According to the St. Louis Fed, there are three functions of money. First, as a store of value. Second, as a unit of account. Finally, as a medium of exchange. The enumeration of these functions represents an attempt to present money and the banking system as organized and the product of deliberate design. Money was never designed, and banking emerged from custom and expediency. Today’s central banking systems might ultimately represent a purposeful design, but it isn’t clear that their purpose is to create money that does what it is meant to do in the best possible way. Instead, the priorities seem to be the stability of the state, followed by stability of wealth. If money was designed only to best fulfill its core functions, how would it work?
Money is a technology which evolved out of natural economic interactions, and it is not naturally associated with particular functions. Economist Bob Murphy explains why money is money, and having functions is not what makes an asset money. An asset becomes money when it has higher marginal utility than other assets. This means that even if you have more and more of it, each new amount of it is still valuable. Or, this is at least more true for the money asset than it is for any other, meaning people will place a priority on obtaining it over other assets after basic needs are met. If you need a backhoe and 500 pounds of gravel for a project, then an additional backhoe and 200 pounds of gravel are worth a lot less to you than what you basically need to get the job done. Money, however, can pay for those basic needs, and leftover money can pay for other things.
An asset doesn’t have to fulfill a function to be money, it just has to be more generally valuable than all other well-traded assets. There are some features of an asset that make it more likely to become money, such as ease of transport and divisibility. Once an asset becomes money, however, it naturally begins to fulfill functions.
Exactly perfect barter isn’t possible in a complex economy, and money fills in the gap. Money can help fulfill the function of a medium of exchange, because of its high marginal utility.
While the Fed highlights money as a unit of account, deferring to practicality, I would instead represent this function in clearer economic terms. Money’s high marginal utility means that it can trade for surplus wealth. Imagine producing 50% more wheat than you need or can even barter. Someone might offer you money for it. That’s all good in terms of fulfilling a function, but what exactly is happening here, why would someone give you money for surplus? The answer is investment. If a person is building something that will increase value or efficiency in the future, then they can price your surplus against future gains, and use money as a bet or coupon against future outcomes.
This is a totally unique function of money because what’s really happening in the present is a competition for your surplus. If five bidders all want your extra grain to feed their builders, then it’s a matter of who’s offering the most money. You don’t care about the future. It’s a subsequent consequence that those builders who plan well will have more money in the end to support their bids next time. Money is an intertemporally supported bidding mechanism on present surplus. Call that “unit of account” if you want to presume that corporate business is inherently a process of bidding on and utilizing present surplus to realize future value.
The third function of money is pretty unambiguous: a store of value. What’s important about this function is how its definition is derived specifically from its temporal relationship to the other two. Exchange is an auction process that “clears” or concludes all barters within a short time window. It happens after production. Investment and production require an intertemporal perspective. Therefore, storing value must preserve intertemporal stability over a longer window than even a round of investment and production.
A store of value’s practical purpose is to have market power over investment bidding. This means having a general claim to the money system’s overall growth gains. It also means purchasing power, which is the ability to sway and win auctions at the level of present day exchange. Power over both functions, and intertemporal stability behind that power, is how store of value is practically defined.
But is this function even a good idea? Ought people have some sort of general, intergenerational power over the market relative to other participants? In the first place, obviously yes. Wealth is the other side of the coin for the investment process. When bidders compete for surplus, they are competing with money, whose value is derived from its utility for exchange. However, as with all auctions, price can vary depending on what bidders bring to the table. Having more wealth means being able to bring more money to the table, it’s having greater power in the auction. What ought to grant greater power? Having successfully won many bids in the past, that is, having been successful as an investor. Wealth rounds out the economic planning process.
That being said, there’s a caveat on wealth. The core value of money comes from exchange. If wealth’s economic bargaining power is used to rig the game, then the other functions of money can become undermined, and market auctions will become distorted. Real information will have less influence on market outcomes. There will be unmet demand, over or under production, among other problems.
