Archive for April, 2009

What is Money?

April 19, 2009

Money is first and foremost a trading currency. A trading currency is a set of tokens representing some immediate value which one receives in exchange for a product or service. These tokens can then be exchanged for additional products or services. Because trading currency is needed in day to day business, government, and personal trading operations, those who save extensive sums, reduce the currency available for trade, which causes prices to rise, reducing the volume of trade, which in turn reduces the value of the given currency, in turn reducing the value of savings, which induces more saving, further reducing the currency available. When currency available for trade is significantly reduced, and prices rise, eliminating demand, with the value of the saver’s holding tend toward zero, the central bank is forced to produce more currency so trading can resume, allowing demand to increase, which tends to stabilize the value of savings. This production of currency eventually dilutes the value of the currency, causing further loss in the value of savings. There are only two known working solutions to this mathematically recursive process. The first involves some forced redistribution of savings, before the deflationary processes start. The second solution requires the central bank to adjust the money supply, such that sufficient currency and credit is always available to sustain trade – which also forcefully devalues savings. Those who have attained significant wealth dislike both solutions. Periodically some of these campaign for the gold standard, or silver certificate solution – which eventually eliminates trading currency. In recent times central banks have largely relied on interest rates to stabilize currencies, however this tool alone does not seem to be sufficient, and may in fact exacerbate the problem.