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Money as a Store of Value

 
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Sat Apr 09, 2016 12:32 pm    Post subject: Money as a Store of Value Reply with quote

Money as a Store of Value
In addition to being ‘a means of exchange’ money is ‘a store of value’ according to the standard definition. It is worth considering what this value is.
It seems obvious that money has value, because it can be used to acquire wealth, defined as goods and services produced by work on natural resources to satisfy a need or desire. But really the money is just a token that registers a claim. The actual value is the wealth claimed, which is provided by the work of other people. To claim the benefit of somebody else’s work needs justification, so it is necessary to show that the monetary claim has been justifiably acquired.
The simple test for justifying a monetary claim is whether the money either has already been earned from the production of wealth or, where credit is given, is to be earned later to repay the credit. A claim using money earned in this way is using it as a means of exchange of wealth and the claim is justified. If the money has not been earned in this way but is then used to claim wealth, there is no exchange and the uncompleted exchange constitutes a debt. Debt can only be discharged when someone works subsequently to create wealth to complete the exchange. Settlement is usually achieved by suffering loss of justified claims as the result of the taxation of earnings.
This simple test is not being applied to most of the new money that is currently being created. It is not created as credit to be repaid from the production of wealth and consequently it results in debt to be discharged by future work to produce wealth. Its measure is in trillions of various currency units. The creation of money in this way is a systemic economic failure of epic proportions. Why does it appear to be necessary to create money as various forms of lending and QE to maintain claims on wealth and produce growth of the economy? The reason is that more and more money is not being used as a means of exchange of wealth. It is increasingly being used to satisfy claims for which no wealth is produced in exchange.
The primary claim of this kind is the private appropriation of the rent of land.
Rent of land may be paid periodically or in a lump sum as the price of the land element of property purchased. Money received as rent of land by private landowners is not earned by them from the production of wealth. It provides landowners with an unjustified claim on wealth.
The proper purpose of rent of land is to fund necessary government expenditure including help for those who cannot be otherwise provided for. The rent is a natural surplus in addition to the proper earnings of those who pay it and provided that it is used as naturally intended, justified claims on wealth are maintained and there is no need for additional new money.
The private appropriation of the rent of land gives rise to the need for the taxation of earnings to meet government expenditure. Taxation is an unjustified claim on earnings. It is the diversion of money from those who have earned it from the production of wealth to landowners who do not produce wealth in exchange that distorts the exchange of wealth and the use of money as the means of exchange. It gives rise to the apparent need for new money and consequently more debt. The larger the debt, the more difficult it will be to work it off by the production of future wealth.
This is a brief overview and a fuller explanation is needed, but there is no doubt that unless the flow of money is redirected to fulfil its proper purpose as necessary government revenue, the idea of money as a ‘store of value’ will become a burning question.
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Simon McKenna



Joined: 09 Jul 2012
Posts: 80
Location: Canterbury, Kent, UK

PostPosted: Wed Apr 13, 2016 1:16 pm    Post subject: Reply with quote

Thank you for that excellent overview, Brian. This is indeed a burning question. I have just seen an article by Dominic Frisby/Positive Money on the problem of young people not being able to buy their own homes, caused, they say, one the one hand, by bad planning legislation and on the other by 'cheap money'. As you probably know, Positive Money always cite the exploitation and abuse of the money supply by banks as the single greatest cause of our economic troubles and our economic inequality. They say banks operate a de facto private monopoly on the creation of new debt. http://www.theguardian.com/commentisfree/2016/apr/12/house-prices-money-cheap-debt-planning

The concept of money creation as a natural monopoly, immediately garners a sympathetic hearing from me since I am always alert to the tyranny of monopolies! It seems plausible that money is a natural need akin to the infrastructure needs created by a community. But the issues surrounding money and property are so foundational it is sometimes very hard to work out how analyse the merits of their arguments and proposed solutions. I hope you don't mind if I try to articulate a response to the problem they present, using your explanation regarding the concept of 'money as a store of value' as a guide.

