Promise Merchants
By Noni Mausa
Promise Merchants
Let me remind you what a very weird idea money is.
The IOU is a simple idea. Money is like an IOU, but carried beyond
the boundary of reason into an entirely different and peculiar
territory.
If I write an IOU, it has my name on it, your name, perhaps a date,
and some indication of the future services which are owed between us.
It’s a minimalist contract, easy for anyone to understand.
But money is an IOU, a promise, with no names. The future benefit is
merely an abstract number whose value is not defined. A dollar does
not equal a loaf of bread, or an hour of babysitting, but is
determined by the usage of all the people who accept it.
This is almost theological in its weirdness.
This sort of a promise has value only to the extent that real goods
are delivered when promise-money is tendered, or the defaulter is
punished when they default on their promise. An economy built on
promises — a capitalist economy — only functions when these promises
are enforced, and enforced multilaterally on all participants.
I have a significant advantage in a promise economy if I can enforce
the promises of others while defaulting on my own promises without
penalty. If I can also unilaterally manufacture more promises that
others will honour, how cool is that? Like counterfeiting, but
without the nuisance of avoiding the FBI.
Whose promise-breaking goes without penalty and whose is punished?
Whose stored-up promises are honoured or dishonoured,, and whose
multiply without effort? Those are the pivotal questions of a
capitalist economy.
Pensions are stored-up promises. Workers build up a backlog of
promises to be honoured at the time they finish their working lives.
The agreement would be nonsense if they thought there was no way to
enforce that promise, especially since at the end of working life they
have little leverage of their own, and little time to spare for
legalities.
Businesses, not being alive nor having a fixed lifespan, body or
dwelling, have a huge advantage over individuals. Given the power
differential, who can enforce such promises? Organizations can
dishonour their promises to people, but if people try it they end up
bankrupt or in jail.
Barring violence by the cheated promisees, the government is the only
agent that can fulfill that role.
It’s not that the government stands behind one or another financial
institution – it stands behind them all. It is the promise which
upholds all the other promises, for good or ill.
And when it fails in its duty, choosing to only enforce some
promise-keeping, not all, punish some counterfeiters, not all, it
chops at the roots of capitalism. When they do this on behalf of
so-called capitalists, they are gnawing off the branch we are all
sitting on.
Because I think capitalism is marvelous, and necessary. Its roots in
the realm of theological-strength nonsense allow us all to make
promises to each other over generations, to slosh our commonly
generated wealth around, and to mobilize the energy of our people in a
way that a mere sack of potatoes could never do.
But useful nonsense is only useful when controlled. The weirder it
is, the more clear-eyed regulation it requires. The Great Recession,
and the many bubbles preceding it, demonstrated what happens when the
balloon has no string. It becomes a vanishing promise, last seen
drifting west over Las Vegas, Nevada.
Noni Mausa
Exactly right on money and IOUs…but…
Imagine that you live in a culture in which IOUs are transferable. If I hold your IOU, and need goods or services now (assuming their is no ‘money” separate from IOUs, the IOU is for return of a good or service), I can exchange it with my neighbor for the good or service (most likely seed or a barnyard beast), and he can collect when the IOU comes due. That was a very early development in finance. Discounting bills was a fine business back when Greece had the most powerful navy in the Med.
If IOUs maintain their value, no matter who holds them, then they can be used as a medium of exchange. Quickly, there is little difference between the simple, easy-to-comprehend “IOU” and the esoteric, tricky “money”. If I have my monetary history right, that similarity is why we call those bits of paper “bills”.
kharris is right
and there is a name on the government iou. and as long as the government is willing to take it’s own iou’s in exchange for government services, as well as issue them for the services it buys, there is a “market” for those iou’s. they only need to hold their value for the length of time it takes you to go from being a seller to being a buyer. and the “value” is only speculative in any case. there is no “intrinsic” value in the truck or cabbage that i buy. only what i am wllling to give for it, or you are willing to take for it AT THE MOMENT of the transaction. of course our willingness is based on our expectation of what that which we trade will be valued in trade for what we want in turn at the next exchange. The whole business is neither mysterious on the one hand nor cast in gold on the other hand as money fundamentalists desperately want to be the case. Gold itself got its start as a medium exchange by exactly the same process… some government was willing to exchange it for goods, and take it in exchange for goods. otherwise it has no more “intrinsic” value than paper money backed by an honest government.
and that, of course, is the real point of Noni’s essay: we seem to be entering a time when neither the government nor the major “businesses” can be trusted to keep their promises. carried far enough this really would be the end of civilization. the question is how far will it be carried, and what will be the “value” of the amount of civilization left to those who have relied on those promises.
