Currency as Debt: A New Theory of Money
An Introduction
Part 3 of 9
 

A major source of difficulty, by the public and economic experts alike, is general agreement on an erroneous idea about the definition of wealth. Both groups sincerely believe that the thing used as money—currency—is wealth. However, providing a new and distinct definition for wealth avoids numerous problems and challenges with understanding the concept of money.

Wealth is ownership of labor, and of anything upon which labor has been expended, whether material or immaterial, which can directly satisfy human wants, needs or tastes. Wealth is goods and services (property) owned.

Some people might argue that wealth can be created without labor. For example, a fruit tree growing in the back yard might represent wealth when the fruit is ripe. Notice, however, that as long as the fruit is not harvested, the fruit is not wealth. Labor must be expended to receive any benefit from the fruit.

With only three definitions, some rules will help describe how the elements interact.

Consider a simple exchange of property between two people. Person A owns a cow and Person B owns two goats. Both desire to obtain title to the property of the other person. They agree to a straightforward exchange of the properties. Notice that goods are directly exchanged for goods.

Now introduce Person C to the discussion. Person C owns chickens and has no intention to trade those chickens for other forms of property, but Person C is willing to trade chicken eggs for milk. Person C then trades eggs for either cow’s or goat’s milk. Little has changed in the discussion except introducing a third person.

Consider that one day, rather than trade directly for milk, Person C decides to trade eggs for goat hair in order to make a new sweater. Yet Person A, who now owns the two goats, is unwilling to trade goat’s hair because of the winter season. Person A is, however, willing to trade for eggs with an IOU (I owe you), promising delivery of goat hair in the spring when the goats will be sheared. Notice that goods are directly exchanged for goods, but that Person C agrees to a delayed exchange.

How has the discussion changed? Person A still has goats and goat’s hair, and some eggs from Person C. Person A owns title to the eggs that Person C provided to Person A, and Person C holds only a piece of paper. In fact, Person A later consumes the eggs and no longer has any eggs. Regardless, Person C has not yet received anything of value; that is, property, in exchange for the property provided to Person A. Yet, nobody denies that Person A owes Person C some goat hair.

Person C can easily exchange that IOU with Person B. Person B can provide Person C some cow’s milk, and in the spring Person A would owe the goat hair to Person B. In this simple but straightforward example, notice that the IOU is currency. The IOU is the thing serving as a medium of exchange. The IOU serves only as a claim on a future exchange of wealth.

Notice that whoever holds the IOU has not yet received actual goods and services (wealth). That IOU serves as a reminder to both the holder and original issuer that an exchange of wealth has yet to be completed. That IOU represents something yet owed.

Therefore, at a fundamental level currency is a symbol of debt—uncollected property, goods or services (wealth). Currency is not wealth.

Debt: Debt originates in a transfer of ownership of wealth in which the owner does not immediately receive full compensation in wealth. Debt is always a negative quantity. All currencies are physical embodiments of debt. Currency represents wealth not received.

The fundamental difference between an IOU and currency is that an IOU is a token symbol of debt with respect to individuals; currency is a token symbol of debt with respect to an entire society.

All forms of wealth are positive quantities, subject to physical deterioration, whereas all forms of currency are symbols of debt, negative quantities not subject to deterioration. Wealth exists in physical form, debts do not. Wealth exists in the real world; debt exists only between our ears—as a concept. People cannot exchange debt, but can exchange IOUs or currency which are symbols of debt; that is, token symbols representing an unfinished exchange of wealth and thus, a future claim on wealth. Therefore, currency embodies both concepts of money and debt.

Regardless of whether a person participates in barter, trade, or commerce, all such transactions are exchanges of wealth. The only purpose for currency is to exchange goods and services—wealth—at a future date. Using currency merely introduces the time domain by delaying when exchanges are completed. Currency represents an unfinished exchange of wealth—goods and services.

Currency then, represents a willingness to forego and abstain from immediately receiving wealth.

Currency is necessary only when an economic society experiences a division of labor. The thing used to represent the concept of money—currency—is used as grease to help a society with a high division of labor to exchange goods and services. In a self-sufficient environment, or in a society with minimal needs and wants, currency is unnecessary because barter and trade will suffice.

As an economic society grows and the division of labor increases, a means is needed to help that society exchange wealth. Notice that in an economic society with a high division of labor that currency is used by almost everybody. By custom and unwritten agreement, all members of a society who use currency agree to use that thing as a medium of exchange; to exchange various forms of wealth.

Therefore, currency is and can only be a claim against the aggregate wealth of society. Wealth and currency are two different entities; or within the new model or theory of money, two different elements. Wealth and currency are not the same thing.