What is Money?

Definition of Money: In the 1990s here at Bob Enyart Live, I wrongly claimed that justice required a return to the gold standard, whereby currency was formerly backed by reserves of precious metals. Years ago you could return a $10 bill, also called a gold certificate, to a bank and receive a certain amount of gold. After studying and thinking about money for years, reading economic texts and reflecting on the Bible, I now know that while metals can be used as money, money itself is not gold or silver. And money seems to be even more than simply a medium of exchange. Rather, money is more like a transferable IOU. The most accurate definition of money considered at KGOV.com is this:

Money is the accounting of transferable incomplete transactions.

That is what money actually is.

Metal, Paper, Web: Back when technology did not exist to support a more effective and lower-cost accounting system, Bible cultures reasonably implemented metal-based money. Since no one can create gold, it was especially difficult to "counterfeit" money without it being easily detectable (like by biting a coin, weighing it, etc.). Later, the printing press enabled the widespread convenience of paper currency, and now the Internet enables the convenience of online transactions. The extraordinary benefit to the lives of millions of people from these conveniences outweigh the risks of counterfeits and deception.

[Programming Note: In December 2010 Bob Enyart did a show about What is Money, talking through the ideas in this article, and that prompted a lively discussion to which you can add your thoughts on a TheologyOnline.com thread in the BEL Forum.]

Here's What Makes the Economy Function: God commands men to "serve one another" (Galatians 5:13). Men shipwrecked onto a deserted island would gradually build an economy as they served one another. And that economy would grow most quickly if these men were free, for the Bible says that, "liberty" provides the "opportunity... [to] serve one another." If they started to keep to themselves, and did not trade goods and services, their economy would sputter and die. So an economy thrives when men serve one another.

Money Is Properly Created By Fiat: If these shipwrecked men washed ashore on a deserted island that had no gold, still, they actually would create money, "by fiat," as they entered into agreements that created something like transferable IOUs. Thus in any nation, every time someone buys a car or a home, etc., on credit, they thereby commit themselves to years of hard work (or at least, to the obligation to pay off the loan), which commitment actually brings more money into existence.

Fractional Banking Is Justifiable: Understanding how money actually functions justifies the modern world's fractional banking system, whereby lenders bring money into existence when making loans, and expunge the principal as it is repaid (1, 2). Regarding the biblical view of debt, God regulated Israel's system of debt, showing that scripturally, debt is not inherently immoral, but can be used for good or bad, like fire. As to the particulars of America's Federal Reserve System, the Fed should be audited (it never is), and other methods of implementing money may surpass the benefit of America's current system. The proper way to judge a monetary standard is to evaluate it's effectiveness (accountability) and efficiency (low cost).

Illustrating Why Fractional Banking is Justifiable: A 19-year-old is now sick and tired of the last year he has spent in the house playing video games and so he goes out and buys a junker car on credit, committing himself to paying $100 a month for a year. Then he is suddenly interested in doing work for his neighbors, so he paints one guy's garage, and mows another's lawn, and repairs someone else's fence, and so on until the whole neighborhood looks better. All that economic activity was precipitated, and somewhat predicted, by his commitment to repay his car loan. Understanding the time value of money helps to calculate future value. Similarly, understanding a borrower's commitment to repay a loan is a factor in estimating the level of future economic activity. So when a bank loans out funds that it does not have, as is done with fractional banking, it is bringing money into existence. (That is, the bank makes an accounting entry for a transferable, incomplete transaction). Doing so as described here shows how and why this can be done responsibly and justly. And when a loan payment is made, a portion of the overall transaction is now complete, and so while keeping the interest it's collected, the bank then expunges the money that it created in the loan.

Gold is Not the Gold Standard in Money: Requiring a gold standard inflates the value of gold by fiat. As a result there is an unnecessary redistribution of wealth by which various governments transfer wealth to other countries that happen to find gold on their land. This is how America ciphered manufactured goods from Europe in return for inflated gold, and then we demineralized our money, devaluing England's vaults.

Gold Does Not Have Intrinsic Value: Gold does not have intrinsic value but as with all valued items, its worth lies in the eye of the beholder. A wealthy nation dying of thirst would trade its gold for water. Even gold dealers who criticize modern currencies still value dollar bills more highly than their inventory of gold. As Mises, an Austrian economist, wrote:

Each party attaches a higher value to the good he receives than to that he gives away. The exchange ration, the price, is not the product of an equality of valuation, but, on the contrary, the product of a discrepancy in valuation. -Ludwig von Mises, Human Action, 1949 (1998 edition) p. 328

Gold Is Not For Hiding: Basing a nation's currency on gold results in building Fort Knox-like fortresses, hidden from view, and filling them up with gold to back the certificates that are issued. But God did not create gold to be dug up and then forever buried again, stored away from sight in underground vaults, which is an inefficient and extremely expensive way of implementing an accounting system, robbing that gold from its practical uses for technology and beauty.

Bob Enyart
KGOV.com
1-800-8Enyart

(If you enjoyed this article, you might really enjoy:
 - our KGOV Political Spectrums chart and program
 - watching Bob's DVD God and the Death Penalty, New Testament Support for Capital Punishment
 - watching Bob's DVD The Trouble with Lawyers
 - listening to Bob's seminar: God's Criminal Justice System.
 - or just browsing the Department of Government in the KGOV Store.