14. Giving, receiving, and the currency

In: A Primer in Monetary Economics

17 Aug 2012

Real costs and real benefits
In all societies people engage in giving and receiving real values: There are real costs in giving them, and there are real benefits in receiving them. In gift-with-reciprocity and hierarchy systems, there is either an undefined counterpart to giving, or no counterpart at all, since giving is driven by people’s initiatives, strong social bonds, or as a result of enforcement.

When people choose instead to keep track of the real values given or received, as is the case in an organized barter (non-monetary) system, then they need to use a quantitative assessment to compare real values, i.e., “relative prices,” as well as a system of real claims and real liabilities subject to some form of social enforcement. Notice that a relative price is the expression of a mutually accepted trade and does not express value equivalence. Normally, in each trader’s intention, what is given is not equivalent to (and is generally of lesser value than) what is received: The guy providing labor for food prefers to have food rather than rest.

Alternatively, in a monetary economy, giving and receiving take place through a contractual system, where a legal framework rules property rights and enforces payments, and these can be settled using state currency. Thus, real costs and real benefits are exchanged for (spot) currency or a promise of (forward) currency. Again, the relationship between the real cost given and the currency received is not one of equivalence of values: The guy who spends currency to get food does it because he prefers to have food rather than currency.

In a monetary economy, people trade real costs for currency and trade currency for real benefits. This introduces an additional means for storing value: Not only products, or real claims to products, can be stored (real assets), but also amounts of currency (financial assets).

Currency provision
Civilized societies entail an administrative organization that controls and coordinates public goods and services. This has been the case since early civilizations, when hierarchical structures developed around a demand for order and stability of land, such as the organization of irrigation systems, food warehouses, and defense.

Then, as today, the established political authority funds its activities through a hierarchical relationship. While the scope may stretch from public purpose to corruption and oppression, the government transfers real benefits (such as food, labor, and other assets and services) from private to public domain through a real tax.

This can be done by compelling people to directly relinquish real values (e.g., food or labor). If people feel that the real tax is fairly offset by the public goods or services the government provides in return, the relationship resembles one of gift-with-reciprocity between the public and the non-public (private) sector of society. Yet, to the extent that the real tax is set by the government (and not left to the spontaneous action of citizens) and that the real benefits obtained are redistributed at the government’s will, the relationship remains one of hierarchy.

Alternatively, the government can provision itself by enforcing a tax payable in the state currency and then acquire real benefits by offering such currency (in numerically countable units). Archeologists and anthropologists stress how the introduction of numerically countable units of value can be traced to religious and ceremonial values and fines and damage compensation. Be that as it may, people accept the state currency if they know they must use it to settle tax liabilities. In the process, the political authority acquires real benefits and supplies its own created currency without incurring any real costs except those needed to issue and manage the currency supply.

Giving and receiving state currency do not entail any real benefit or real cost. Currency is a social relationship between the political authority and society, as suggested by the etymological root of the word money (Latin monito, meaning “warning, inscription, notification”). It is a relationship that exists to the extent that taxes are not high enough to absorb the currency entirely. Normally, people find currency a more convenient means by which to settle their contractual obligations than using a system of real claims and liabilities or a currency issued by a foreign state.

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