Contemporary money is rumoured to have three functions, namely Medium-of-Exchange, Store-of-Value, and Unit-of-Account.
One might argue that the Medium-of-Exchange is pretty much electronic nowadays, while the Store-of-Value could be considered a proxy for goods and services, rather than an investment. On this page we will focus on money as a Unit-of-Account.
Perhaps just a quick note on what we mean by money. Notes and coins are legal tender issued by governments interest free, and the need to pay taxes with it (in the past) creates demand and acceptance. Now it is mostly a government utility for the unbanked and financially excluded, whether using the coinage directly, or purchasing call-time for remote payments and remittances over cellphones.
Whether having intrinsic value (gold or silver) or not, payment is pretty much barter of goods and services for government (commodity) money.
More commonly money is debt, which has preceded coinage, and makes up the vast majority of the money supply. Let’s look at a severely abbreviated history of money and bookkeeping.
- Single entry bookkeeping
- Double entry bookkeeping
- Triple entry
Single entry bookkeeping
The earliest Sumerian clay tablets were records of debt. Payments (for beer for eg.) were made with clay IOUs typically redeemable in produce (wheat at harvest for eg.). Fired tablets are quite immutable, and kept by the creditor who would hand them back to debtor to be destroyed on settlement.
These IOUs could of course be used as money to make purchases. The vendor would then be able to redeem them for produce on presentation to the debtor.
Double entry bookkeeping
Tally sticks offered a convenient way for the debtor to also have a copy of accounts by way of the foil which could tally the notches against the stock held by the creditor. As with clay tablets, the stocks could be monetised on “stock” exchanges or simply used as money.
Double entry bookkeeping originated in Florence about 800 years ago, and has been instrumental in reducing errors, and managing with the complexity of corporations.
Triple entry bookkeeping
Double entry bookkeeping requires reconciliation with partners to confirm balances of current asset accounts, such as receivables, payables, and cash.
On Yap island, everyone knows the ownership of the money (Rai stones) overcoming this reconciliation problem. When a purchase is made and ownership transferred, the entire community meets, confirms the transaction, and updates their memories. This is how blockchain consensus works.
Triple entry accounting (not Ijiri) uses a blockchain to carry shared, immutable copies of those common, working capital accounts, kept up to date in realtime.
Transactions can be shared over replicated databases, decentralised blockchains, networks use APIs to extend business processes across partners, such as EDI over supply chains, etc.
This application distributes posting to the databases of the partners in a transaction. Thus a payment on one database, is simultaneously a receipt on the other.
Transaction1. Grant credit
2. Revoke credit
3. Make a payment
4. Reverse payment
Participant 11. Credits (Cr)
3. Payments (Cr)
Participant 21. Credits
2. Revocations (Cr)
4. Reversal (Cr)
5. Receipts (Cr)
Credit, trust, acceptance, and adoption
Money is an accounting entry by private corporations called banks. It is created on the strength of a promise, and issued as debt at compounding interest. Although the majority of money used by government is bank money, there is a very small amount of colourful paper and coins from the mint.
Why do we accept money (banks) or coinage (mint) for our labour or products? Primarily because we are forced to pay tax in them under threat of incarceration.
So why would anyone accept mutual credit for labour and products? Here are the ways in which trust in the medium is established:
- Firstly, there is no interest. Banks harvest interest for nothing more than us doing bookkeeping. This is a never ending charge as long as we use money, compounding to many times the original amount borrowed.
- Mutual credit payments are essentially IOUs, which means the issuer is obliged to redeem the IOU on being presented with one. For example, if I promise the baker two dozen eggs for a loaf, and the baker spends that IOU on, the third person can come to me for two dozen eggs. Of course, communities use local currencies rather than eggs and loaves.
- A participant can only spend (make payments) to the limit of their receipts and credits. Credits granted by another party is essentially that party vouching for someone, either through collateral or trust, with the understanding that they co-guarantee payments made with that credit.
- The local community will need to defend the credibility of their currency, by preventing refusals to redeem, supporting weaker members, or revoking credit.
- The credit mechanism can be used as a mutual insurance for members, and also act as a way of raising funds and capital.