Kindly remastered by Ken Royall and Pal Grabbein. This lesson can be used for non-commercial purposes if clearly stating: Adapted from Bendell, J and M. Slater (2015) Money and Society, free course,

1. Welcome to the Money and Society mass open online course, brought to you by me Matthew Slater and Professor Jem Bendell from the Institute for Leadership and Sustainability.


Money and Society MOOC (free online):  Lesson 1 – Introduction to money: functions, forms and fallacies


Pre-course work for the Certificate of Achievement in Sustainable Exchange:

Matthew Slater has been programming open source community accounting software for six years, and asking myself what is money and how it affects society.
We created this course to contribute to your understanding of money as a social technology, and its relationship to society. This free MOOC is the pre-course work for the Certificate of Achievement in Sustainable Exchange, more information on which can be found by clicking the link on this slide
This lesson is the first of 4. You can navigate it at your own pace, as when you click through the slides you will hear a new segment of audio recording from me. Listen to the full audio before moving on. In the notes to each slide you will find the full references and weblinks to resources mentioned.
At the end of each lesson, which will be no more than two hours, we will give you some readings and an assignment. The online forum will be open for a few days for you to submit your assignment and engage with other participants on the course.


2. Why study money?

I did not think about the money system at all. I took it for granted as a neutral and inevitable aspect of human society. … I now understand…  that the prevailing financial system is incompatible with sustainability…

~ Dennis Meadows (2012), one of the authors of the 1972 Limits to Growth report.

At the end of this MOOC you will be able to:

  • Critically assess views on the form and function of money and currency by drawing from monetary theories
  • Explain theories on how social, economic and environmental problems arise from mainstream monetary systems
  • Explain alternative forms of money and currency and the theories on how they can support better social, economic and environmental outcomes

It is easy to assume that money is neutral. We go out to work to earn it; we spend it on goods and services. If you need more than you have, you can borrow some for a while, from someone who has more than they need. From such a perspective, the problem is not money, but how its used. This course explores a different set of ideas – where money and its issuance is not neutral; but open for critical discussion and innovation to promote social and environmental outcomes. We therefore build upon the work of what Professor Wray (2007) calls “heterodox economists” who “share an endogenous approach to money that insists that money is an essential component of the normal operation of the capitalist economy. Hence, they deny that money could be neutral, whether in the short run or in the long run.” By drawing upon a range of disciplines to explore money we believe this to be a unique and necessary online course.

It is meant to be of particular interested to people interested in sustainable development. That term has been used for over 20 years to describe economic, social and environmental goals. One of the most famous reports which inspired a generation of environmentalists, was published in 1972 and called “Limits to Growth”. It suggested that although the world’s leaders appeared fixated on increasing economic growth, there are physical limits to providing resources and sinks for waste on this one planet. This quote from one of the authors of the Limits to Growth report that most people working on environment, or on sustainable development more broadly, have not looked at monetary issues closely. Dennis Meadows said: I did not think about the money system at all. I took it for granted as a neutral and inevitable aspect of human society …. I now understand … that the prevailing financial system is incompatible with sustainability”.

By the end of this course you will have a deeper grasp of this issue and be able to:
• Critically assess views on the form and function of money and currency by drawing from monetary theories, and second
• Explain theories on how social, economic and environmental problems arise from mainstream monetary systems, then third
• Explain alternative forms of money and currency and the theories on how they can support better social, economic and environmental outcomes.

Though we will cite some big names in economics, philosophy and sociology, and the traditional schools of thought on money and currency, this is not a “bluffers’ guide” to help you to namedrop; our first intention is to help you grasp how money works and the impacts of modern money on our world, so that you can be more informed about your own choices for innovation, activism or just personal finance.
This lesson is about the very stuff of money, where does it come from, and what actually is it?


Lietaer, Arnsperger, Goerner, Brunnhuber (2012) Money and Sustainability, published by the Club of Rome, EU Chapter.
Wray, L. R. (2007).

Endogenous Money: Structuralist and Horizontalist. Levy Economics Institute of Bard College.


The lost science of money

3. Money is important

“Since the monetary question directory impacts all areas of human activity, in order to make real progress towards justice, a clean environment, a sound energy policy, decent health care and retirement systems, a greater real freedom of choice and action for the citizenry requires the monetary problem to be addressed and solved first.” ~ Stephen Zarlenga

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.”
~ John Kenneth Galbraith

Reflect before moving to the next slide:
How do you feel about the scale of the claims made by some monetary reformers, about the damaging consequences of our modern monetary systems? Does it draw you to study this, or do you feel skeptical and repelled? Notice the feeling and then try feeling the opposite. What might a spirit of learning feel like?

In a world with so many political, economic, social problems we might approach money as just another part of the world that needs fixing. But the monetary reformers, if you listen to them, often make an extraordinary claim. They are saying that the way money is issued is the root of all evil. Well, almost all evil. They note that all modern political power, comes from the control of the money supply, and that the democratic organs who are supposed to be accountable to US, have lost control of that power.

