Chapter 2. Money systems: their elements, nature and functions.
- Goals and method of this chapter.
- Elements of the money systems.
- People and merchandise.
- Money units.
- Mercantile values.
- Money instruments.
- Synthesis on the elements of the money systems.
- Nature of the money systems.
- Functions of the money systems.
- Money system and market strategy.
1. Goals and method of this chapter.
What are they, how do they work and which is the use of money systems?
In this chapter we will try to reply to these questions. We must warn
readers that the idea we are going to explain does not correspond to those
expressed in most of the textbooks or specialized books on this matter.
Besides, not even our idea is enough to explain clearly the present ways
of the money reality.
Therefore, we are not going to describe how present systems are working,
but we will try to find the descriptive and essential character of any
money system, even if they do not necessarily correspond to their present
With respect to the method of explanation, we have chosen a generative
process, even if not exactly historical. In fact, we will present a temporary
step sequence, but without any reference to specific historical facts.
We must however admit that this succession in time of steps is deducted
from actual historical facts previously considered. Under this condition,
perhaps it would be better to start with history and then carry on with
its interpretation. However, we have decided to start the other way round
for the sole reason that in this way, when we start the historical approach
in the next chapter, we will have at hand all
the theoretic interpretation instruments, which will be very useful to
understand actual facts.
2. Elements of the money systems.
For a greater clearness and accuracy we will distinguish, within any
well developed money system, several elements which make it up, and which
correspond to different levels of reality which must be completely separated
to avoid confusion.
A first set of realities is the one made up by all the people who act in
a market and by all the goods exchanged in this market. Evidently we are
dealing with a level of actual realities.
The second element to take into consideration are the money units: they
belong to a level of completely abstract realities.
In the third place, we must consider the mercantile values, realities
of a mixed concrete-abstract level.
Finally, we can distinguish what we will call money instruments: it is
a level of mixed realities, but much more complex than the ones mentioned
All these elements will be defined in the following paragraphs; after their
analysis, it will be possible to reply to the original questions: what
are the money systems? Which are their functions?
3. People and merchandise.
As we have already said, a market is an exchange of utilitarian commodities;
since there is an exchange they are called merchandise.
In the market real people work who exchange real goods. Only if the
actual exchange takes place both with respect to its subjects and objects,
can we talk of a money system.
Money systems are, as we will soon see, completely abstract constructions;
but they can only spring from the market as facts real and alive: they
have been invented by real people to make the exchange of real merchandise
easier. We insist on this fact, even if it seems obvious: people or merchandise
are not really a part of the money system, but they are its sine qua non
condition. Market is therefore a frame to remember when we deal with money
4. Money units.
Exchange of goods can be perfectly brought about without any need for
a money system. Under these conditions, every elementary exchange or barter
of a real merchandise «A» against a real merchandise «B»
is effected simply according to the subjective needs of the two actors
in the exchange. If these needs are filled through a given barter, an agreement
In these cases, the feeling of a satisfaction by the agents of the market
is always qualitative, as there is no quantitative model of the value of
the goods to refer to, to calculate the exact equivalence between the exchange
value of any two merchandises.
For societies which have a far reaching and complex market, this subjective-qualitative
barter is not enough. In these societies, human ingenuity produces money
units, in order to measure quantitatively the exchage value of all and
every one of the real goods existing in a given market.
Money units allow the production of quantitatively equivalent exchanges,
which we will call money barters.
In the same manner as to measure actual distances we use a metre, which
is a conventional and abstract lineal unit, to measure the exchange value
of real goods we will use money units. Money units are completely conventional
measuring units, abstract and therefore universal.
We say that money units are abstract, because they are pure formal conventions,
void of a real content.
And we say that they are universal because they constitute an
abstract common denominator, which unifies all the real and varied goods
existing in the market under consideration.
In the money market, every actual merchandise is indicated by a given
quantity of abstract money units: thanks to this monetary uniformity of
the real goods, naturally varied and different, it is very easy to calculate
numeral equivalences among different goods.
We want to point out that the introduction of money units in a market
does not imply the disappearance of an elementary barter, that is of the
real exchange of real goods. Money units simply make barter easier and
more perfect as far as figures are concerned, and, as we have said, it
becomes a money barter.
5. Mercantile values.
An immediate consequence of the introduction of money units in a market,
is the determination of mercantile values, which are mixed elements,
concrete-abstract in nature, and are a consequence of the uniforming comparison
among different real goods and abstract uniform money units.
Direct mercantile values are those obtained from the comparison
of real goods/abstract money units, that is from marking every real merchandise
with a given number of money units.
We can distinguish two sorts of direct mercantile values. If we talk
about produced goods, we have price-mercantile goods, or
simply sales prices. For example: «Price for 1 kg of
potatoes is 30 money units». If we talk about producing goods
we have salary-mercantile goods, or simply salaries. For
example: «1 day work of a peasant worker is worth 2000 money units».
