Chapter 2. Money systems: their elements, nature and functions.

1. Goals and method of this chapter.

What are they, how do they work and which is the use of money systems?

In this chapter we will try to reply to these questions. We must warn readers that the idea we are going to explain does not correspond to those expressed in most of the textbooks or specialized books on this matter. Besides, not even our idea is enough to explain clearly the present ways of the money reality.

Therefore, we are not going to describe how present systems are working, but we will try to find the descriptive and essential character of any money system, even if they do not necessarily correspond to their present forms.

With respect to the method of explanation, we have chosen a generative process, even if not exactly historical. In fact, we will present a temporary step sequence, but without any reference to specific historical facts. We must however admit that this succession in time of steps is deducted from actual historical facts previously considered. Under this condition, perhaps it would be better to start with history and then carry on with its interpretation. However, we have decided to start the other way round for the sole reason that in this way, when we start the historical approach in the next chapter, we will have at hand all the theoretic interpretation instruments, which will be very useful to understand actual facts.

2. Elements of the money systems.

For a greater clearness and accuracy we will distinguish, within any well developed money system, several elements which make it up, and which correspond to different levels of reality which must be completely separated to avoid confusion.

All these elements will be defined in the following paragraphs; after their analysis, it will be possible to reply to the original questions: what are the money systems? Which are their functions?

3. People and merchandise.

As we have already said, a market is an exchange of utilitarian commodities; since there is an exchange they are called merchandise.

In the market real people work who exchange real goods. Only if the actual exchange takes place both with respect to its subjects and objects, can we talk of a money system.

Money systems are, as we will soon see, completely abstract constructions; but they can only spring from the market as facts real and alive: they have been invented by real people to make the exchange of real merchandise easier. We insist on this fact, even if it seems obvious: people or merchandise are not really a part of the money system, but they are its sine qua non condition. Market is therefore a frame to remember when we deal with money systems.

4. Money units.

Exchange of goods can be perfectly brought about without any need for a money system. Under these conditions, every elementary exchange or barter of a real merchandise «A» against a real merchandise «B» is effected simply according to the subjective needs of the two actors in the exchange. If these needs are filled through a given barter, an agreement is reached.

In these cases, the feeling of a satisfaction by the agents of the market is always qualitative, as there is no quantitative model of the value of the goods to refer to, to calculate the exact equivalence between the exchange value of any two merchandises.

For societies which have a far reaching and complex market, this subjective-qualitative barter is not enough. In these societies, human ingenuity produces money units, in order to measure quantitatively the exchage value of all and every one of the real goods existing in a given market.

Money units allow the production of quantitatively equivalent exchanges, which we will call money barters.

In the same manner as to measure actual distances we use a metre, which is a conventional and abstract lineal unit, to measure the exchange value of real goods we will use money units. Money units are completely conventional measuring units, abstract and therefore universal.

We say that money units are abstract, because they are pure formal conventions, void of a real content.

And we say that they are universal because they constitute an abstract common denominator, which unifies all the real and varied goods existing in the market under consideration.

In the money market, every actual merchandise is indicated by a given quantity of abstract money units: thanks to this monetary uniformity of the real goods, naturally varied and different, it is very easy to calculate numeral equivalences among different goods.

We want to point out that the introduction of money units in a market does not imply the disappearance of an elementary barter, that is of the real exchange of real goods. Money units simply make barter easier and more perfect as far as figures are concerned, and, as we have said, it becomes a money barter.

5. Mercantile values.

An immediate consequence of the introduction of money units in a market, is the determination of mercantile values, which are mixed elements, concrete-abstract in nature, and are a consequence of the uniforming comparison among different real goods and abstract uniform money units.

Direct mercantile values are those obtained from the comparison of real goods/abstract money units, that is from marking every real merchandise with a given number of money units.

We can distinguish two sorts of direct mercantile values. If we talk about produced goods, we have price-mercantile goods, or simply sales prices. For example: «Price for 1 kg of potatoes is 30 money units». If we talk about producing goods we have salary-mercantile goods, or simply salaries. For example: «1 day work of a peasant worker is worth 2000 money units».