Stephen Zarlenga is founder of the American Monetary Institute, and a powerful intellectual advocate of what is called “fiat” money, that is, money that is issued by government and gains its value from government. In his breeze block of a book, the Lost Science of Money, he makes the case that properly managed government-issued currencies support prosperous countries. He also shows how the money-changers, merchants, and banker classes have always worked, often nefariously, to wrest control of money away from political processes and then to destabilise economies to their financial advantage. Zarlenga says in his introduction, “Since the monetary question directly impacts all areas of human activity, in order to make real progress towards justice, a clean environment, a sound energy policy, decent health care and retirement systems, a greater real freedom of choice and action for the citizenry requires the monetary problem to be addressed and solved first.”

During this MOOC, you will discover that Zarlenga is most certainly not alone in this view, and a variety of monetary critics have made similar analysis over the years. We will also look at the substance of their arguments. 
Yet mainstream economics maintains that everyone is getting richer, and has little to say about the money in which they are measuring that wealth, let alone seeing money issuance as a problem in itself. According to the Bank of England, the profession has been mis-informed. In its Quarterly Bulletin 2014 Q1, “rather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.” The Bank of England does not offer critiques of the current system, but their report highlights the errors of mainstream economics on the most elementary aspect of money – where it comes from.

A far-reaching error, it would seem. A survey of British MPs in 2014 found that only one out of ten knew that banks create the majority of money in circulation in the UK.
Perhaps that is what iconoclast economist, John Kenneth Galbraith meant when he said “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.”

Before moving to the next slide, take a moment to reflect on how you feel about the scale of the claims made by some monetary reformers, about the damaging consequences of our modern monetary systems. Does it draw you to study this topic, or do you feel skeptical and repelled? Notice the feeling and then try feeling the opposite. What might a spirit of learning feel like?

”Money: Whence it came, where it went’ John Kenneth Galbraith, 1975
The Lost Science of Money”, Stephen Zarlenga, 2002
Only 1 MP in 10 understands that banks create money


4. The barter origin of money?

Try one of these videos on barter:

  • Understanding Money, part 1 – the Origin of Money
    Gold Standard Institute
  • Charming homemade animation.
  • The American Dream
    ‘The Provocateur Network’

To see the contemporary usage of this narrative,
search google news for “Back to Barter

Once upon a time, perhaps during the agricultural revolution, human activity became more specialised and people began to swap the fruits of their labour. Direct swapping of his apples for her pears was inefficient because of the ‘problem of coincidence of wants’ (for instance she might not want his apples). So they started to exchange intermediary stuff like salt and spices. These goods were useful in themselves, but they developed another use as a medium of exchange. As they settled on metal as the best media, the king provided a wonderful service of guaranteeing the weight and purity by minting the metal into coins. Eventually the coins were too cumbersome to carry so money evolved into paper promises of coins. And the rest is history.

The videos linked on this slide all tell similar versions of this story. Have a look at one of them. Then, if you search the news for the expression “go back to barter” by clicking on the link you’ll see that the notion that, if/when the money system somehow fails we would be swapping goods and services directly – like in the old days.
From these stories we could be led to assume that money is a commodity with special properties that make it useful for exchanging, and which can be used to make trade easier. Instead of swapping a product of value, we swap a bit of money with value.


5. Properties of money

Aristotle’s (extrapolated) properties:

  • Valuable
  • Durable
  • Divisible
  • Portable

We could debate what has “intrinsic” value, rather than any “value” existing in relation to the wider l living world, but that would be another MOOC other philosophers, from East, West and beyond.

Aristotle, a Greek philosopher from around 600BC said a few things about money which show that it wasn’t so very different in his day as ours.
Scholastic theologians, who were mostly concerned about usury, studied Aristotle and extrapolated that good money should have the following properties.
• It must have intrinsic value. This value of money should be contained in the money itself…
• It must be durable. It must not fade, corrode, or change through time.
• It must be portable. It it holds a high amount of ‘worth’ relative to its weight and size then it is convenient for shopping, and hiding from thieves.
• It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics.

How well does modern money satisfy these criteria?
Imagine washing up on a desert island with 10 other people. What commodities do you think we would end up bartering with? Would your choice change with more people or more technology?

Reflect before moving to the next slide:What commodities would be suitable as a medium of exchange for modern day barter?


6. Monetising commodities

Here are some commodities that have been used as money. Did you think of any of them?

Many commodities have Aristotle’s properties, more-or-less… Beer – Tobacco – Honey – Tide detergent – Gold & Silver

Gold and silver






Aristotle’s criteria have since been extended slightly. More than simply being divisible, we must be sure that each part is the same value as each other part. So using muesli as money would be problematic because all the nuts float to the top of the bag. If you used crude oil, you would need to specify the grade of it.
Another criteria that applies to any commodity is that it must be easily identifiable. For example exchanging physical gold is troublesome if every payee must check that it is not tungsten wrapped in gold.

Something happens when a community agrees to use a commodity as money. As that commodity develops another use, demand for it goes up, the price goes up, and if it is available, supply goes up as well. In other words the market for that commodity is completely transformed and distorted. Think about the commodities you chose from the last slide. What would happen if they were adopted as the main currency of the land? How much of them would be needed? Would they become unaffordable? How much trouble/expense would it be to store them for long periods? Would there be forgery? Remember even the ‘perfect’ material, gold, suffers from all of these issues, to some degree.

Whoever controls that commodity is empowered as well, as the authors of the book Money and Sustainability (2012) explain “…whatever the government choose to accept in payment of taxes automatically gives enormous power to those who produce or control that particular item…When governments choose to be paid in gold, gold producers and gold hoarders held the power. ”


Beer as money

Honey as money

Tobacco as money

Tide as money


Lietaer et al (2012) Money and Sustainability pp 132 The Institutional Framework of Power


7. The Myth of Barter



OR…! No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.” ~ Caroline Humphrey, 1985.


