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, interacting with one of the world's leading consultants on monetary policy, reading economic texts such as Ludwig von Mises' Theory of Money and Credit, and reflecting on the Bible, I now affirm that while metals can be used as money, money itself is not gold or silver. And money is 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.
If in fact, that is what money actually is, then as those transactions are completed, the actual money based on those transactions, disappears. This article will test that idea.
Metal, Paper, Web: Money is not a thing. It is an accounting system. Back when technology did not exist to support more effective and lower-cost accounting procedures, the ancient Israelites and other cultures reasonably implemented metal-based money. Since no one can create gold (well, at least not until recently), it was difficult to counterfeit money without the theft being detected (like by biting a coin, weighing it, etc.). Later, by the time of Christ, a businessman could cash a check in Ephesus with the funds drawn on his bank in Rome, a thousand miles away. Later still, the printing press enabled the widespread convenience of paper currency. Today, the Internet enables the convenience of online transactions. While all forms of money come with risk of fraud, these modern monetary conveniences provide extraordinary benefit to billions of people.
Programming Note: On a December 2010 show and again in September 2015, Bob Enyart aired programs to answer the question, What is Money?, talking through the ideas in this article. 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). If men were shipwrecked on a deserted island, and they refused to work with one another, and stayed isolated, they would not build an economy. On the other hand, as they attempted to survive, or even thrive, if they did begin providing goods and services to one another, then they would gradually build an economy. An economy grows as human beings increasingly serve one another. And an economy will grow most quickly if these men are free, for the Bible says that, "liberty" provides the "opportunity... [to] serve one another." However, if they began to keep to themselves, and stopped trading goods and services, their economy would sputter out and die. So an economy thrives when men serve one another.
(Economist Walter Williams is a truly great mind, so only with careful thought do we offer two caveats to his otherwise brilliant remarks, about his loose words regarding the "benefit" that comes to some from government economic intervention, and his praise of the U.S. Constitution for its alleged support of limited government.)
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). That process, and the commitment itself, 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 they expunge the principal as it is repaid (Mises.org., etc.).
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 the bank keeps the interest that it has collected, it then expunges the money that it created in the loan.
Expunging Returned Principle: The lender expunges the returned principle that had been created by fiat, which is consistent with our definition, that money is the accounting of transferable incomplete transactions.
The Bible and the Fed: 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 its effectiveness (accountability) and efficiency (low cost).
Gold Is Not The Gold Standard In Money: Requiring a gold standard inflates the value of gold, by fiat. The fiat is the government declaration requiring a gold standard. That fiat requirement thereby artificially, that is, by government decree, inflates the value of gold. In this way America ciphered manufactured goods from Europe in return for our fiat-inflated gold; we then demineralized our money. By merely then going off the gold standard, from a distance and without cracking a safe, we devalued England's vaults.
The Gold Standard Arbitrarily Redistributes Wealth: As a result there is an unnecessary redistribution of wealth by which various governments transfer wealth to other countries that happen to find gold within their borders. Conversely, a government puts unnecessary hardship on citizens living in lands that lack gold deposits.
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 ratio, 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.
2016 Update: The pending vote in Switzerland to prohibit commercial banks from creating money, if "successful", would severly harm the Swiss economy and therefore will probably pass.
Also: If you enjoyed this article, you might also enjoy:
- BEL's What makes the economy go?
- Bob's DVD The Trouble with Lawyers
- Our KGOV Political Spectrums chart and program
- Listening to Bob's seminar: God's Criminal Justice System
- Bob interacts with a fellow from the UK's Adam Smith Institute, Tim Worstall, at Forbes
- Watching Bob's DVD God and the Death Penalty: New Testament Support for Capital Punishment
- Or just browsing the Department of Government in the KGOV Store.
* Select BEL Definitions: Among those definitions for common terms that Bob Enyart has posited as clarifications:
- God: The eternal Creator of the universe who is living, personal, relational, good, and loving.
- Time: The beginningless, endless, present, continuous, irreversible future to past dimension of change.
- Conservative: A Republican trying to save a social program started by a liberal.
- Bias: A loyalty (bias for one's team) or a false belief that one may draw conclusions from.
- Knowledge: (human) Awareness of truth. ex. He has much knowledge.
- Knowledge: (in books) Record of truth. ex. The library stacks contain much knowledge.
- Terrorism: Violent crime committed to influence public policy.
- Money: (from above) The accounting of transferable incomplete transactions.
- Forensics: Historical science; investigation of the past whether criminal or not.
- Crime: Click for witty definitions of legal terms.
If you think we should add some other definition used on BEL sometime over the last quarter century, please email your suggestion to Bob@kgov.com. Thanks! -The KGOV Crew