more inventory.

4. Saturday we transfer our 100 balance to the grocery store. We are made good on our loan to the commercial bank with goods, not with money.

5. The grocery store uses the transferred balance to pay the loan.

6. Both debts are erased. The loan you made to the bank is paid with goods & services, and the loan the bank made to the grocery store is canceled by the balance transferred.

This is an exogenous example. On another occasion we can develop endogenous examples. But it must be clear now. The commercial banking process gets resources to companies before we buy goods & services, so they have our preferred economic goods in their inventory. Commercial banks coordinate our commercial time-preferences with the time-structure of investment in the commercial sector.  We lend, then the commercial bank lends, and later we get paid by the goods & services we get weekly; many times daily.

The commercial bank owes you the amount deposited, the contract clearly says that.

Furthermore, we have to keep in mind that the checking account contract is very clear. The contract states: "Unless otherwise expressly agreed in writing, our relationship with you will be that of debtor and creditor. That is, we owe you the amount of your deposit."* There is no deceit that our money is stored waiting to be picked up.Checking accounts are not property titles, checking accounts are credit we give to the bank and we are paid by the goods & services we get from companies that do business with our banks. Then again, we lend, then the commercial bank lends, and later we get paid by the goods & services we get weekly; many times daily.

Conclusion 

In closing, fractional reserve banking has been wrongly labeled as fraud, but it cannot be fraud. Our checking accounts are not property titles, they are credit we give to the commercial bank. Also, fractional reserve banking coordinates our commercial time-preferences with the time-structure of investment in the commercial sector. One last time, we lend, then the commercial bank lends, and later we get paid by the goods & services we get weekly; many times daily. We cannot avoid its effectiveness in coordinating our actions over time with the companies we do business with.

*Consumer Deposit Account Agreements, Banking Relationship Fact Sheets, and Notices

https://online.citi.com/JRS/popups/ao/Consumer_Client_Manual.pdf?JFP_TOKEN=POJGUX3S

Yes, Money in Fact Arose from Barter

The Story is Just More Interesting than We Thought

By Aaron Cuevas

 

There has been an incessant attack on economic theory from left leaning academics. According to anthropologists, there is no observable evidence that monetary exchanges arose from barter. Actually, they have not found any ancient society that ever practice barter. Therefore, they conclude that economic science has been debunked—and so Austrian Economics disagree.

What anthropologist have discovered is that members of small rural communities would use gift-giving and promises of future payment in specie as medium of exchange among themselves. And so we agree, people inside of communities of trust practiced barter, but inter-temporal barter. The critics of economic science just do not know that money is a time management mechanism. To be more precise, money is the tool that arose from social interaction to manage consumption over time. It was just natural that money would arise from inter-temporal barter because money is an inter-temporal tool, and so it became an accounting tool because of its wide acceptance.

The more nuance story of the genesis of money is that in dealing with strangers, on spot barter happened in the tribal life. Why? Because inter-temporal barter—unsophisticated credit if you wish—was impossible between strangers. Following David Graeber, a critic of economic science himself, we affirm that the “barter scenario might be absurd when applied to transactions between neighbors in the same small rural community, but when dealing with a transaction between the resident of such a community and a passing mercenary, it suddenly begins to make a great deal of sense" (pg. 213). When you wanted to trade with a stranger to your community, there was no way to see him again nor have the social bond connection that would facilitate the fulfilment of the barter promise later in time. Therefore on spot barter happened.

If you wanted to convince a stranger to trade his extra, say, fur for your milk or other perishable product, he would reject it together with your promise to pay him with milk or the like in the future. So, what else could have be thought out to be a good medium of exchange for the stranger to use later, far away from the place of the trade? The natural medium of exchange with a stranger in the tribal life would be to exchange ornaments or jewelry for specific products. Jewelry or ornaments would function as goods that would last long enough to be exchange for consumer goods later, long after the monetary/jewelry exchange happened. A good reason why gold is the natural money. You can use it as jewelry or as a medium of exchange over time, not only on spot. The wide acceptance of gold as medium of exchange, even and mostly among strangers, turned gold into the medium of account, and so it became money. Gold has an inter-temporal quality, it last long and is portable.

  Therefore, gold becomes money when money is needed the most, during difficult times (i.e. among strangers or during war time). Graeber helps us see it. "For much of human history…an ingot of gold or silver, stamped or not, has served the same role as the contemporary drug dealer's suitcase full of unmarked bills: an object without a history, valuable because one knows it will be accepted in exchange for other goods just about anywhere, no questions asked" (ibid). If Graeber could only see that he just made the case that gold makes the greatest medium of exchange because it will be accepted, no questions asked, even under environments of mistrust. Money, not promises, is used to deal with strangers on any circumstance. And historically the best money—an inter-temporal medium of exchange—is gold.

"As a result, while credit systems tend to dominate in periods of relative social peace, or across networks of trust (whether created by states or, in most periods, transnational institutions like merchant guilds or communities of faith), in periods characterized by widespread war and plunder, they tend to be replaced by precious metals" (ibid).  In explaining the function of precious metals, Graeber gave us the key to understand the genesis of money—exchanges among strangers. This we call commerce, not friendship, and that is fine. Following Hayek, the anxiety that socialist types suffer when dealing intellectually with e concept of money “is based on ignorance of the indispensable role money plays in making possible…human cooperation” through its communication, calculation, and incentive power. “Money is indispensable for extending reciprocal cooperation beyond the limits” of the tribal life. So by expanding the opportunities to trade with strangers that we might never know, civilization ensued and we left the tribal life.

In conclusion, money did in fact arose from barter, but inter-temporal barter. Although communities of trust could rely on exchange promises among their members, cooperating with strangers was difficult. So money arose out of the necessity to avoid unfulfilled promises, to control consumption over time, and to aid in the calculation of demand and supply in distant unknown places to trade with. Gold’s inter-temporal qualities and wide acceptance for other uses, made it the perfect unit of account, and so the best commodity money available.  

Congress is to Blame for the National Debt

By Aaron Cuevas

Congress is to Blame for the National Debt,

But We Should End the FED Too

There has been a rumor around libertarian circles that the Federal Reserve creates debt when they increase the money supply. The mal-investments created by the FED toying with the money supply are huge issues that need to be dealt with; well, by ending the FED. However, the root of the mal-investments and of the national debt is Congress, not the apparatchiks at the FED. They are the enablers though.

Central Banks like the FED have their origin in the need of politicians to spend beyond their tax revenue, so a private bank was given a monopoly on note and coin issuing in exchange for cheap credit to the mercantilistic kings. The reality now is not meaningfully different. Politicians in DC want to get their pet projects in the annual budget, but there is no human way voters can get their “free” college, “free” wall, “free” healthcare, “free” war,…you get the picture. Therefore, politicians and their cronies created the FED to finance the federal debt. And when bond vigilantes are ready to make a run on the Treasury (Congress’ lapdog), the Fed buys bonds like crazy with new e-money.

This is the process: Congress borrows from banks and the general public, including foreigners, this debt is created by Congress in the form of Treasury Bonds. Then the Fed buys a portion of those bonds giving fresh new e-money to banks, increasing the money supply. This in effect is financing the federal debt, making it easier to grow and pass on to future generations.

Whatever words you want to use, Congress is the root of all this evil. The Fed is an animal of Congress. The monster that creates the debt is the political system that likes to live off your labor and the labor of your descendants.

We should definitively abolish it, but don’t forget to End the Fed too.