I must confess, we may have been leading you up a blind alley. Taking barter as our starting point has led to a very specific, and widespread understanding of money as a thing of value in itself, or a commodity, but not necessarily the correct, or the only understanding. Cambridge anthropology professor Caroline Humphrey concludes “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing. Economist and monetary historian Glyn Davies (2002) concludes “the overwhelming tangible evidence of actual types of primitive moneys from all over the world and from the archaeological, literary and linguistic evidence of the ancient world, is that barter was not the main factor in the origins and earliest developments of money.” Another Anthropologist David Graeber writes a whole chapter ‘The Myth of Barter’ in his book ‘Debt, the First 5000 years’. Here are a few excepts showing why we need to keep an open mind about history…

“Now, all this hardly means that barter does not exist-or even that it’s never practiced by … ‘savages.’ It just means that it’s almost never employed … between fellow villagers. Occasionally one can even find some kind of currency beginning to develop: for instance, in POW camps and many prisons, inmates have indeed been known to use cigarettes as a kind of cur­rency, much to the delight and excitement of professional economists. But here too we are talking about people who grew up using money and now have to make do without it-exactly the situation ‘imagined’ by the economics textbooks.”

“Ordinarily, barter] takes place between … people who might as well be strangers-that is, who feel no sense of mutual responsibility or trust, or the desire to develop ongoing relations… The English words ‘truck and barter,’ like their equivalents in French, Spanish, German, Dutch, and Portuguese, literally meant ‘to trick, bamboozle, or rip off.’”
“We did not begin with barter, discover money, and then eventually develop credit systems. It happened precisely the other way around. What we now call virtual money came first. Coins came much later, and their use spread only unevenly, never completely replacing credit systems.”

“We will explore more history on the earliest forms of money and the role of coins in the next lesson. The reason we dwell on this mistaken barter theory of money is because it suggests that money in its essence is a commodity with value in itself. But as we shall explore next, this is a limited view which is likely to empower those factions which control the flow of commodities in society. From anthropology we can learn a great deal about other ways to measure value, store value, and account for exchange. From our limited readings of anthropology, concepts of kinship, honour, property, debt and payment become very blurred; its clear though that though we can see many elements of money in other societies, but there is no clear evolution of money, no substantial concept which was covered up by layers of history.”
This diversion into barter has been useful, but to really understand the substance of money we need another approach.

Further reading
• Davies, G. (2002) A History of Money. A History of Money. Cardiff: University of Wales Press.pp24
• Graeber, D (2011) Debt: The first 5000 years, Melville House Publishing.
• Humphrey, C (1985) Barter and Economic Disintegration, Man New Series Vol. 20, No. 1 (Mar., 1985), pp. 48-72 [p. 48]
• Money & Myth Barter:


8. Functions of money

• Medium of exchange • Store of Value • Measure of value
Before we go any further, we need to touch on the classical functions of money, which are often referenced on the occasions when economists discuss money. Most commonly three functions are identified, but after a period of hyperinflation, many more uses can be found for great numbers of small pieces of paper!
A good medium of exchange enables us to ‘split the barter’. That means it enables me to sell something to you today and buy something else from someone else tomorrow. Austrian economist, Silvio Gesell said in 1916 that money should be a medium of exchange and nothing else. “it should be secure, accelerate and cheapen the exchange of goods.
A good store of value is something that can be exchanged for as much in the future as it is now, or more. Even though we don’t know what the future holds.
 A good measure of value doesn’t have to have value in itself, but it provides a way to compare the price of one thing against another, consistently over time. Different monies perform each of the three functions more or less well. In the past and in the popular imagination, these multiple functions are performed mostly by one thing in each country, such as the Pound in UK. But we will see in later lessons why that doesn’t have to be the case.
Critics might say that our modern money does none of these functions very well. As a medium of exchange it is subject to fees, delays, surveillance and security checks; as a store, and measure, of value it should be consistent but inflation decreases its value by a few percent every year. In fact some of these functions work against the other functions. You would want a store of value to increase over time, a measure of value to stay the same, and a medium of exchange, for reasons which will be explained, to decrease over time.
In Money and Sustainability, the Missing Link, we read, “Because these are three functions of money they characterise what money does. This is different to a definition of what money is. With such a widely accepted functional definition, there is actually little real inquiry into the nature of money.” So lets dig a little deeper…

Reflect before moving to the next slide:If a measure of length has to be long, and a measure of weight has to be heavy, does a measure of value have to be valuable?

• Silvio Gesell (1916) The Natural Economic Order, Part 4: Free-Money or Money as it Should Be.
• Lietaer, Arnsperger, Goerner, Brunnhuber (2012) Money and Sustainability, Chapter IV pp12, Club of Rome.


9. So what actually IS money?

In this lesson we will use the terms currency and money interchangeably. Experts amongst you may already be concerned with that and later in the course we will look more closely at different views about what is contemporary money and currency. To begin with, however, let’s reflect on what a non-legalistic understanding of money might involve.