Your account of money as a store of value immediately lends clarity to the problem of 'cheap money', or the increasing indebtedness of a generation, because you show that it is not only the presence or absence of money which has meaning but that money itself has an ethical dimension. Money has an ethical dimension because it's value comes from human work on natural resources. We are more often inclined to think of money only as a measure or 'means of exchange', abstract and therefore beyond the ethical realm, like the values of angles in a triangle.

Money has been justifiably earned if received in exchange for wealth created by the production of goods or services, or if provided to assist in the creation of new wealth. Wealth is 'the benefit of someone else's work' so money is valuable only in so far as it can be used to buy goods or services which are necessarily the results of someone else's time, skills and energies. If money can procure the benefits of what other people have given a portion of their lives to creating, it is then obvious that one should only be able to command these benefits if the money has been legitimately attained or 'worked for'. Acquiring money through rent is thus clearly unfair since it requires no work.

You also show how rent or ‘house prices’ also have an ethical dimension because rent has ‘a proper purpose’. Rent is required to fund the services needed for communities to function. The rental value is created by and reflects the level of investment required to fund these services. This is illuminating in relation to the problem posed by Positive Money (the difficulty of a generation to buy houses) because it shows that the object of getting a mortgage is not really to buy 'a house', but to fund public services, or to buy a lease on the right to procure the benefits of those services for a lifetime.

Paying taxes and rent makes it harder for individuals to save which contributes to the difficulty of paying the rent (as private rent or private mortgage) and to raising the capital to invest to generate more wealth. But paying rent and taxes is also ethically unsound because it means that people who work for a living and pay rent, pay for a share of the public services and pay rent on top of that, whereas it should only be necessary to pay for the natural value of public services. If rent was collected naturally and redistributed justly, the community would be getting the benefits they need without taxation. Taxation unjustly appropriates value created by others, which penalises those who produce and gives others people more purchasing power than they deserve (the unearned increment).

As you point out a natural consequence of this injustice is a distortion in the ‘exchange of wealth’. Economic inequality sets in, and increases, as a majority of the population is obliged to give a proportion of their created wealth for the communities needs as tax and an additional proportion of their wealth to landowners in rental fees. As a result, the community suffers from lack of investment, wealth producers are doubly penalised for their economic contribution to society, and the landlords enjoy the benefits of collecting rent while also enjoying the benefits created by the community funded by taxation. As the community is deprived of rent and individuals are taxed, there is less money to be spent and invested. The economy slows, thereby further reducing the ability of the young to make money.

Fiscally, it is highly problematic, since it means money created as loans for houses is not put into the productive economy. It is not exchanged for wealth or used to create wealth. Negative effects are compounded by the fees imposed on borrowers as interest. Money taken as interest, and private rent, is appropriated by people who have no legitimate claim on the wealth they now wield. Lending money does not create wealth. Apart from that proportion of tax which makes it into public services, wealth is unjustifiably withheld from the community. Furthermore it serves to give those who claim it more power to appropriate products and services created by the community they exploit; an inequity whose symptoms are inharmonious relations between people nominally equal but who are in reality denied equality by a system rigged against the community. The result on a conscious or unconscious level is the stimulation of a kind of house envy.

In ethical terms, it is unjust (if understandable) to aspire to ‘buy’ a house, since by getting a mortgage, natural rent is diverted from where it is needed and belongs, to the private banks who are essentially acting as landlords (not to mention as usurers who profit from creating debt). Ultimately it only means the new owners will then be in position to exploit the next generation. The aspiration to buy a house is at root the aspiration to escape exploitation by joining the exploiters. Positioning the argument as though a generation is being denied the opportunity to buy a house misses the fundamental injustice of house ownership. Although on the face of it, a generation aspires to escape rent slavery, in fact the argument is identical to a lament that young people can no longer own slaves.

Is this an adequate reply, according to your view Brian, to Dominic Frisby/Positive Money? How would you frame a dialogue with their position on money creation? Do you think of the condemnation of ‘cheap money’ is useful?
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Brian Chance



Joined: 09 Nov 2008
Posts: 115
Location: Croydon Surrey U.K.