There is also an inverse mercantile value, obtained by comparing
«money units/real goods» which we call money. Money
is defined as «purchase power of real goods by the money unit within
a given market». For example, «with one money unit we can buy
1/30 kg potatoes, or 1/2.000 of a peasant worker».
6. Money instruments.
In societies with a reduced trading dynamism and socially conservative,
salary and money are usually determined almost exclusively by tradition
and have a very slow evolution. Under these conditions, money barter as
explained above is still useful.
But in more open societies there can be a more dynamic market, and prices,
salaries and money can reach a good degree of liberty fluctuating and changing
continuously, not only with respect to the desire of each of the parties
to possess the merchandise offered by the other, but also with respect
to objective situations: war or peace, want or abundance, more or less
difficulties in transport, warehousing, etc.
Under these conditions, mercantile reality is so varied and complex,
that money barter becomes also insufficient, and it becomes necessary to
find new ways of exchange to allow quicker and easier transactions. Then
instruments spring up.
Thanks to money instruments, joint barter or direct exchange of goods
can be substituted by an elemental money exchange, which is an exchange
of goods delayed in space and time. It is not necessary then to wait and
find the person interested in my goods, owning besides a merchandise which
I want. Now it is possible to obtain the desired merchandise without giving
any other merchandise in exchange, using money instruments and thanks to
which is narrowly related.
From now on we can define a money instrument as «an accounting
document, which can be inter-compensated in an accounting system».
It is a document produced with every free elemental mercantile act, in
order to record all the amounts with an accountancy interest. With these
documents it is possible to build up a system of inter-compensation in
personal current accounts which will allow to finally give up barter, whether
with or without money.
Let us imagine a possible trade (mercantile) relationship between two
merchants: merchant A supplies grain to merchant B, but this has no merchandise
of interest for the first one, therefore no barter relationship can be
established between them. Thanks to the money instruments they will be
able to reach an agreement.
Merchant A, whom we will call supplier, provides grain to somebody
whom we will call customer; the supplier will receive no merchandise
in exchange, but he will prepare a document where he will indicate quantity
and price of delivered grain, the date of the operation and the names of
both (and of witnesses to the act, if any). The two merchants will sign
the document, and this will become an avowal of debt by the customer towards
the supplier for the number of money units indicated. It is only necessary
then for the supplier to go to the place where both merchants have a current
account (today we would say a «bank»): there, with this document
as a proof, there will be a «notation of amounts», that is
a transfer of the indicated money units from the customer's current account
to that of the supplier.
In this way, the money or purchasing power for the number of money units
involved in the operation passes to the supplier, who will be able to use
it as a customer, therefore completing the cycle of barter. But his purchases
may be with different traders, in other towns, in other time periods...
that is why we call it a deferred barter or exchange. The original
barter of real goods has been separated in two or more elemental money
exchanges, which implies the elemental movement of goods in one only
direction through the money instrument.
After this, the balance present in every barter because of the equivalence
of the exchange values of the exchanged goods will only be reached in the
global market, because the various elemental money changes in which every
barter has been dissociated are not necessarily balanced in their turn.
To conclude and in short, we say that a money instrument is simply «an
acceptance of a debt, exactly documented and inter-compensable through
a system of personal current accounts, within the whole free market of
all the elemental free money changes». In this essay we will talk
both of money instruments and of money documents, depending
on whether we want to put in evidence its character of technical instrument
-an accounting medium which allows the realization of a new kind of mercantile
change- or to put in evidence its character of a document which exactly
registers every mercantile elemental exchange.
It is clear that the elemental money change is much more nimble and
allows a greater dynamism than the global money barter. In fact, from now
on there is nothing new to be invented as far as the money system is concerned,
since all the fundamental elements are present. The money instrument we
have described is flexible enough to be adapted to any situation, whichever
its mercantile complexity. It is only necessary to update it, depending
from the mercantile realities and the present technological possibilities.
7. Synthesis on the elements of the money systems.
As a final synthesis we can say that the money systems are complex realities
where we will distinguish the following elements:
Real people, market agents exchanging real goods within a
given market. Without this market it makes no sense to talk about money
Money units which work as measure units; radically conventional-abstract
and invented to meet the need to establish exactly the exchange value of
each and all the real goods exchanged in a given market.
Mercantile values (prices, salaries and money)
which are mixed items, concrete-abstract, resulting from comparison between
real goods and abstract money units.
The previous three elements are enough for an underdeveloped market; however,
in societies with a greater mercantile dynamism a new element appears:
These are an invention of a purely instrumental-auxiliary character to
make a new sort of transaction easier and at the same time to record exactly
each of the operations effected.
8. Nature of the money systems.
The fundamental conclusion derived from the above is that the money
systems are of an exclusively instrumental nature, conventional and abstract.