Though we all intuitively understand money, when we try to define it, it starts to slip through our fingers.
We know that in history money has taken different forms: it has been ‘backed’, or sometimes ‘minted’ into precious coins, yet now the “stuff” of money is paper and digits and plastic.

But there is more to it than the form. The Greeks used to distinguish between the form, or shape of something and the substance, or what ‘stands under’ it,  
To grasp the substance, we need to do more than describe money’s properties or functions. Have a go now, and see if you can come up with a definition of your own: “Money is………”  Then, once you have that definition, search for it on-line, using inverted commas, to see if that definition or a similar one is used elsewhere and by whom.

Reflect before moving to the next slide: Put aside the properties and the functions of money.  Ask yourself, what IS money? Write down your own original definition in one sentence, now, before moving on. Search online for a definition that agrees with you.  Only after, advance to the next slide


10. Money is….

Ideas from the 1800s: …the god of commodities” – Karl Marx

…a documentary promise ratified and guaranteed by the nation to give or find a certain quantity of labour in demand” – John Ruskin

Here are a couple of definitions of money. Which one is closest to yours?

The 19th Century political economist Karl Marx saw that people experienced money as a special kind of commodity, that could be exchanged for anything. That’s why he called money ‘the god of commodities‘ – it was better to have money than any other single commodity, as it bought you access to any commodity. This is a view that we might reach from the myth of barter, and it leads to money having value-in-itself.
Despite this view, Marx believed that things should be valued for the work that goes into making or providing them. His contemporary John Ruskin had a similar view, but that led him to argue strongly that money should have no value in itself, but be a promise guaranteed by the government that you could get something produced by someone. In this view, the value of money is not in the money itself but from some kind of social belief or contract, inscribed somewhere, perhaps on paper.

The difference between these is key. The two approaches are called the commodity theory of money and the credit theory of money. You may also hear of metalists, who focus on precious metals as money, or Chartalists, who focus on money as credit systems enabled by the power of the state, through legal tender laws, government taxes and spending. We will explore these further in a moment, but a key distinction to make is between commodity and credit concepts of money.

Reflect before moving to the next slide: Are these views mutually exclusive? Or could they both be right? Can something be both a commodity and a promise of labour?

• Marx: “A Contribution to the Critique of Political Economy” 1859
• Ruskin, J. (1852) cited in Dodd, N (2014) The Social Life of Money, Princeton University Press.
• The Bank of England Quarterly Bulletin 2014 Q1



11. Basis of money

“Why should I accept your money? On what basis does it have value?”

  • Offers present value – as a value-in-itself which can be exchanged for like value – commodity money
  • Offers future value – as a promise of future value – credit money
  • Offers past value – as proof of past value created – acknowledgment money

What is it that makes money valuable? If money is defined as a “claim on goods and services” as it often is, then what is the basis of that claim? Why should I give you my stuff in exchange for money? One answer is, or course, “Because I believe that other people will accept it from me, in turn”. This is of course a recursive answer, which does not address the basis of the claim and few people would argue that is the only way in which a currency like US has value. Most people would prefer a stronger basis for the value of their money.
We see three possible answers, or bases for the value of money.

1. Because your money has the same value or greater than my stuff, and right now, your money is more useful to me than my stuff, so we can do a direct swap, value for value, just like in the barter economies we just considered. If that seems obvious let me present you with an alternative view.

2. I will accept your money because I know that someone else will give me something valuable for it later. Not that I trust I can buy something with the money, but that your money comes with a guarantee from the issuer to redeem the money for something of ‘real’ value. The money isn’t valuable in itself, but it represents a promise of future value, like a cheque, or IOU. This is called credit money.  And if the redemption can happen in the future, could it have been in the past also? Therefore, a third option is:

3. I will accept your money because I know that it represents ownership of value created in the past; while I hold that money, that means I paid for whatever value was created. We, your tutors, are calling this “acknowledgment money”. If this sounds strange, might it be because in our society acknowledgments are worth less than promises?
This is a new approach to understanding money that we are calling the Value Sequence Theory of Money.
We will now explore each of these in more detail.

• Simmel, Georg (2011 [1907]) The Philosophy of Money (Routledge Classics Edition),
• Bendell, Slater, Ruddick (2015) Reimagining Money to Broaden the Future of Development Finance$file/Bendell%20et%20al.pdf


12. Money as Commodity

Intrinsic value

  • Specie Money, meaning payment ‘in kind’
  • ‘Sound’ money, ‘Honest’ money
  • Austrian School

In a sense money is always a commodity in that it can be owned and that it is ‘worth’ something. But we mean something different when we talk about Commodity money as a type of money. We mean that the money has value-in-itself; it would have value even if it wasn’t money.

Perhaps it is edible, or it glows seductively against your lover’s neck; it might make your cruise missiles more reliable or your mobile phone batteries last longer.
Gold, the ultimate commodity money has been used often in history for settling debts between monetary regimes who may not have a use or trust for each other’s internal currency. The great thing about commodity money is that it works even without a government, and anthropologist David Graeber (2012) finds it especially effective in periods of war.

The school of thought that favours this kind of ‘value-in-itself’ money is called the Austrian School, after some of their major intellectuals such as Ludwig Von Mises (1912)  who argued for forms of money free of state control. Today you may hear them arguing for a gold standard, and assuming ‘myth of barter’ versions of the origins of money. Some also assume there was an old era of sound banking when people knew that money was gold and silver. It is a view with limited, or even no evidence in history, as we will explore in lesson 2.