There is also an inverse mercantile value, obtained by comparing «money units/real goods» which we call money. Money is defined as «purchase power of real goods by the money unit within a given market». For example, «with one money unit we can buy 1/30 kg potatoes, or 1/2.000 of a peasant worker».

6. Money instruments.

In societies with a reduced trading dynamism and socially conservative, salary and money are usually determined almost exclusively by tradition and have a very slow evolution. Under these conditions, money barter as explained above is still useful.

But in more open societies there can be a more dynamic market, and prices, salaries and money can reach a good degree of liberty fluctuating and changing continuously, not only with respect to the desire of each of the parties to possess the merchandise offered by the other, but also with respect to objective situations: war or peace, want or abundance, more or less difficulties in transport, warehousing, etc.

Under these conditions, mercantile reality is so varied and complex, that money barter becomes also insufficient, and it becomes necessary to find new ways of exchange to allow quicker and easier transactions. Then money instruments spring up.

Thanks to money instruments, joint barter or direct exchange of goods can be substituted by an elemental money exchange, which is an exchange of goods delayed in space and time. It is not necessary then to wait and find the person interested in my goods, owning besides a merchandise which I want. Now it is possible to obtain the desired merchandise without giving any other merchandise in exchange, using money instruments and thanks to accountancy, which is narrowly related.

From now on we can define a money instrument as «an accounting document, which can be inter-compensated in an accounting system». It is a document produced with every free elemental mercantile act, in order to record all the amounts with an accountancy interest. With these documents it is possible to build up a system of inter-compensation in personal current accounts which will allow to finally give up barter, whether with or without money.

Let us imagine a possible trade (mercantile) relationship between two merchants: merchant A supplies grain to merchant B, but this has no merchandise of interest for the first one, therefore no barter relationship can be established between them. Thanks to the money instruments they will be able to reach an agreement.

Merchant A, whom we will call supplier, provides grain to somebody whom we will call customer; the supplier will receive no merchandise in exchange, but he will prepare a document where he will indicate quantity and price of delivered grain, the date of the operation and the names of both (and of witnesses to the act, if any). The two merchants will sign the document, and this will become an avowal of debt by the customer towards the supplier for the number of money units indicated. It is only necessary then for the supplier to go to the place where both merchants have a current account (today we would say a «bank»): there, with this document as a proof, there will be a «notation of amounts», that is a transfer of the indicated money units from the customer's current account to that of the supplier.

In this way, the money or purchasing power for the number of money units involved in the operation passes to the supplier, who will be able to use it as a customer, therefore completing the cycle of barter. But his purchases may be with different traders, in other towns, in other time periods... that is why we call it a deferred barter or exchange. The original barter of real goods has been separated in two or more elemental money exchanges, which implies the elemental movement of goods in one only direction through the money instrument.

After this, the balance present in every barter because of the equivalence of the exchange values of the exchanged goods will only be reached in the global market, because the various elemental money changes in which every barter has been dissociated are not necessarily balanced in their turn.

To conclude and in short, we say that a money instrument is simply «an acceptance of a debt, exactly documented and inter-compensable through a system of personal current accounts, within the whole free market of all the elemental free money changes». In this essay we will talk both of money instruments and of money documents, depending on whether we want to put in evidence its character of technical instrument -an accounting medium which allows the realization of a new kind of mercantile change- or to put in evidence its character of a document which exactly registers every mercantile elemental exchange.

It is clear that the elemental money change is much more nimble and allows a greater dynamism than the global money barter. In fact, from now on there is nothing new to be invented as far as the money system is concerned, since all the fundamental elements are present. The money instrument we have described is flexible enough to be adapted to any situation, whichever its mercantile complexity. It is only necessary to update it, depending from the mercantile realities and the present technological possibilities.

7. Synthesis on the elements of the money systems.

As a final synthesis we can say that the money systems are complex realities where we will distinguish the following elements:

These are an invention of a purely instrumental-auxiliary character to make a new sort of transaction easier and at the same time to record exactly each of the operations effected.