In any market the basic element, the immediate subject of all the utilitarian
interests, is constituted by the real goods. They have an intrinsic
value which makes them desirable. They are considered as first realities
on any trade utilitarianism.
A money system, on the contrary, is an artificial construction which
is placed over these first concrete realities, with the only instrumental
scope of controlling them more easily and effectively.
The real goods and the real people who exchange them are the basis of
the existence of the money system: we therefore will consider it a second
reality derived from the first one. The second and derived money reality
has no intrinsic value, only a purely instrumental value, based on its
abstract structure of the metric system.
If historically some forms of money instruments have been given a very
concrete intrinsic value -we are talking about coins or any other form
of merchandise currency- it does not mean that their being intrinsic is
the defining and essential quality of money systems, on the contrary, the
essentiality and usefulness of money systems is to be found precisely in
their abstraction, conventionalism and instrumentality. This position has
been defended since the times of Plato, the so-called nominalist theory.
9. Functions of the money systems.
A simple metaphor will explain the working of a money system such as
the one described above.
We can imagine the money system as a very special mirror which shows
squared pictures (second and abstract realities) of the real goods
and of their movements in the market (first realities). Every time two
market agents make an operation, the subject merchandise moves across a
mirror where its cross-section squared picture is seen: this picture is
the market value (price, salary and corresponding money). If the mirror
has also a photographic device which makes a picture of the moving merchandise
and of the agents involved, then the picture obtained is the money instrument-document.
The image to be seen in the mirror is short lived, it disappears as soon
as the operation is finished; but the photographic image remains and leaves
an evidence of all the details of the operation. With respect to money
units, they are the graticule in the mirror, the abstract-numeral scheme
of all the previous images.
A money system such as that detailed above, whether it does exist or
not at present in reality, has the following mercantile and social functions:
Metric funtion: money units are, in the first place, measuring units.
They are conventional abstract units to measure the exchange value of the
real goods exchanged in the market. A money system is therefore a metric
Instrumental function: the reference to an abstract, conventional
and universal money unit, homogenizing real goods -naturally dissimilar-
lets these goods be easily compared in the market. The money system therefore
becomes the instrument which gives the market a larger and better agility
and dynamism: it is like an oil lubricating gears.
This function is strengthened with the invention of the monetary-accounting
instrument, which on being used as a paying means, allows a new sort of
exchange: the elemental monetary exchange.
Documentary-informative function: the first two functions are mercantile,
this one has besides a great social importance. The monetary instrument-document
gives an exact and complete evidence of each of the elemental mercantile
acts, so becoming a very effective instrument of information on the market.
This function will be analysed and studied here in the first place. The
important consequences derived from its present non-fulfillment, and of
its possible future fulfillment, after a simple currency reform, will be
analysed in this essay.
10. Money system and market strategy.
After studying the elements, nature and functions of the money systems,
we must make a last consideration to show the role played by these systems
in society. There is still another fundamental function that the money
systems do not fulfill directly, but of which they are the only possible
instrument, at least up to now. It is the function which we might call
Markets are not, on their own, in an equilibrated situation. Equilibrium
must be found from outside, by means of an action of the will, which can
be called strategic action.
One of the equilibriums which must be obtained in the first place in
the market is the equilibrium between total sales power and total
purchase power: purchase power has a trend to be lower than sales power,
and we are not going to study why, at present. This unequality, when it
is very important, is called monetary deflation. If the deflation
is long lasting and takes an important size, it can produce serious crises
of contraction of the markets and a productive recession.
The applicable strategy in these cases of insufficient buying power
is the so-called money invention: supplementary buying power can
be invented by way of certain monetary mechanisms.
This strategy is essential for any society since from it depends to
a great extent the well being of all its components.
If the valid money system is informative and provides the exact and
complete documents for every free elemental monetary exchange effected,
then the market is well known in each of its sectors and sub-sectors. The
choice of a money invention adapted to the real needs of this market
is made possible in the appropriate quantity and directions. This will
be a good strategy of money invention which we will call eu-strategy.
Historically, the invention of money has been an activity brought about
by very specialized people, bankers, who have acted more by empirism
and intuition than by a complete and scientific knowledge of the market.
As a consequence, the strategic action has not had actually equilibrating
results, on the contrary many times it has gone to much worse opposed situations:
we are talking about money inflation, that is an alarming excess
of buying power.
At present strategic errors are so enormous, that we have at the same
time a terrible inflation and a deep recession, a situation called stagflation.
The crisis is there worse than ever: it is urgent to find innovating
strategies and technological solutions, that is on a scientific basis.
Under the circumstances, it is easy to understand the importance of
reconsidering the nature and functions of the money system. If we can make
the money system an abstract and fully informative instrument, we will
also be able to carry out a rational strategy for the market, a really
We will try to define the bases for this strategy in the last chapters
of this essay.