In the mid-west of the USA there is a movement around Old-school Republican Ron Paul, which is promoting the use of silver as money. They call it ‘honest’ money, ‘sound’ money, because the value is in the coin, rather than relying on a dubious government to give it value. With the emergence of Bitcoin, we see commodity money discourse being applied to this entirely virtual currency, and arguments about freedom from government currency that resonate with the Austrian School tradition.

Using a commodity as a means of payment is cumbersome. In practice, most so-called commodity monies are really circulating promises or receipts for a commodity, because using a commodity is cumbersome. First the commodity must be acquired, checked for quality, securely stored with a trusted party until needed for settlement, and then securely transported to the payee. Having someone store the commodity and issue receipts is very convenient, but if there if for any reason a receipt should ever not be redeemed, or be feared not to be redeemed, then the underlying commodity, sitting in a vault is serving little function! The party holding that commodity must be absolutely trusted to safeguard it, and ensure that commodity is stored for every claim issued.

If the quantity of money in circulation is limited by the need to have stored value somewhere, that constrains issuers from profiting by issuing too much money. It can also constrict the economy from expanding however, should the economy need more money. Commodity money is expensive. To get $1m more in circulation, you need to put $1m worth of stuff in storage.

For trade between economies, where trust may not have been build, or where the opportunity to reciprocate is not apparent, a commodity is the perfect form of payment to settle a debt.

• Von Mises (1912) The Theory of Money and Credit



13. Honey Money – thought experiment

Imagine the currency collapsed and your local town quickly adopted honey as the local currency.  After a year of using honey money, what would you see?

a) People carrying pots of honey everywhere?
b) No visible change at all?
c) Economic depression?
d) Panic over news of escape of genetically modified killer bees?

Another form of money, often overlooked, is money as a promise of future value. It can take the form of a cheque, IOU, promissory note or indeed, any agreement concerning future value exchange. This kind of money only works within a context of trust (or force, of course).

In a credit economy, many debts never need to be settled, because they can cancel each other out, saving a lot of effort. For instance I owe Jane one, but Jane owes you one, and you owe me one, so nothing needs to be exchanged.
People holding large quantities of such currencies are wealthy because not because the promises are wealth, but because they have a large but unrealised claim on the community’s wealth.
A huge advantage of credit money is that the quantity is elastic not fixed. If you say it is backed by trust, then an issuer can have as much money as there is trust – regardless of how much can be delivered. If the economy needs more money, the issuer is doing a service to the economy.
But there is a flip side to that. If the economy changes direction or if trust in the issuer should be lost, then a lot of outstanding promises are suddenly called upon. The people holding those promises can lose everything as the promises become worthless.
This also happens in a gradual way, just as share prices go up and down with the confidence of the market in the company, so the price of credit goes up and down with the confidence in the market.
One of the functions of banks is to reinforce my promise-to-pay with their institutional promise to pay. So I give my credit to the bank in form of a contract, and the bank underwrites my credit with its own name. In banking language this is called ‘making a loan’ although nothing is really loaned, as we will explore later in this lesson..
An issue around credit is the problem of interest. The party extending the credit typically demands more back than was extended. Interest has been a contentious issue for thousands of years, in many cultures with different religions, as we discuss in the next lesson. Interest had been justified as a way to cover the risk of default. But usually interest is much higher than that, and creates a power disparity between those with the ability to extend credit, and those who need or want the ability to spend now and pay later, as we discuss in lesson 3.
The Credit Theory of Money was well explained by Alfred Mitchell-Innes in the early 20th Century, using examples like Tally Sticks, which we discuss in the next lesson. Some economists see little difference between credit money concepts and “chartalist” or “neo-chartalist” views that equate money with the state. They are, however, quite different, as credit money can exist without state involvement, and modern state-supported monetary systems are arguably not credit-like, as we will examine later in this lesson.
• Mitchell-Innes, A What is Money? (1913)
• Mitchell-Innes, A (1914) The Credit Theory of Money


14. Honey Money – thought experiment (2)



It’s unlikely people carry will pots, instead using paper and electronic honey-IOUs. Swift action would mean sufficient IOUs for all trade. Profits from honey would stop colony collapse but encourage engineering bees that make more honey.

Given the role of the state in issuing our currency, or at least apparently issuing it, why do we make the distinction that credit money need not involve the state? Our reason is that many private networks of companies and individuals use credit systems, and not all are use a national currency as a unit of account.

One credit model is sometimes called ‘mutual credit’, or ‘collaborative credit’ by one of your tutors. Instead of having cash which embodies value and which passes from person to person, a mutual credit system has accounts and payments between accounts. As this simple ledger shows, since no ‘money’ enters the system and none ‘leaves’, then the total balance of all accounts is zero. The system is just recording how much all its members owe each other. What makes the credit ‘mutual’ is that members agree that the value of each member’s credit is the same and therefore that all credit cancels out all debit. It also means that if a member ‘defaults’ which means stopping trading without returning to zero, then the inflationary losses, or gains, are spread across the whole system.

Mutual credit book-keeping is different to conventional accounting. Instead of having accounts with balances which are changed as stuff goes in and out, a mutual credit approach would use only a single ledger of transactions between specific accounts.