In later and post renaissance europe they were busy re-learning what the early Greeks new in many areas. Money and finance was just one. But ever since Cortez, the spanish success in finding and mining silver in the new world gave them a near monopoly in minting silver coin. So that became the de facto international and trade and reserve currency. But for large transactions, europe’s bankers of the day would issue “bills” or “notes”. These were accepted for payment, mainly based on the reputation of the banker, and the promise the banker would ship physical silver or sometimes gold to whomever ended up holding the note. This greatly facilitated international trade.
For small transactions, countries would mint their own coins, but these were never as successful as spanish silver coin because either the minter of the day would eventually debase the coin with base metal, private counterfeiters did it too, and people would even file or clip tiny pieces off before attempting to pass the coin again. Silver was nearly free for the spanish, probably was cheaper than vellum, so they never had to debase spanish coin.
So when buying a nice plump chicken at the market, everyone really new what the chicken was worth, and they haggled over how much the buyer’s money was worth, depending on how much smaller or corroded the units of exchange were. That was the beginnings of modern monetary theory.
And yet the Spanish with their free supply of silver lost their empire to the British with their national debt.
I haven’t researched that part of history in great detail from an international monetary policy standpoint. However around the year 1700 the Brits put Issac Newton in charge of the mint, and also introduced the new concept that government issued money had value because it was backed by the wealth of a nation.
So I imagine it had something to do with calculus.
Also, bankers discovered they were doing fractional banking, and the government thought that was a cool idea. More calculus.
Thankyou thankyou thankyou. Yes, that is the point. We trust a dollar to be good for a loaf or bread or 1/1000 of a month’s rent, or whatever other real thing we need or desire. And in the short term this is the case. more or less.
But once those dollars, not being used for bread or rent, go off to play with all the other dollars — once those promises are distanced in time or scale from the people who will need them, they become vulnerable either to unjustifiable multiplication, or to evaporation.
So the money managers who multiplied our real, bread-buying dollars times forty or a hundred with invisible dollar-friends, took their cut to be used as real bread buying dollars, while the remainder evaporated. They blew a huge bubble-gum bubble, appropriated the gum, and we got the air from inside the bubble.
Refrigerators work by pumping a liquid in one chamber, into another chamber (pipes in the inside of the fridge) where it is allowed it to expand to a gas and become cold (so it absorbs heat from the second chamber) , and then compressing it again to a very hot liquid and pumping it back through tiny pipes outside the fridge, which radiate the heat away (in our case, into the kitchen.)
Money, not regulated properly, acts as a compressible / expandable liquid/gas, absorbing value in one environment and shifting it to the second environment. Pension agreements entered into honourably are dishonoured, but mortgages designed to fail are upheld. Each small movement of money can be tapped for validity as it moves, like a financial Maxwell’s Demon.
This is the difference, in degree though not absolutely, between the left and right wings. The right wing knows the fridge and how it works — and plans to keep their cool comfy spot amidst the white wine, cream, and strawberries. The left doesn’t quite grasp the dynamic, but to the extent they do, they want a bigger fridge, with room for everyone.
Cedric Regula: “around the year 1700 the Brits put Issac Newton in charge of the mint”
Who came up with the brilliant idea of putting many regularly spaced notches on the edges of coins to prevent shaving. 🙂
coberly: “ that, of course, is the real point of Noni’s essay: we seem to be entering a time when neither the government nor the major “businesses” can be trusted to keep their promises.”
And that perception, in the case of the U. S. gov’t, is the result of bald-faced lying, propaganda by those who wish to undermine trust in that gov’t or to spread fear for political purposes. The U. S. has never defaulted, and never will, unless the crazies take over Congress. (A lot of crazies are saying that the gov’t can’t be trusted. If they are elected, they will do their best to make that a self-fulfilling prophecy.)
Min
i think you are mostly right. but i keep hearing noises from people “in” goverment that sound like they are just sure the only way to save the country from the great and terrible deficit that they created is to force granny to work into late old age.
Noni
yes, something like that. But you know what happened to Maxwell’s demon.
with regard to the one promise i know something about, i would caution against “the left” which seems to believe the way to keep the promise is to abandon the whole precept… which is, was, that SS is an insurance program for workers paid for by the workers themselves. it is not welfare. it is not a tax on the rich. it is not “levelling.” it is not “redistribution.” It’s simply a very elegant way for workers to protect their own savings from inflation, market losses, and personal losses.
Trouble is it can’t be “voluntary” because like the guy with the fire, most people are too stupid to pay in, and when their fire comes, the consequences are too ugly for their neighbors to bear.
Money has always been based on IOUs. The reason gold was useful is that it is hard to counterfeit and relatively easy to assay. If the ancients had had high speed computing and a public key algorithm, gold would have been just another pretty metal.
There’s a lot of stuff that we take for granted that is kind of weird when you think about it. Consider agriculture. The primary practice that distinguishes it from simple gathering is that one buries perfectly good food in the filthy ground. How weird is that? It was probably as hard a sell as Keynsian economics is today.
@coberly
Yes, some of the crazies (or their puppet masters) are already in the gov’t. 🙁