What Is Money?

Too much discussion is going on about money while we do not even agree on what it actually is. Naturally, this yields to a dangerous confusion, where public opinions are formed, and regulations are introduced based on false statements. Sadly, without exaggeration, the freedom of our society is threatened by uninformed or lobbied politicians protecting an unhealthy status. Inheriting the values from the French Revolution, we not only have the comfort to enjoy them but also the duty to protect those values based on freedom.

Central Banks define money as the combination of the monetary base, M1 and M2, while the intersection of M1 and monetary base is the portion of currency held by the public.

The monetary base is the total amount of currency that is either in general circulation or in the commercial bank deposits held in the central bank’s reserve. M1 is defined as the sum of currency held by the public and transaction deposits at financial institutions. M2 is defined as M1 plus savings deposits, small-denomination time deposits, and retail money market mutual fund shares. The idea behind this classification is the different degree of liquidity, i.e., accessibility.

This definition is, however, a very narrow and self-serving definition.

The Micronesian island of Yap is known for its stone money, known as Rai. Rai are large doughnut-shaped, carved disks of calcite and up to four meters in diameter. The monetary system of Yap relied on an oral history of ownership. Because these stones are too large to move, buying an item with one involves agreeing that the ownership has changed. As long as the transaction is recorded in oral history, it will now be owned by the person to whom it is passed and no physical movement of the stone is required.

British exchequer tallies were a way of recording debts with a system that was sublimely simple and effective. A stick would contain a record of the debt. The stick would be split in half, down its length from one end to the other. The debtor would retain half, called the “foil”. The creditor would keep the other half, called the “stock” — even today, British bankers use the word “stocks” to refer to debts of the British government. If you had a tally stock showing that, for example, a Bishop, owed you £5, then unless you worried that he wasn’t good for the money, the tally stock itself was worth close to £5 in its own right. Consequently, if you wanted to buy something, you might well find that the seller would be pleased to accept the tally stock as a safe and convenient form of payment. So the tally sticks themselves became a kind of money, a particular sort of debt that could be traded freely.

On Monday 4 May 1970, the Irish Independent published a matter-of-fact notice with a straightforward title: Closure of banks. Every major bank in Ireland was closed and would remain closed until further notice. The Irish had been expecting trouble, so they had been stockpiling reserves of cash. However, what kept the Irish economy going was writing each other Cheques. Cheques are paper-based instructions to transfer money from one bank account to another. But if both banks are closed, then the instruction to transfer money can’t be carried out. Nevertheless, people wrote to each other cheques, and they circulated. The cheques would circulate around and around, a promise to pay an amount that couldn’t be fulfilled until the banks reopened and started clearing the backlog. There was always the risk that people lost track of their own finances and started unknowingly writing cheques they couldn’t afford and wouldn’t be able to honor. Perhaps the biggest risk of all was that trust would start to fray, that people would simply start refusing to accept cheques as payment. Yet the Irish kept writing each other cheques.

These are just a few examples showing how narrow a central bank’s definition of money is.

• abstract unit of value
• system of accounts which keeps track of credit or debit balances
• the possibility that the original creditor in a relationship can transfer debtor’s obligation to a third party in settlement of unrelated debt

The transferability is the main differentiator between credit and money; in other words, money is transferable credit. Naturally, the basis of credit is trust. Consequently, money cannot exist without trust.

Contrary to public belief, the concept of central banks is obviously much younger than money itself. In history, central banks, notably Napoleon’s Bank of France and Germany’s Reichsbank, were established to finance expensive government military operations. This was precisely the reason why Thomas Jefferson strongly opposed establishing a central bank.

Modern central banks only date back to the 17th century with the Bank of England and the Swedish Riksbank being the first. The main objective of the modern implementation is controlling inflation. In order to do so, central banks need to control government spending, for which they need to be independent of the government.

Looking at Erdoğan interventions you can see how this independence is threatened. Unfortunately, other examples like president Trump’s comments and constant pressure show that this independence is also threatened in the United States. The shameless horse-trade done between France and Germany to install Lagarde instead of Weidmann as president of the European Central Bank, offering von der Leyen the presidency of the European Commission instead, is also a serious intervention here in Europe. Jens Weidmann was just not acceptable because he openly criticizes the convenient low-interest environment.

Clearly, there are enough problems in the current system. As a society, we cannot just ignore these things. Personally, I do not know if Bitcoin or Libra is addressing the need for money adequately. Reality is, that nobody knows at this point. We will have to figure that out through trying and hence we cannot allow a troubled system, grasping for even more power, to stop that process.

Germany’s latest suggestion to forbid Libra has the only purpose to protect its own power and is harming its own citizens.

Instead of trying to disallow new forms of money, governments should try to restore trust. After all, that lost trust is the reason why people start using Bitcoins in the first place.