Money as a container of value and its purchasing power

Today money is at the center of all economic trends and developments: prosperity and crises, irrespective of their being public or individual and whose effects, in any case, impact on people and households, are always “measured based on the existence and possession of money”.

This being given, the question is what really is money?

“Passively” accepting its implicit meaning, without carefully considering what money really is, can lead to limiting conclusions, especially when looking for solutions to the increasingly frequent economic crises.

Therefore, it is extremely important to grasp, simply and clearly, the essence of the concept of money, in order to “discover” that, in addition to a type of money that today seems “nearly a private affair”, governed only by the tight and limiting debit-and-credit logics, there could be also “political money”[1], that is to say, money that, in the first instance, serves public good and the essential needs of human society.

Therefore, first of all, a first founding concept must be clarified: today, money has no value in itself but only based on the purchasing power it represents. Indeed, this has always been true, also when money consisted of gold and silver coins. In fact, these two metals, which are defined as precious, have a value because such value is assigned to them by society.

In primordial social groups, commodity money had a value in use and, therefore, an economic value in itself. Not only is this clear in barter but also in the increasingly complex forms that came after if over time.

Bartered livestock had an economic value, a value in use, as did wheat and salt but also iron; iron was given “in payment”, as raw iron ore (in the first instance) and in the form of measured bars or rods (afterwards) and it was used, given its ductility, to manufacture tools or weapons, in accordance with the seller's requirements. In general, it can be seen that a good (but also a service) has a value when it is fit to meet a human need.

Quite early on in the history of human societies, the exchange of goods and services became an unavoidable necessity as people became aware that they could not procure everything by themselves and that it is essential, and even vital, to have exchange relations with neighbouring groups, finally arriving at production specialization.

The monetary phenomenon, even where it was based on barter that was physiological and essential to the life of very small tribes (clans), came before the phenomenon of taxation, which, even though occurring earlier, needs evolved societies organized into complex communities.

The “quantum leap” occurs - and it is worth pointing it out - when the goods or services are paid for using something that has no value from an objective point of view: seashell ornaments, earlier, and gold and silver jewels, afterwards. As already mentioned, the above goods have no actual value in use, but they had a very high one for primordial societies; indeed, in such societies they had a very high magic and ritual value in use: these sacred objects, received as payments, could be used to ask everything of the gods and, therefore, they had an immense value in use.

So, in addition to being means (intermediate) in the exchange process and a value measure, money is also a “container” of value, either because it has a value in use in itself[2] or because such value, through an age-long abstraction process, whose origins have been barely outlined above, is acknowledged to it by society.

Today, undoubtedly this value is one and the same as the purchasing power provided by it, that is to say, its liquidity feature. Thanks to this feature, money can be immediately converted into goods[3] (durable or consumption goods) that are necessary for human life.

Therefore, if money has no purchasing power it can be deemed as valueless, and it essentially becomes empty and as useless as “waste paper”.

Irrespectively of the theories used to design any (public[4]) governance of money (monetary policy), it must be always kept in mind that money should at all time retain a sort of identification with the goods or services it can be converted into, which give concrete meaning to the purchasing power it carries.

If, in primordial societies, which used barter, the following equation (identification) applied:  (G)oods = (G)oods, in evolved societies, even the most complex ones, like ours, this identification has actually only slightly changed into the one given below:  (G)oods = (M)oney = (G)oods.

It is very clear that money comprises the value of some goods or services and then it becomes part of the value of other goods and services, all in accordance with the subjective preferences of users in terms of utility.

The concept of (G)oods could be replaced with that of (U)sefulness, thus better measuring the extension (from tangible to intangible) of the goods and services that people have been exchanging continuously and unceasingly between them, since the dawn of time.

The scarcity of existing resources[5] is the true limit, and an insurmountable one, to the value of money: the creation of new money cannot, in itself, magically result in the creation of new goods. Only man-made creation of new goods and services through the creation of new money, (as the intermediate of utilities in the exchanges of production processes[6]) within the limits set by the scarcity of resources, can meet human needs to a wider and better extent, increasing general welfare, if such a process is implemented fairly[7].

In the end, we have come to a simple but not so obvious conclusion, especially in a time, such as the present one, of enhanced finance capitalism: money identifies with the value or utility of the goods and services that are intended to be created or purchased with it to meet human needs.

Obviously, excluding thefts, robberies, looting[8], frauds, abuses, etc., a clear exchange relation or link exists between holders of money (utility) and goods or services (another utility): tendentially, except for specific situations, nobody gives up goods/money (values and utility) to have nothing or much less in return.

Also in this case, the amounts paid for taxes and levies, which actually are paid once again in exchange for non-divisible general services that the State is to provide against the collection of such taxes and levies[9].