PostPosted: Fri Dec 09, 2016 8:57 pm    Post subject: Reply with quote

Thank you for this full exposition and I would add only one suggestion. You mention that the private banks are essentially acting as landlords, but this is going rather too far. The price of the land element of a house price is the current capitalised value of all future economic rent of the land. The bank loan makes it possible for the vendor to receive this rent as a lump sum in advance on the date of sale rather than as subsequent annual instalments from the purchaser of the house. The right to collect the rental or location value passes directly from the vendor to the purchaser The bank only recovers from the purchaser the amount that it has advanced and does not itself act as landlord. The bank does collect interest on money that has cost it nothing to create, but the justification for the charging of interest has to be considered separately from the charging of rent.
My response to the proposal by Dominic Frisby on behalf of Positive Money is that our systems of money and planning are not the primary causes of the housing crisis. I agree that the house building industry is efficient and can easily build at a fair price whatever form of home is required. The major corporations have large stocks of land with outline planning consent and can easily increase the supply of homes. They do not do so precisely because that would reduce the price in accordance with the laws of supply and demand. The supply of homes is pitched at a level that will maintain and increase the price to the maximum obtainable. If an attempt is made to by-pass this system by private or small scale building it is first necessary to acquire the land and the fact is that the price of land in a market economy is calculated backwards by deducting the building costs from the intended selling price of the homes to be built on it. House building is limited in order to maintain the house price and thereby the land price.
The housing problem is therefore primarily a land price problem. House prices are governed by the price of the land following the simple economic law that there is a fixed supply of land. Each building plot is unique and cannot be moved or replicated. Landowners are therefore able to force up prices as demand increases and the more desperate are the young generation to get a foot on the housing ladder, the easier it is to push up the price of the land. Government schemes designed to provide financial help in one form or another simply make it possible to pay a higher price for the family home and thereby push the land price higher still.
It is true that the banks aid and abet the land owners by creating and offering the necessary money. They lend for this purpose rather than for the creation of wealth because homes are the best form of security. If the borrower cannot repay the loan, the bank can avoid loss by selling the property. Of course this bank lending has to be stopped but it has to be stopped by eliminating the primary cause, which is the ability of landlords to control the supply of land. It is no use trying to limit or control bank lending because there is plenty of money available from the rent already being collected by landlords and from savings in pension funds and elsewhere This money would be diverted from other more useful objectives to the financing of house purchase for the same reason that the banks do it. It would consolidate the ownership of the most valuable land in the hands of the present landowners who are predominantly metropolitan home owners.
The way to eliminate the land problem is to collect the economic rent of land for the benefit of the community as a whole.. This would reduce the price of land to a nominal sum because nobody would pay the capitalised value of the rent to the current owner if the future rent was to be paid to the government for the benefit of the community, who are the rightful beneficiaries. House prices would be reduced to the building cost, which is work on natural resources to produce wealth and is a perfectly proper subject for bank lending.
The return of the economic rent of land to the people is truly a panacea for all our economic ills but the change is so fundamental and the effects so great and far-reaching that it is difficult to comprehend and even more difficult to put into practice. It will need a great leader capable of inspiring both those who will gain and those who will lose. An inspirational leader who understood could open hearts and minds to a new beginning which is not a utopia but a simple expression of the ethical and moral natural law.
When it is no longer in the interest of banks to lend for the land element of house prices, the present distortion of the money supply would stop and banks would revert to their proper function of providing credit for wealth creation. This will need a widespread branch network with personal contact between borrower and lender. It will not be necessary or desirable for the government to get involved except to ensure that the central bank has effective powers to control commercial banks. This is quite enough to fulfil the government obligation to control the nation’s money supply.
When money is recognised as a mere token representing a justified claim on wealth produced by others in exchange for wealth already produced or to be produced, money will be just a means of exchange on a human scale. It will no longer be a matter of great economic significance.
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