The implicit assumption in mutual credit is that, since, in order to be stable, all accounts close at zero, the purpose of the system is to do accounting for exchange. Knowing this, all accounts with positive balances are looking to spend, and all accounts with negative balances are looking to earn. Since the sum of all positive balance balances equals the sum of all negative balances we can be sure that, in the long run, supply always equals demand.

However if accounts start piling up huge deficits or surpluses that can mean other accounts may have trouble returning to zero. Typically there is no interest in mutual or collaborative credit systems as the “currency” is designed purely for enabling exchange. Because of this tendency towards balance, mutual credit systems have some devoted fans, and such systems can work at scale. They do not feature in mainstream economics discourse, but we will revisit them in lesson 4.

Some prefer to describe mutual credit as “moneyless” exchange systems, to emphasise that the currency is not a fixed object of value, but a unit in a system. However, we consider them to be a form of money, as we view money as a social technology for enabling exchange. By a social “technology” we mean a set of agreements, assumptions, beliefs, norms and habits as much as sets of physical objects.

What do you think is a better form of money, or a better way of looking at money?
Take a moment before the next slide.

• Bendell (2014) How collaborative credit can heal – rather than just disrupt – capitalism, in The Guardian. July 3.
• Bendell, J and T Greco (2013) Currencies of Transition, in McIntosh et al (2013) The Necessary Transition, Greenleaf.


15. Money as Credit/Debt

  • Social agreement
  • Trust in issuer
  • Promissory notes
  • Cheques
  • Credit Theory of Money

The difference between commodity and credit money is critical to a proper understanding of monetary science. Georg Simmel, the 19th Century sociologist devotes 70 pages to “The value of money as a substance”. It begins very lucidly:
“Through all the discussions of the nature of money there runs the question as to whether money, in order to carry out its services of measurement, exchange and representation of values, is or ought to be a value itself; or whether it is enough if money is simply a token and symbol without intrinsic value, like an accounting sum which stands for a value without being one.”

There are number of differences I would like to draw out here, because they are part of the lexicography of the following lessons. Commodities make a much better store of value than credit because commodities are intrinsically valuable. Credit makes a much better medium of exchange because it is easy to create and destroy as much as necessary, even for free

Sometimes the economy needs to grow, and maybe sometimes to shrink. More or less money is needed. With commodity money creating money means setting aside more of that commodity, which can be expensive, disruptive, or even impossible. However if creating money is as easy as extending credit then the quantity of money can easily be adjusted. This is called elasticity. Usually interest rates are used for this. (Higher interest rates means a smaller money supply as the cost of borrowing increases)

Credit money requires trust in the issuer and if issuers can’t be trusted we might be better off using currency backed by a commodity. But notice the term “backed” – as backing is just a promise. The same institutions who manage credit have historically been those who keep the gold safe, and they understand how to make money whatever the monetary weather. We will be covering some of them in the next lesson. If social and economic justice is the goal, minting precious metals into coinage would be a secondary measure to ensuring that democracy, law and order are functioning properly

Commodity money is much more expensive than credit money to issue. For a monetary volume $1trillion, that would mean setting aside $1 trillion of assets in commodity money. Credit money could be free, yet currently the mainstream forms we use require payment of interest at point of issuance. Yet if the state issued the credit then the interest belongs, in principle, to the people, making it less of a challenge. Another cost issue associated with commodity money is the social and environmental cost. For instance, gold mining can cause toxic pollution problems, soil loss, deforestation, and ongoing conflict with forest dwelling peoples, for instance in the Amazon today. Child labour in small non industrial gold mines is also widely reported.

Commodities are always subject to market speculation. This can be incidental, or it can be financial bullying or warfare. Big speculators can crash small countries using commodity money, ruining their ability to import. Credit can also trade on markets as a commodity, but it is easier to protect a credit currency because ultimately it is about trust between the issuer and the holder, not about 3rd parties.

With a commodity, the issuing power is in the hands of the rich because the rich can control the quantity of commodity / currency in circulation and hence the availability of money and the price. With credit money, it is possible to put the issuing power in different hands. Peer to peer credit is also possible, as in the case of mutual or collaborative credit.

So these two approaches produce different financial instruments suitable for different purposes and which can serve different interests. There is no law that says we have to choose one or the other – they are not incompatible.

• Simmel, Georg (2011 [1907]) The Philosophy of Money (Routledge Classics Edition), trans. David Frisby and Tom Bottomore.


16. Mutual Credit

A transaction ledger between Alice, Bob and Carol.  Which implies that members have the following balances, which MUST total 0…

Date Payer Payee Amount
Mon Alice Bob 10
Tue Bob Carol 20
Wed Carol Alice 10
Name Balance
Alice 0
Bob -10
Carol 10

For a friendlier explanation, watch this…

 So money can have intrinsic value, or it can be a promise of value in the future, when it is redeemed. There is another possibility though, that money represents value already created.

For example, the Boya Boya currency in Australia, is a certificate issued in acknowledgment of carbon emission reductions. You could imagine similar certificates being issued for any socially valuable work. People accepting payment in acknowledgment currencies are honouring the act of value creation that the certificate denominates. People holding large quantities of such currencies are wealthy because of how much value creation they have paid for.

