[Welcome, Crooks and Liars readers! -- lambert]

In case anyone might interested, This week's This American Life: "The Invention of Money".

The nature of money is clearly important to any discussion about national debt, so I thought some here might appreciate the link, given recent blog posts. However, my personal interest in the topic is rooted in what should we, as individuals, do with savings. Leave it in currency form, or use it on skill development, property, a part-time business, livestock--something more substantial than currency?

UPDATE For readers who come here from C&L, welcome again. I want to add this note to Zolodoco's post because there's been more discussion on the question "What is money?" here. First, at the Fiscal Sustainabilty conference that Correntians helped organize, Stephanie Kelton from the economics department at UMKC wrote this; it's lengthy, but not technical, and very revealing:

What we didn’t do, I guess, a lot of this morning is really to talk about money, and what is money. And, while there were some references to accounting, and blips on a screen and button pushing and so forth, we didn’t really distinguish what we’re talking about in Modern Money Theory from what most of the textbooks describe and what our students end up getting taught in most economics programs across the globe. [00:03:27]

When you open up an economics textbook, and you turn to the page that begins to talk about money, inevitably you find a story that begins with something about barter; and ‘once upon a time’ man trucked his wares to the local trading venue because he’s preprogrammed to truck barter in exchange, as Adam Smith told us, and there was no currency around. So you had to lug your clay pots and your shoes and your fish and whatever else you may have specialized in the production of, down to some local trading venue, where the only way the exchange could take place is if you happen to come upon the person who not only had what you wanted, but wanted what you had. [00:04:10]

Economists refer to that as the double coincidence of wants. And so, barter is this clumsy system for conducting exchange and, so the story goes, man suddenly decided – hey there must be a better way to organize – we should really think about finding some Thing that would be universally accepted. And, lo and behold, they hit on money, primitive forms of money first. The textbooks tell stories of things like pebbles and shells and feathers and beads and all of that, and later discovering money things like precious metals, which had nice properties that fish and other commodity monies didn’t have, in that they would serve as a good store of value, they were easily divisible, they were portable – you put your coins in your pocket and go conduct your exchange. [00:04:58]

But, the story is always told that this somehow happened spontaneously. The private sector figures out that there’s a more efficient way to conduct exchange. They choose to use money. They decide what money is. And this all happens without imposition from any authority, no state, nothing like that. So the money is stateless. And, then of course, over time, money evolves (I’m still in the textbook story) from things like primitive money to gold and then to paper with gold backing. People take paper in exchange for real goods and services and the argument is – well, but at the end of the day, it’s as good as gold. So they continue to accept the paper. [00:05:42]

Then the story gets more difficult to explain, for this group. Sometimes we call them the Metalists because, when you have a pure fiat money system, why do people accept currency, that is intrinsically worthless, backed by nothing of value, and yet people will beg, borrow, steal, toil away the day, in order to get these otherwise worthless pieces of paper? [00:06:05]

And so, what we like, what we prefer, is the story that’s been dubbed, or the approach that’s been dubbed Modern Money Theory, which traces the nature and origin of money to the early authorities. Randy has written a lot about this in his, ‘Understanding Modern Money’ book, from the early temples and later to the nation states and we could go on and on about this, but that’s not what I want to do. But, it does trace the origin and nature of money to some power authority; that is, the money does not emerge spontaneously by the will of the people, but it is imposed on them. [00:06:43]

How is it imposed on them? It is dictated by the authority. It is chosen. The authority establishes that you all must pay something to me. I define the unit of account. In the United States, the unit of account is the dollar. So I say in what unit you must pay obligations to me and then I tell you what you have to do to eliminate those debts. And so, I impose a tax liability on you. I make you indebted to me. Now you need to do something to eliminate your obligation to me. And I tell you how you can do that. In the United States, you can earn dollars. You pay your tax obligation to the state in U.S. dollars. That gives value to the government’s otherwise worthless pieces of paper, and allows them to move real resources from the private to the public domain. [00:07:34]

So we have a very clear way to answer the question ‘Why is fiat money accepted?’, whereas our textbook counterparts have some difficulty with that.

And Warren Mosler offers the following thought experiment, which simplifies the above and shows these ideas working in the real world. "How to turn litter into money":

[00:00:00] I take my business cards out here, and these are twenty dollars apiece if anybody wants to buy any. Nope. Any takers? Nope. All right, if anybody wants to stay after and help clean up the carpet and tidy up the room, I'm going to pay one per hour. All right, well, five per hour. One per hour, anybody want to stay and help? Ok, not a lot of takers. Then I add one more thing, look, there's only one way out of here, and there's a man at the door with a nine-millimeter machine gun [laughter], ok, and you can't get out of here without five of my cards. [laughter] Ok, now things have changed. I've now turned litter into money, now you will buy these, you will work for these things if you want to get out. The man at the door is the tax man, and that's the function of taxes. Stephanie talked about how taxes do it. But you can recreate that.

Mosler goes on to extend that parable to how the national debt really works. Please bear these ideas in mind when Obama's calling for sacrifice in the SOTU, and ask yourself who's sacrificing, and why.

See also here for "Money is a spreadsheet" (as Bernanke admits), and that since the dollar is created under the Preamble and Article I, Section 8 of the Constitution, the dollar is also, by definition, created by the sovereign people for a public purpose. --lambert]