These straightforward logics underlie the much wider and more complex monetary policy choices.

These choices also entail, in complex societies, setting down how much money is to be in circulation, as well as how, at what conditions and when it is to be created and, especially, who is entitled to do that and for what purposes.

It can be inferred that, in historical and social-economic terms, the considerations that may be made in this regard are extensive and, it goes without saying that here they cannot but be sketched focusing of some aspects that are deemed somehow useful, especially in the present monetary and financial crisis.

The value of the money existing at a given time should never “break” the relationship with the value of circulating goods and services. As mentioned above, in theory, the identification (G)oods = (M)oney, (G = M) should tendentially be always true.

Inflation processes (money losing value) are always linked to the alteration of this relation: any increase in the quantity of money without the relevant increase in goods and services (with their utilities fit to meet human needs) causes a decrease in its value.

Conversely, the creation of new money concomitantly with the creation of new utilities by means of new goods and new services does not, immediately[10], cause inflation[11], since, obviously, the necessary and sufficient identification remains in place, (G = M).

Therefore, money in the exchange of goods and services takes on a “serving function”, since the money requirement would be determined by the economic relations between “individuals”.

Based on the above, the importance of the money creation processes, their impact on the relevant quantity of money in circulation and, especially, their “relation” with the actual “requirement of payment means” resulting from economic trade is quite obvious. In modern economies, the above “monetary function” (i.e., the creation of payment means) is performed mainly by banks. The next paragraph deals with the main aspects of the above matters, focusing specifically on the relevant dysfunctions.

[1] This concept must be very clear: not “money of politics” but “political money”, meaning, as it will be better explained hereinafter, an innovative use of money, to be placed at the basis of the formulation of a theory of public expenditure financed through the issue of new money, without generating debt and without increasing the tax revenue, in a scenario of counter-cyclical economic policies.

[2] Today, this does not take place, even with the maximum abstraction reached by the concept of money, up to Bitcoin, i.e. the first decentralized digital currency, created and held electronically.

[3] Hereinafter the term “good” is considered a synonym of “service” and vice versa, meaning, as stated above, anything that can have an economic use.

[4] Referring to the function rather than to the governing body.

[5] A very important separate chapter should be opened on the natural capital depletion that such an economic development as the present one is causing.

[6] "Production process" is herein meant in its wider sense of exchange of wealth and not simply as tangible processing of goods or production of services.

[7] Fairness is meant in an economic, and thus social, sense.

[8] Looting, raids, spoils of war, all had (and sometimes still have), in other terms, the purpose of financing the communities to which the invaders belonged, in a sort of fiscal system “without taxes”.

[9] It would be unproductive and useless, as it has probably always been, emphasizing that, in accordance with the specifically relevant legal doctrine, the imposed taxes would be without a specific cause, in the sense that their payment would not generate any right to a specific service to be provided by the State to taxpayers in return. It is clear that, in addition to their being necessary to finance public expenditure, taxes also have a solidarity function and a purpose of wealth redistribution, aiming at the (theoretical) reduction of inequalities. Moreover, as economists are well aware of, progressive income taxes could have also an important automatic counter-cyclical action, even though certainly not in the present stifling economic scenarios: in good economic times, as income increases, the increase in taxes puts a bridle on any excessive expansion of the economy, whereas, again in theory, the exact opposite should occur in times of recession.

[10] Subsequently and indirectly, demand-pull inflation could arise induced by an increase in income, but such effect can be effectively controlled and governed by the competent monetary authorities.

[11] As well known, inflation is calculated by institutes of statistics based on the change in the consumer prices of some goods and services occurred in a given period of time (a month, a year, etc.). It is clearly a subjective figure and not an objective one, since it is affected by what goods and services are included in the so-called “basket of goods and services”, for its calculation. Therefore, nominal inflation and real inflation are two different things. In extreme terms, and going beyond the mere change in the consumer prices of certain goods and services, if, for instance, systemic financial crisis become the rule (one or more per year, as it seems to have occurred lately) and therefore, over a short period of time, billions of Euros “contained” in financial products commonly held by small investors are wiped off, it is only obvious that, in a broad sense, such phenomena, which are no longer one-off or occasional, generate inflation, by violently reducing the “store of value contained in the impaired financial instruments”. Today, this seems an effect of excess liquidity in the global finance circuits and, especially, of liberalization in capital movements and of the deregulation of financial markets. This excess monetary base vs. real goods does not generate the above disastrous consequences immediately and, to a certain extent, is hoarded in the so-called “shadow financial system”, also thanks to the so-called “tax havens”, until a sort of “tornado effect” starts, goes on for a variable period of time and ends with the creation and burst of a “financial bubble”.