Think about it. I could plant a tree and earn a certificate indicating the community’s gratitude. You could provide me a meal in exchange for that certificate. Who, then, is the community grateful to? Since I have been ‘paid’ with a meal, does not the kudos for planting the tree now reside with you, the holder of the certificate?
This acknowledgment model is very rare in societies where people feel social safety nets are inadequate and so everyone wants a guarantee that their money will save them. Instead, we acknowledge and appreciate not the people giving the most to society but the people who have the largest unspent claims on our future work and resources.

Acknowledgments cannot be redeemed for anything, but circulate forever. Every time valuable work is done more of them come into existence. There’s no problem with people accumulating them but some kind of inflation or retiring of the certificates may be designed in to help stabilise prices.

The terminology in Bitcoin, of “proof of work” refers to the work done by a computer to crack a cryptographic code, before it is then allowed to add the latest block of worldwide Bitcoin transactions to the blockchain, and receive 25 Bitcoin as reward. Therefore it is an acknowledgment currency, but not for all computers that maintain the network, only those that crack the code first by trying many combinations. It is fairly unique in the history of currencies for an acknowledgment currency to command such market value, and we look more at Bitcoin in lesson 4.

Boya Boya


17. Commodity vs. Credit

“Through all the discussions of the nature of money there runs the question as to whether money, in order to carry out its services of measurement, exchange and representation of values, is or ought to be a value itself; or whether it is enough if money is simply a token and symbol without intrinsic value, like an accounting sum which stands for a value without being one.” – Georg Simmel (1907)

Some of the differences:

  • Store of value vs medium of exchange
  • Elasticity
  • Trust & Fraud
  • Cost of issuing
  • Vulnerability to market speculation / manipulation
  • Issuing Power

Here is a rather clear statement from the English, some years ago, about the power of the state in saying what shall and shall not be money.

So far in this lesson we considered the essence of money in a political vacuum. None of the three types of money we have described are recognisable as the national currency we keep in a bank and spend at the shops.

That official money, such as pounds, euros or dollars, is not a commodity money unless you think it is possible to create value from nothing or have an imaginative view of what intrinsic value of an object can mean.  It could be credit money, if you regard your pounds or dollars as a tax credit from the government – that is, a means of offsetting a future tax bill. When the money has value simply because the issuer says it has value, this is called fiat money, from latin, meaning ‘let it be’.

Fiat money appears to fit into our category of acknowledgment money, issued in acknowledgment of whatever work the government commissions, and circulating forever, with no intrinsic value.

The idea that money is fiat money dominates mainstream monetary thinking today, including the assumption that money is an instrument of the state and only the state. Those who believe they are governed by consent or that personal freedoms are problematic, argue that the power of seignorage (the right to issue money out of nothing) rightly belongs with the institution that manages society and allocates resources for the collective benefit. Some go further and assert that sovereignty, the power of absolute self determination, must include the power to issue money.

Schools of thought in economics which take this state-centric approach are Chartalism, the State Theory of Money and Modern Monetary Theory. Chartalists often focused on arguing against commodity money theorists, such as the Metallists who prefer precious metals or the Austrian School, who tend to prefer a free market of privately issued currencies (Wray 2000). The famous British Economist John Maynard Keynes (1930) thought the battle won years ago when he concluded that “all the civilised money is, beyond the possibility of dispute, Chartalist.” In recent years so called neo-Chartalists, who espouse Modern Monetary Theory, have found that governments may not actually have had such power after all, and focus on critiquing the current mainstream monetary systems for giving private banks, not governments, the pleasure of issuing the vast majority of our money supply at interest. It is a critique we will explore in a moment.

Keynes, JM (1930) A Treatise on Money.

Wray, R (2000) The Neo-Chartalist Approach to Money, Working Paper No. 10, Jul 2000.

For MMT start with wikipedia:

Bank underground blog (2015) Monies – Joining Economic and Legal Perspectives


18. Money as acknowlegement

Not only can money be of value-in-itself or a promise of future value but it can be a proof of past value created – acknowledgment money.

The Boya Boya?
Bitcoin (via proof-of-work)
Circulates indefinitely

We’ve been focused so far on the idea that money has a substance, an essence to uncover beneath layers of political and erroneous language. But the notion of fiat money questions that. Fiat currency and maybe even credit money is difficult to argue as having any intrinsic value at all. It is clear that the value arises from a social system of assumptions, beliefs, norms, and rules that utilises different physical things, whether paper, coin, plastic or computer chip, at different times. Another way of saying this is that money is a socially constructed. We define it collectively, and we may experience it slightly differently. There is no real money to discover a perfect definition for, as it is invented by us. It appears people are always seeking to “thingify” social constructions, which are complex processes, into something more simple. For instance, Aristotle, in his actual writings, didn’t define money as precious metal at all. In fact he said the opposite: “Money exists not by nature but by law.”

Bernard Lietaer, who had a hand in designing the current international system of floating exchange rates, and then the Euro, before dropping out of that system and writing several books on complementary currencies, has an almost circular definition of money. It is, he says, “an agreement within a community to use something as a medium of exchange” (Lietaer, et al, 2012). For him, the substance of the money is irrelevant, it is simply its general acceptance in exchange that makes some thing, or some system, money. Arguably, unit of account and store of value are sub functions of that exchange function of money – as units are used to enable valuation for exchange, and one stores value to enable inevitable exchange at a later date. Simmel made the same argument at the turn of the last century, when he argued that money is a process not a thing. That process includes our everyday assumptions and stories about money. It is also why celebrity historian Niall Ferguson (2008) defines money as “trust inscribed” and that it doesn’t matter what it is inscribed on.
So we should be wary when people try to tell us what money IS. As a social construction, we decide what money is in the way we talk about it, earn it, spend it…. However, our exploration of the concepts about money will give you a better insight into the assumptions that shape people’s view of what is important about money, monetary policy and currency innovation.

