DEFINING THE REAL PURPOSE OF MONEY

A number of economists, especially in the academic field, consider the discipline of economics to be a science worthy of study. It is definitely worthy of study, but it is far divorced from anything resembling a “science”. Economics is fundamentally, a collection of theories, seemingly aimed at the issue of “growth”, but only determining “growth” as a means of achieving “wealth.”

It also appears that the abstract concept of “wealth” from an economic point of view, can only be measured in terms of “money”.

The amazing thing about the study of economics, and the people who study it, is their almost complete and utter refusal to define the origin, purpose, ownership, and the why, a supply of “money” is needed for a modern day society to function.

At root, economics is about “money,” and despite all the theorising, the mathematical calculations, the charts, the historical boom and busts, everything boils down to “money” – the very thing economists strenuously refuse to discuss.

What is “money”?

Sure, it’s been around for centuries; and yes, every country uses it in one form or another. And yes, it has been created in a thousand different ways and from all sorts of different material. But why has “money” featured throughout history as something that’s seen as desirable, as necessary, as valuable, and as convenient?

Convenient for what? That’s the question that is really the key to defining the purpose for having a money system at all.

“Money” is the most practical and convenient way to create a medium of exchange.

That’s it. There is no other real, or legitimate, purpose at all for having a money system in any society.

It really doesn’t matter what is used to create the “money supply” as long as the two principle characteristics are fulfilled. Creating a “money supply” is a fundamental public purpose for having a Government, as only a Government is in the position to guarantee the legitimacy of the nation’s legal tender, and to create a “token” that can be universally accepted.

Whatever tokens are used, whether it is a metal of some description, pieces of paper, some plastic, or some numbers written in cyber space, the first characteristic is that the “token” has to be universally accepted within the society. The second characteristic is a guarantee that the “token” is not a false “token”, and that there are ways and means, to ensure only genuine “tokens” are allowed to be created.

It is virtually axiomatic that every society is completely aware of the convenience for having a “money system;” a system that allows the daily buying and selling of goods and services. As long as the two principles above are addressed, the people need no coercion, or justification, for accepting “money” as their preferred medium of exchange.

Is “money” valuable? In itself, a “money token”, irrespective of what form it takes, is only as valuable as the quantity and quality of the goods or services it can be exchanged for.

Is “money” desirable? “Money tokens” themselves, are not normally things to be admired, or desired, although some of the physical “tokens” do have an intrinsic value, and some notes can be objects of quite artistic virtue. However, the accumulation of “money tokens” is seen as desirable, but really, only because it enlarges one’s choices for exchanging it for items needed, or wanted. If the accumulated supply of “money tokens” is not used for some practical purpose, then it is basically useless.

Essentially, the missing link in the worlds financial systems is the fact that our society's productive capacity is divorced from its consumption capacity. There is absolutely no point in producing anything if it can't be consumed. Once you convert "money" into a commodity and allow gambling into the system, and the creation of "money" without any relationship between production and consumption, it must result in the boom and bust cycles along with inflation and deflation.

As for linking politics and the economy - it is virtually impossible to separate the two.

Actually, two of the best writers on economic issues are C H Douglas and Fredrick Soddy - both practical and qualified professional in Engineering and Chemistry, respectively - and not professional economists. Both wrote in the 1930's and accurately foresaw where the current financial system was heading.

The question of debt

To 'rationalise' going into debt as being a reasonable "capital investment', when it's not your 'capital', and you have no alternative to achieving the generally accepted standard of living, seems to be the approach of a rationalist. Going into debt can work for some people, if used in a responsible manner. However, the "responsibility" is a two way street, it applies to the lender as much as it does the borrower, and when the lender is motivated by the amount lending he can achieve, "responsibility" gets put on the back burner.

Most people have to borrow to buy and live in a house, and in today’s world, to use a credit card through necessity. Some people are fortunate to sometimes have housing provided, but bringing up a family will usually necessitate borrowing. It is not necessarily an either/or statement that if you have to borrow you can't save a penny - a lot of people do both, but the point is they had to borrow in the first instance. However, there are many people who cannot make ends meet in this modern economic society and are in need of food vouchers and other forms of assistance.