8. Nature of the money systems.

The fundamental conclusion derived from the above is that the money systems are of an exclusively instrumental nature, conventional and abstract.

In any market the basic element, the immediate subject of all the utilitarian interests, is constituted by the real goods. They have an intrinsic value which makes them desirable. They are considered as first realities on any trade utilitarianism.

A money system, on the contrary, is an artificial construction which is placed over these first concrete realities, with the only instrumental scope of controlling them more easily and effectively.

The real goods and the real people who exchange them are the basis of the existence of the money system: we therefore will consider it a second reality derived from the first one. The second and derived money reality has no intrinsic value, only a purely instrumental value, based on its abstract structure of the metric system.

If historically some forms of money instruments have been given a very concrete intrinsic value -we are talking about coins or any other form of merchandise currency- it does not mean that their being intrinsic is the defining and essential quality of money systems, on the contrary, the essentiality and usefulness of money systems is to be found precisely in their abstraction, conventionalism and instrumentality. This position has been defended since the times of Plato, the so-called nominalist theory.

9. Functions of the money systems.

A simple metaphor will explain the working of a money system such as the one described above.

We can imagine the money system as a very special mirror which shows cross-section squared pictures (second and abstract realities) of the real goods and of their movements in the market (first realities). Every time two market agents make an operation, the subject merchandise moves across a mirror where its cross-section squared picture is seen: this picture is the market value (price, salary and corresponding money). If the mirror has also a photographic device which makes a picture of the moving merchandise and of the agents involved, then the picture obtained is the money instrument-document. The image to be seen in the mirror is short lived, it disappears as soon as the operation is finished; but the photographic image remains and leaves an evidence of all the details of the operation. With respect to money units, they are the graticule in the mirror, the abstract-numeral scheme of all the previous images.

A money system such as that detailed above, whether it does exist or not at present in reality, has the following mercantile and social functions:

10. Money system and market strategy.

After studying the elements, nature and functions of the money systems, we must make a last consideration to show the role played by these systems in society. There is still another fundamental function that the money systems do not fulfill directly, but of which they are the only possible instrument, at least up to now. It is the function which we might call strategic.

Markets are not, on their own, in an equilibrated situation. Equilibrium must be found from outside, by means of an action of the will, which can be called strategic action.

One of the equilibriums which must be obtained in the first place in the market is the equilibrium between total sales power and total purchase power: purchase power has a trend to be lower than sales power, and we are not going to study why, at present. This unequality, when it is very important, is called monetary deflation. If the deflation is long lasting and takes an important size, it can produce serious crises of contraction of the markets and a productive recession.

The applicable strategy in these cases of insufficient buying power is the so-called money invention: supplementary buying power can be invented by way of certain monetary mechanisms.

This strategy is essential for any society since from it depends to a great extent the well being of all its components.

If the valid money system is informative and provides the exact and complete documents for every free elemental monetary exchange effected, then the market is well known in each of its sectors and sub-sectors. The choice of a money invention adapted to the real needs of this market is made possible in the appropriate quantity and directions. This will be a good strategy of money invention which we will call eu-strategy.

Historically, the invention of money has been an activity brought about by very specialized people, bankers, who have acted more by empirism and intuition than by a complete and scientific knowledge of the market. As a consequence, the strategic action has not had actually equilibrating results, on the contrary many times it has gone to much worse opposed situations: we are talking about money inflation, that is an alarming excess of buying power.

At present strategic errors are so enormous, that we have at the same time a terrible inflation and a deep recession, a situation called stagflation.

The crisis is there worse than ever: it is urgent to find innovating strategies and technological solutions, that is on a scientific basis.

Under the circumstances, it is easy to understand the importance of reconsidering the nature and functions of the money system. If we can make the money system an abstract and fully informative instrument, we will also be able to carry out a rational strategy for the market, a really equilibrating strategy.

We will try to define the bases for this strategy in the last chapters of this essay.