Before we can design a better money system, we need to understand the true nature of the problems inherent in the one we now have.
PART ONE: BASICS OF CURRENCY
What is Money?
- most people would answer "It's what I never have enough of", but what is it exactly that they wish they had more of?
- money today takes many forms: cash, cheques, debit & credit cards, etc.
- what most people really mean when they refer to money is something that gives them purchasing power or the ability to acquire goods & services
Difference between Money & Assets
- Money has little or no intrinsic value. On its own it is relatively useless. It doesn't taste very good, doesn't burn very long or produce much heat. You can't wear it or build anything with it. It is only good when it can be used as a medium of exchange, that is when someone else is willing to give you something that you want or need in exchange for it.
- Assets are goods or services that have an intrinsic value or are useful in and of themselves. Food, clothing and housing are important basic assets. Cars, televisions and stereos are more exciting assets. But assets can also be non-material too. Knowledge & experience, skill & talent, creativity & intelligence are valuable assets. Good health, clean air & safe communities are important assets too.
- Money is often called an asset because it can usually be exchanged for real assets without much trouble - money has even taken on some of the attributes of an asset because traders and usurers have invented a host of complex, speculative schemes to manipulate its value, but if you were ever stranded on a deserted island with nothing but a suitcase full of money, you would soon appreciate the important difference between the money and real assets
A Historical Overview of Money
- 3 main types of money: commodity (object), specie (precious metal), fiat (symbolic value) - in early times commodity money was most common - the earliest known commodity money is China's spade money, 580-476BC - the gold & silver coins of ancient Greeks (mid-3rd century BC) were probably the first forms of international specie money
- in the 16th century, the goldsmiths who worked with precious metals had excellent security systems which attracted people who had valuables such as gold bars and coins that they wished to store - for a fee, goldsmiths provided safe-keeping services to others and issued certificates of deposit which were traded like currency - goldsmiths discovered that because not everyone wanted their gold back at the same time, they could lend out other people's gold, or issue more certificates than they had actual gold for, and earn interest without getting caught - this clever deception was the beginning of fractional reserve banking
- although the earliest records of banking date back to 1792 BC, modern banking began in 1694, when King William III, needing a way to fund a war against France's Louis XIV, granted the Bank of England a private charter
- in Canada, prior to the arrival of European settlers, the aboriginal people had used commodity money called Wampum, shells strung as beads into belts, but European counterfeiters soon destroyed its value
- first European settlers also used commodity money: mainly furs
- in the 1600s, the "made-beaver", which was equivalent to the value of one prime quality skin from an adult beaver, was the standard unit of account
- in the 1700s made-beaver tokens (coins) were minted in brass or stamped out of the copper bindings of shipping kegs
- as the colonial economy developed, more traditional forms of specie money from the exploring/trading nations found their way into circulation here
- around 1685, due to a shortage of coins, the French introduced playing card money (signed & sealed cards cut into halves, quarters, etc.) - after the fall of New France, the British refused to redeem the card money - this hurt mostly only the French settlers who lost confidence in paper currency
- in 1690, in support of "King William's War" the Mass Bay Colony invaded French Canada. The Boston soldiers were paid in promissory notes which were declared to be legal tender. Other colonies copied and from that day until the American Revolution (1775-82) there were no banks in the 13 British North American colonies - most colonial governments printed their own currencies and needed nearly no taxes
- worried that control over the colonies was slipping away, the Bank of England got the British parliament to forbid the colonies to produce their own money - Benjamin Franklin and the Continental Congress's defiance of the king was one of the main causes of the American Revolution
- fearing the War of 1812 would spill over into Canada, Sir Issac Brock issued paper currency called "Army Bills" to pay wages and acquire weapons & equipment - after the war they were redeemed by the government for gold & silver without losing their acceptance and value - this helped build people's confidence in paper currency again
- the first Canadian bank, the Canada Banking Company, was established in 1792, but it failed because it could not obtain permission to issue bank notes
- the first Canadian chartered bank, the Bank of New Brunswick, also failed and was eventually taken over by the Bank of Nova Scotia
- the first successful bank was the "Montreal Bank" established in 1817 - it became the Bank of Montreal and received its charter in 1822
- with the establishment of the banks the use of paper money increased - people could exchange the notes in payment for goods & services and were confident that they could be redeemed for gold & silver on demand (interestingly, the Montreal Bank notes were denominated in US dollars)
- as more and more banks were established, many notes in various forms were issued by these banks - some banks failed and many counterfeiters and phantom banks flourished - public confidence again became a problem and the need for a national currency soon became obvious
- in 1858, the Currency Act required that all government accounts be kept in decimal currency - the dollar was adopted as the official unit of account of the Province of Canada and 1, 5, 10 & 20¢ coins were struck
- in 1867, the first government notes were issued, first as Provincial notes, then as Dominion notes
- in 1871, the Bank Act repealed any provincial acts that conflicted with Dominion powers and guided the issuance of currency by private banks
- in 1894, the Bankers Association was formed - in 1901, it incorporated and became the Canadian Bankers Association
- in 1931, Royal Cdn. Mint was established - Canada abandoned the gold standard
- in 1934, revisions to the Bank Act provided a schedule for the reduction and eventual elimination of the issuing of currency by the private banks by 1944 - the Act also established the Bank of Canada to assume the total responsibility for issuing currency
- the BoC became operational in 1935 - although privately-owned initially, by 1938 it was publicly-owned
- as of Jan 1, 1945, all banks ceased issuing or re-issuing their own notes
PART TWO: BASICS OF CREDIT
Difference between "Money You Own" and "Money You Rent" (or Credit)
- money you own can be either cash in your pocket or earnings deposited in your savings or chequing accounts - it is money that you have already earned from your own labour and initiative
- money you rent is any borrowed money that you must eventually repay
- interest is the Rental Charge that you must pay to the lender to use his money for a period of time
- another way to look at interest is as a Tax on Future Potential. The lender assesses your future earning potential. If you have sufficient collateral, and he believes that your ideas, skills and initiative will likely produce a steady and reliable income, then he will monetize your potential and lend you the right to develop your own abilities. While the government taxes all your past accomplishments, the lender taxes all your future achievements. Both feed on your energy and initiative. If you are aggressive in the marketplace, after paying them both, there may be enough of your earnings left over for you to live on.
Differences in Purchasing Power
- the purchasing power of an Owned Dollar is equal to exactly one dollar
- the purchasing power of a Borrowed Dollar is equal to one dollar less the amount of interest that is charged by the lender
- the purchasing power of a Loaned Dollar is equal to one dollar plus the amount of interest that is charged by the lender
- for example, if you have 100 Owned Dollars in your pocket, you can purchase goods and services worth exactly $100 (ignoring taxes for now)
- if you have 100 Borrowed Dollars , and the interest charged is $10 or 10%, then you can only buy $90 worth of goods and services - or if you buy $100 worth of goods and services, you will have to earn $110 later in order to be able to pay back your debt
- if you have 100 Loaned Dollars , on the other hand, when they return to you with interest added, you will be able to purchase $110 worth of goods and services
- this is why the wealth of people with many Loaned Dollars grows much faster than the wealth of people using many Borrowed Dollars
- when interest rates soar, people relying on loaned dollars can't purchase as many non-financial goods & services... consumer demand falls, production slows, layoffs occur and a recession soon follows