C, H. Douglas was an engineer in charge of areas of production during WW1 and approached the financial side from a very practical point of view. His books, "Economic Democracy" and, "The Monopoly of Credit" were written back in the 1920 to 30's and are as relevant today as when they were originally written. He pointed out that the wage earner can never have enough purchasing power to buy the goods and services produced because, the wages component of any product is between 25 to 35% of its cost. Consequently, people are forced to borrow to maintain the standard of living in their society. Obviously, the banks love that sort of situation, except, the bankers are now finding it more profitable to deal in those toxic and exotic financial products that actually produce nothing substantial apart from more money for the big time gamblers.

GOLD, TAXES AND BORROWING

In truth, taxes and borrowing are only essential for a nation that operates on a money supply restricted to the amount of gold they have available. A Monetary sovereign nation using their own currency does not need to impose any taxes at all, unless it needs to cool down an overheated economy. The real problem with the fiat currency system is the lack of a constitutional restraint on a government from creating money that is not regulated by the growing productivity needs of an expanding society. As the population increases, more goods are needed, and as long as the money supply is related to the nation's productivity and services, inflation will not be a problem.
When the medium of exchange is created and used for non-productive activities, such as gambling on the stock exchange, in derivatives and bonds, that's when the value is destroyed. 
Gold cannot be independent of government manipulation as Roosevelt proved. He confiscated gold at $20 an oz and revalued it at $35 an oz to provide the government with a $3 billion windfall. It was the farcical attempts of the Bretton Woods agreement to try and maintain the price of gold at $35 an oz that was unrealistic. There simply wasn't enough gold in the world to maintain the expanding economic activity, including the ongoing war mongering, after the Second World War. 

If a nation, with a growing economy, tries to restrict its money supply to the amount of gold it has available, it will be forced to either continually revalue the relationship between the money supply and the governments gold supply, or be forced to abandon gold just as happened to Nixon in 1971.
Alternatively, if the relationship is maintained as the population and the economy grows, the government will be forced into ever increasing debt to the private lenders. 
Ron Paul is incorrect in defining gold as “money” - gold is not money although it has been used as such, but in today’s world - it is a barometer for measuring the value of any given currency. Gold is really only useful if it can be exchanged for the currency used in the nation. 
In fact, it is quite ridiculous to say a nation can only create a medium of exchange if it has a store of gold available. The real problem with fiat currencies is their divorce from the productive capacity of the nation. If governments were compelled to relate the money supply in line with the growing production of assets and services required by their society, that currency would become a 'sound' money supply backed by physical assets of the nation.
Unfortunately, for a country to be governed by the rule of law this requires them to be constrained through a Constitution, a Constitution which is fully supported by their judicial system. That seems to be too hard an ask for most nations in the world today.

The economy of today is based on the fiat currency system and is totally divorced from the gold standard system, at least partially in place until 1971. So few politicians, economists, commentators, educators and members of the general public, realise or understand the significance of this change, and keep discussing the economy in terms parameters that no longer apply. For anyone who really wants to understand the difference, they should read Warren Mosler's book, "The Seven Deadly Innocent Frauds of Economic Policy". It's a small book and can be downloaded on the internet.

Actually, gold, and other "precious" metals, could be perfect barometers in respect to the real value of any currency, provided the gold price itself, isn't manipulated, as it currently is. In that respect gold is very useful, but it is not, and really cannot be, a controlling factor in the way governments operate their financial system, especially in respect to a growing economy. 

The current issues facing the populations are a direct result of deliberate Government fiscal policy, but that policy of slashing the social network, and destroying employment, stems from the fact that the politicians, and the government, are kowtowing to the banks in applying gold standard principles to the fiat currency system. Given that the Government is the monopoly issuer of the fiat currency, then the spending by the government is actually independent of the amount of revenue it can raise. There is no such concept of the government being “out of money” or not being able to afford to fund a program. How much the national government spends is entirely of its own choosing. The government needs to do what it has the constitutional authority to do, and that is create the nation's currency free of interest payments or the necessity to borrow from the private sector. As long as they restrict the nation's currency to the productive and consumption capacity of the nation, and in relation to the nation's population levels, inflation would not be a problem.

Our government got conned back in 1923, when the Bruce/Page Government effectively killed off the original Commonwealth Bank of Australia as the publicly owned Government Bank that operated in the interests if the Australian people. The Constitution says the government is the authority and has the sole right to create the nation's money supply. The interesting thing about our current Reserve Bank, and every other private bank in the world, is that they create the loan money and credit advances out of thin air, under the government sanctioned fractional reserve system.