Ask Yourself This Question…What Is Money?
If your answer is… Hunh? Or… What do you mean by that? Or… The stuff in my wallet, then it shows you lack an understanding of the nature of money (as do many, if not most people today).
The most important thing you need to know about money, as our editor Rudy Fritsch says… money is what extinguishes all debt, or in another word, it is payment.
I’ve written this article from the perspective of an Australian, since I am one. However, what follows is equally applicable to the ‘paper money’ of any nation, on any continent, anywhere on Earth.
The Australian Dollar was originally called the Pound and these Pound notes (keep the word note in mind) used to have printed on them “The Treasury promises to pay the bearer the equivalent in gold coin”1. That’s right, you could take your Pounds to the Treasury (or a bank) and redeem them for a specific weight in gold coin, this was known as the Gold Standard. The Treasury (or the bank) had ‘on deposit’ real gold coins.
If you wished, you could then exchange2 your gold coins for other goods and services. Another way of saying this is that gold could legally be tendered in payment of debt, to wit, it was legal tender, it was, quite literally, for the average person (though the average person may not have had a lot of it), money. Why was gold money? Because it extinguished all debt, it was payment.
The Pound was also considered money (and legal tender) at the time because as long as the bearer (of the note, i.e. you) could redeem said Pound notes with (a specific weight of) gold, the Pound was considered to be as good as gold. But remember, note… in finance a note is debt. The Pound could only be held to extinguish debt and thus be considered money, as long as the note itself could be extinguished by gold. The Pound was merely a ‘promissory note’, a promise to pay, an obligation of the issuer (the Treasury), not payment in and of itself. It was akin to a modern day bearer cheque, when the drawer, instead of writing your name on the cheque, writes ‘Cash’. This cheque can then be cashed at the bank of issue by the bearer, who need not be you. Conceivably, you could have ‘paid’ someone else with it.
What is nowdays legal tender? What can be legally tendered in payment of debt? In Australia, it is the Australian Dollar, it says so on an Australian banknote: “This Australian note is legal tender throughout Australia and its territories”. If you’re not from Australia, take a look at your native notes, they will say as much. Legal tender everywhere is a banknote.
So what is the Australian Dollar? Most people would say money, though no one would nowdays claim that it is as good as gold. You cannot redeem your dollars for a specific weight of gold (or silver, or anything else) at the Treasury. The Australian Dollar is in fact the irredeemable note (debt, liability) of the Reserve Bank of Australia (RBA). But remember, money is what extinguishes all debt, how can (irredeemable) debt extinguish debt? It can’t. So how can the Australian Dollar be money? It isn’t. The RBA will never admit it, but as a bearer of dollars, you are in fact a creditor of the RBA, the RBA is in debt to you. The dollar is (like the Pound was) a bearer cheque, that says to you the bearer: There is on deposit at the RBA something to the value of whatever number is printed on this note. Of course nothing like this is actually printed on the note these days.
But hang on, didn’t I just say that you cannot redeem your dollars for anything at the Treasury? Yes I did, and you can’t redeem your dollars for anything at the RBA either. So doesn’t this mean that the RBA is writing dud cheques and passing them off on you and me? Yes it does. There is nothing on deposit at the RBA, aside from the questionable obligations of other banks, foreign governments and even the Australian Government itself. The government claims its own liability as an asset and draws cheques against it, because you see, the RBA is ‘wholly owned by the Australian Government‘, what a rort!
And anyway, isn’t writing dud cheques a form of fraud? I think so.
A private bank could not endlessly draw cheques on itself if it had nothing of value to redeem. At some point the bank would be held on its ‘promises to pay’ and if found wanting a bank run would ensue. The bank would be ‘rupt’. On the other hand, how can you hold the government on its promises (to pay)? It sure doesn’t matter which one you elect.
So the Australian Dollar is debt, and being irredeemable, it is, if you will, a ‘bounced’ cheque. But you well know a bounced cheque has no value at all, so how can something that has no value… have value, after all the Australian Dollar is still money isn’t it? The only reason the Australian Dollar retains any value at all is because despite it being the liability of the issuer (the RBA), it is in fact you who must redeem it with the fruits of your labour; it must be accepted by you in payment of debt, by the person you pass it on to in payment of debt and so on. It is legal tender and you do not accept it in payment of debt (redeem it)… at pain of government displeasure.
What’s more, being worthless, how can the Australian Dollar possibly maintain its value over time, after all, you save it up to buy stuff in the future, yes? The truth of the matter is that the Australian Dollar is not maintaining its value over time (against anything you may wish to redeem it for). Its value has declined and will continue to decline. How so?
Imagine a debtor ‘paid’ you by cheque, say $100 for a days work. What if at the bank of issue you can only redeem it for $50 in cash? You would likely demand your debtor write you another cheque for $100 immediately, but certainly you would demand a cheque for $200 if you were ever inclined to work for this person again (so you still receive $100 in cash). But what if on some subsequent occasion the bank now redeemed your $200 cheque for only $50? Then your next days labour would cost $400. Are you getting my drift? These cheques are depreciating in value against cash, and thus your labour, and likely any goods or services you wish to spend your cash on. This you may otherwise know as inflation.
Is it any wonder that when priced in dud cheques (the Australian Dollar), the ‘price’ of everything relentlessly rises, year after year? That is to say, the Australian Dollar is being redeemed for less and less, year after year. If it wasn’t legal tender it would have long ago failed to have been redeemed for anything of value and so ceased to be anything of value, it would well and truly have depreciated into worthlessness.
- In the United States, printed on the note was “This certifies that there has been deposited in the Treasury of the United States (however many) dollars in gold coin. Payable to the bearer on demand”. Even the first Federal Reserve Notes (the modern day U.S. Dollar), were emblazoned with “redeemable in gold”.
- Notice I haven’t used the word redeem here. Redeem means to make up for, to reinstate (oneself) in someone’s good opinion. Only if you are passing a promise of payment (rather than actual payment) to someone for debt incurred would you need to redeem yourself, in the form of actually paying.
- The RBA does claim to have 2.57 million ounces of gold ‘on deposit’, however the International Monetary Fund (not the RBA!) admits that this includes gold ‘on loan’. So some portion of that 2.57 million ounces is actually the questionable obligations of bullion banks (banks that deal in physical gold… yes, they still do!). The RBA lends gold to the bullion bank and the bullion bank deposits a note, a promise to repay in gold, with the RBA. Why? Because gold still extinguishes all debt, it is still payment and thus remains money, just not yours. However, you cannot question the worth of the obligations on deposit at the RBA and thus the worth of your dollars (despite you being the RBA’s creditor), by redeeming them for (a specific weight of) gold. So in other words, your dollars are dud cheques.
May 20th, 2010