The generally accepted definition of money I was taught in High School Economics class is “Money is a medium of exchange and a standard of value”.
What does this mean?
Medium of Exchange
It can be used to buy and sell stuff.
Standard of Value
There is common agreement that money is what the value of everything else is compared to or denominated it.
But Something is Missing
While the above is true, it’s not the complete story.
Money is tax credits. Plain and simple. It is what the citizens of a nation need to pay their taxes.
The best way to illustrate what this means is to tell a story. It is the story of the origin of money, from ages ago, in various cultures around the world.
As with many good stories, it starts with…..
Once upon a time, people lived in small villages where the principal occupation was farming. The raising of plants and animals for food, clothing, and pretty much everything else.
Life was simple. A bit harsh perhaps, but simple.
It often came to pass that someone had a need or a use for something someone else had.
As everyone knew everyone else, and nobody traveled anywhere, the principal way of handling transactions, what we might call commerce, was an informal, but often fairly complex system, of credits. Debt if you will.
Someone needs 3 chickens. Someone else has 3 chickens. The chickens were given with an understanding that person A now owes person B something with the value of 3 chickens.
Maybe this was a quarter of a freshly killed deer, maybe this was a table for their kitchen, maybe this was a stack of firewood for the winter.
These informal credit transactions were easy to keep track of, as the village was very small. Most cultures didn’t even bother to write this stuff down, which was good as most people couldn’t yet read or write.
Every so often, maybe once or twice a year, the entire village would gather for a debt circle.
Someone would say “I owe him 3 chickens”. The guy who is owed the chickens would way, “Yes, and I owe that guy two chairs”. The guy who is owed the two chairs would say “Yes, and I owe that guy a cooking pot”.
They would go around the circle until they got back to the person with whom that debt circle started, at which point those debts would be canceled.
They would do this again, until they had another debt circle where all debts in that circle were cancelled.
This would continue until they could not make a full circle. Until so many debts had been cancelled, there weren’t enough to get back to the person who started it.
Those debts would stand, and the cycle of transactions through credit would start a new.
This style of commerce went on for a very very long, long, long, long time.
Eventually, villages grouped together into larger units, and even larger units, and even larger units, until you have Kings who rule large (at least to them) territories and have issues with neighboring Kings who rule other large territories.
Periodically there would be disputes between Kings, between kingdoms. Periodically those disputes would result in war.
Now, for the first time, people travel. Some villagers from various villages were conscripted into the Army and sent off to fight people in neighboring armies.
These soldiers need stuff. They need food, clothing, sword sharpening, maybe new swords, shields, etc.
But the credit system doesn’t work with these guys. The credit system is based on the people participating in it always being around. In the old credit system, you knew you would be repaid, because the guy who owes you is your neighbor.
Now you have some burly guy with a sword who needs stuff. If you give it to him, that way you’ve done for your neighbors for forever, you’ll never be paid back. That burly guy with the sword is leaving town.
This created a problem for the King. He needed a way to provision the army, without requiring an army of logistics people to do so.
The answer (and this happened over and over and over again in the ancient world) was money and taxes. Which by the way, go together like peanut butter and jelly, potatoes and buttermilk, beans and corn, raw fish and rice, Abbott and Costello, etc, etc. You get the idea.
Money and taxes show up together, over, and over, and over in early human societies.
The King decreed that silver was money. It was a convenient form of money as it was easily carried and easily divided into various values.
The King took ownership of all the silver mines in the kingdom (as after all, he IS the King), and had coins made with his picture on them.
The King paid people in silver coins, and required them to give him some back every year.
At this point, you might ask, if the King owns all the silver mines, and all the silver belongs to him, why did he give it out, only to take part of it back once a year? Why does that make sense?
The answer is….. The King required everyone in the kingdom pay taxes, and he paid his soldiers in silver.
This immediately created demand for these silver coins. Everyone needed them to pay taxes. To get them, you had to sell something to a soldier.
Suddenly, everyone in the kingdom has a keen interest in obtaining the silver coins. Everyone has an interest is selling something to the soldiers.
NOTE: This is actually how money works to this day.
Money is issued by a government, who taxes it back, in order to provision itself with whatever it thinks it needs. The government gets what it gets, from the larger economy, by virtue of having created demand for money, through taxation.
- Money is state generated.
- Taxes create demand for money.
- Because taxes are coercive (pay or be punished).
Money is tax credits.
This is true of US Dollars, British Pounds, Euros, you name it.
Money and taxes go together. One does not show up without the other.
Money is first and foremost, tax credits we members of an economy need to pay our taxes.
Beyond that, money is ALSO a medium of exchange and a standard of value.
Don’t believe me?
Maybe you’ll listen to Warren Mosler. He’s the guy who initially saw how this works.
While he does have a BA in Economics, he was a Wall St bond trader when he figured this out.
He was subsequently awarded an honorary P.hD. in Economics for seeing things classically trained economists missed.
The video below is where he describes how currency is simply a tax credit.
And in the video below here he explains brilliantly how taxes are what give currency value.