Currency as Debt: A New Theory of Money
Back To Basics—The Nature of Money
Part 3 of 4
 

Contemplating the early history of this nation’s monetary system, or lack of it, reveals much useful data about the nature of money, or more properly, the things used as money.

All things used as money in any practical monetary system will have certain common characteristics: general acceptability, portability, divisibility, non-liability to deterioration, and comparative stability of exchange value. Notice that these attributes combine to give money an information content. Money is information, not just in its identity, but also in its use. Its importance in the information age continuously increases.

One path leading to discovery of the nature of money follows the long-standing practice of classifying the things used as money into two categories—either hard or soft currency (Table 1). Hard currency consists of gold or silver coins or other tangible items having intrinsic value. By contrast, soft currency such as paper money has little if any intrinsic value. These categories coincide with the two philosophical domains of the concept of money, hard currency being unconditional and soft currency being conditional.
 

Further classifications using this dual identification method are possible. Currency can be said to live in the time domain, either past or future. Gold and silver used as money are historical. Their use evolved spontaneously, prior to recorded history, in the individual choices of people making exchanges. The information content is more than just the weight and fineness of the commodity coin; its value does not magically appear. Someone had to invest the labor to mine and coin these metals. This production cost and the inherent beauty, utility, durability, scarcity and capital service of these commodities over time and distance determine their exchange value. In direct barter, payment is deemed accomplished through the intrinsic value of the coin.
 

Desirable common characteristics: general acceptability, portability, divisibility, non-liability to deterioration, and comparative stability of exchange value.
 

	Hard	Soft
Philosophical Domain	Unconditional	Conditional
Time Domain	Past	Future
Value	Intrinsic	Exchange
Regulation	Physical Law	Agency
Quantity	Limited	Unlimited
Production Cost	High	Low
Defining Standard	Constitutional	Statutory
Estate Basis	Asset	Liability

On the other hand, paper currency lives in the future domain. Its exchange value is invariably tied to the anticipation of an action, to its swap in future exchanges for either coin of intrinsic value or other goods or services. When issued by the government, or one of its agents, its exchange value becomes associated with either a promise of redemption or the expectation of its eventual acceptance as payment for debts, such as state-imposed taxes. Common law required everyone, including the sovereign, to accept the return of his own commercial paper at face value. But paper currency is only a tender in payment; it is not payment unless acknowledged as such, either by agreement or through default, by those involved in the transaction. Being contractual in nature, its acceptance is always based on the faith of the recipient in the outcome of some anticipated action.
 

Advocates praise hard currency systems for their inherent self-regulation features. Because of its low deterioration rate, the world’s total quantity of refined gold and silver is essentially stable. Mining activities add only a modest, predictable percentage each year. The total usable volume remains small enough to preserve its high exchange value and large enough to provide sufficient coinage for trade. In a free society, nature’s physical laws assure impartial regulation.

Opponents of hard currency call such a system barbaric. Obviously, handling coin as bulk material unnecessarily burdens commerce. They object to the mining of precious metals for monetary purposes, to tearing the earth open, to the pollution of the refining processes. They argue that the same amount of effort would be better used building public facilities or providing community service, overlooking the fact that providing a stable monetary system is a most fundamental public service.

This argument is not easily settled. A country could adopt a strict hard currency system only to find that soft currency remained in use. Goods might be placed with shop owners on consignment or one person might receive goods or services from another on an IOU or credit basis. Individuals often spend their word in commerce as if it were gold. This was done in times past because the actual transfer of gold from one location to another exposed it to thieves and pirates. Merchants frustrated robbery by trading signed and sealed paper contracts. The paper contracts were useless to criminals who probably could not read them. The expression “A merchant’s word is as good as gold.” was once literally true.

Notice that in a free society, trades accomplished with hard currency are instantaneous, each party to the exchange immediately receiving full value, property for property. Conversely, contracts or credit transactions always involve an element of trust because the exchange is accomplished over time. The benefits of such a system are only available to a nation with high moral standards.

The personal experiences of the Founding Fathers supported their well-reasoned reservations about the nation’s monetary system expressed in the Constitution. “Bills of Credit” are absolutely forbidden. Such bills, issued by the national government or state governments, and even the notes issued by private corporations operating under government charter as banks, always contained a promise of redemption in a specified amount of gold or silver when there was never enough gold or silver to make good on all promises. All such issues of false documents for fraudulent purposes, namely the obtaining by the issuer of valuable considerations without a corresponding exchange of comparable value, amount to a positive constructive fraud against the public. Without the limitation of a strict gold and silver reserve requirement, the temptation for additional issues of paper currency always wins over prudence.

Webster wrote of the Continental currency issued by Congress: “If it saved the State, it has also polluted the equity of our laws, turned them into enemies of oppression and wrong, corrupted the justice of our public administration, destroyed the fortunes of thousands who had most confidence in it, enervated the trade, husbandry, and manufactures of our country, and went far to destroy the morality of our people.”[34]
 

34 William G. Sumner, A History of American Currency (1873, Reprinted 1968 by Augustus M. Kelley, Publishers, New York, NY 10010), p. 48