Last of all, there is a hybrid function of money, which might be called middle class wealth. Workers whose relationship with money is on a short term, needs fulfillment basis, are normally familiar with only the exchange function of money. However, they can piggyback on the systems used for storing value. While these systems are meant to make investment possible, access to them can help workers gain intertemporal benefit. In the simplest sense, this means social mobility and rising into wealth. However, the more common outcome would be the realization of bonus consumption in the future, things like vacations or retirement. Also, as society’s general wealth rises, workers can piggyback and share in higher standards of living.
With this in mind, what form would money take if it was deliberately designed to best fulfill these functions?
The relationship between each function of money is temporal, so a good system would let time serve a purpose in balancing the functions money serves. Another problem with money is how stores of value can give undue economic power to the wealthy to rig auctions using monetary and banking policy. Decentralized money, such as Bitcoin, have been proposed as tools to prevent the manipulation of the money supply. Unfortunately, digital decentralized currencies have yet to be tied to real or stable value.
I would like to propose a solution that incorporates both of these concerns, serves the functions of money, and finally settles the question of whether debt is essential for economic growth.
Imagine a blockchain based currency that utilizes smart contracts. Suppliers of real raw materials at the top of the production chain all issue currency against their annual output. This is something like a combination of a commodity future or simply a claim ticket on real materials. While materials can be claimed against tickets at any time, the account is settled at an annual clearing, when the time limit triggers.
Beneath these are insurance clearing house agencies. These purchase the annual tickets and bundle them into quarterly basket tickets. For example, fungible commodities like oil will be purchased in the form of annual tickets from suppliers. By packaging tickets from multiple suppliers into one basket, it lowers risk, while the quarterly ticket is still serving as a shorter window commodity future on that same commodity. The clearing houses will insure these baskets, and serve the real economic function of delivery, warehouses, settlement and so forth. Their management will cover any gaps in the system. If an oil rig blows up, for instance, then when quarterly baskets containing the annual tickets for that rig close, then the next quarter’s basket will have to be repackaged, perhaps at the cost of insurance.
The idea is that when a ticket expires, it converts into its basket’s tickets which haven’t expired yet, by smart contract. These are then repackaged back into new quarterly tickets. Customers will possess accounts with quarterly tickets only, and clearing house firms will constantly cycle in new tickets for old, to keep up with the window closures. In this way, the market value of commodities is tied directly to the real health of supply including delivery and fulfillment.
Quarterly tickets will be packaged into mixed commodity tickets which expire monthly. This will be this system’s equivalent to commercial paper, and the closest thing to pure money. Industrial accounts will settle with these tickets. On the one hand, they are built out of commodities the industry might need to have as supplies. On the other hand, they are good as tradeable assets. The idea is for these basket commercial papers to structure to optimize industrial use and stability, while being good as money. Firms who manage this will have to constantly shuffle tickets and repackage baskets, while customers will see stable access to some percent claim on the ticket as a sort of mutual fund.
Furthermore, there will be weekly tickets for payroll and consumer checking, and daily tickets (the equivalent of an ATM withdrawal) for consumer spending.
Investment will see commercial paper firms offer monthly tickets (bidding on surplus materials) in exchange for multi-year contracted access to newly issued annual tickets. Guaranteed multi-year access to real supply gives intertemporal stability to firms which maintain commercial paper. This link is what forms the chain that keeps the economy growing. Stable avenues of real production, perennially relevant to investment and growth, will represent strong commercial-paper-as-currency. More disruptive or disrupted areas of the economy will see more volatility as money structures and re-structures to serve real production.
Value storage will occur in a relative sense. More stable quarterly tickets will become more valuable. Growth and wealth will no longer require debt, inflation or monetary expansion. Rather, it will be like league standings. Wealth will chase after winners, while positions shift. Owners of real production assets will be perennially valuable, and good maintenance of real production will underpin value throughout the economy.
Volatility and stability balanced by constraints imposed by real production.
I know, it’s science fiction, but it’s a market based system of money that would do everything money does but more efficiently.