Which of the following do you most celebrate in a person?

  • How much they have accumulated, i.e. their net worth)
  • How much they have created? i.e. work done
  • How much they have given i.e. generosity

Lietaer, Arnsperger, Goerner, Brunnhuber (2012) Money and Sustainability, published by the Club of Rome, EU Chapter.
Ferguson, N (2008) The Ascent of Money, Penguin Press.
Georg Simmel


19. Fiat money

The sovereign, or those licensed by him, has the authority to create the money of his dominions and it is treason for any other to do so… When the sovereign declares a piece of money to a penny, groat, or shilling, that makes it so…This is a power that the state reserves for its own safety and welfare. – ‘Mixt Monies of Ireland’ landmark ruling in English law, 1600AD

Chartalism and neo-Chartalism
State Theory of Money
Modern Monetary Theory

We, your tutors, have yet to discover a typology of money that is coherent, comprehensive and useful. We are finding that the commodity, credit, and acknowledgment money categories that we have described here are helpful to people working on money from the perspective of social change. Yet sometimes those words mean very different things in other contexts, making them sometimes hard to explain and apply.

For example the suggestion that fiat money is an acknowledgment is quite subtle, and the fact that all our modern currencies are traded on markets as commodities, even though they have no metal specie value makes no sense until we grasp that the typology concerns only the basis of issuance of each currency, not how they are then traded.

So we would like to offer another framework we are working on for understanding money –  what we call the traits of a money.

The rock band KLF burned one million pounds of their own money. In this chat show they received a somewhat hostile reception. What is the effect on a fiat economy when fiat notes are destroyed?

20. A thing or a social construction?

Socrates • Bernard Leitaer • Georg Simmel:  Money is “an agreement within a community to use something as a medium of exchange” ~ Lietaer. 

Money is essentially a process, not a thing, and that process includes our everyday stories of money.  Arguably, unit of account and store of value are sub-functions of the exchange function of money.

2We’ve been focussed so far on the idea that money has an essence to uncover, beneath layers of political or erroneous language.  But the notion of fiat money really questions that.  Fiat currency, and maybe even credit money is difficult to argue as having any intrinsic value at all.  It is clear therefore that value arises from a social system of assumptions, beliefs, norms or rules that utilises different physical things, whether paper, coin, plastic or computer chip at different times.  Another way of saying this, is that money is a socially constructed phenomenon.  We define it collectively, and we may experience it all slightly differently.  There is no real money to discover a perfect definition for, as it’s invented by us. It appears people are always seeking to thingify social constructions which are in fact complex processes, they want to simpliify it into something simple.  For instance Aristotle, in his actual writings, didn’t define money as precious metal at all.  In fact he said the opposite, he said:  “money exists, not by nature, but by law”.

1Bernard Lietaer, who had a hand in designing the current international system of floating exchange rates, and then went on to help design the euro before dropping out of that system and writing several books on complementary currencies, has an almost circular definition of money. It is, he says “an agreement within a community to use something as a medium of exchange”.  For him the substance of the money is irrelevant, it is simply its general acceptance in exchange that makes something or some system to be money.  Arguably a unit of account and store of value are sub-functions of that exchange function of money, as units enable valuation for exchange, and one stores value to enable inevitable exchange at some future date.

3The sociologist Simmel made the same argument at the turn of the last century, when he argued money is a process not a thing.  That process includes our everyday assumptions and stories about money.  It is also why celebrity historian Niall Ferguson describes money as “trust inscribed” and it doesn’t matter what it’s inscribed on.  So we should be wary when people try to tell us what money is.  As a social construction we decide what money is in the way we talk about it, earn it, and spend it.   However, our exploration about concepts of money will give you a better insight into the assumptions that are shaping people’s view about what’s important about money, what’s important about monetary policy, and indeed, what is important and possible and right about currency innovation.


21. Typologies of money

So we your tutors have yet to discover a typology of money that’s coherent, comprehensive and useful.  We’re finding that the commodity, credit and acknowledgement money categories that we’ve described in this lesson are helpful to people who are working on money from the perspective of social change.  But others may find this difficult to understand, for example the suggestion that fiat money is acknowledgement is really quite subtle, and the fact that all our modern currencies are traded on markets even though they don’t have any physical value. Yet sometimes these words mean different things to different people and therefore it doesn’t necessarily help people to understand, for example the suggestion that money is traded makes no sense with our categories unless we realise that the typology only concerns the basis of issuance of each type of money, not then how they are traded once they’ve been issued. So we’re still looking for the ideal typologyof money, and in light of that, we would like to do now is to propose the seven (or eight) traits of money, so that’s what we’ll move on to now – these are our own theories that add to the three-way typology of money that we’ve just shared.

In these slides, when we say “tutors” we mean the authors of the lessons, professor Jem Bendell and Matthew Slater, and not the tutors on the forum and webinar, who will have their own arguments to add later.

22. The Eight Traits of Money

1. Backing / intrinsic value:
When the value of the money is in the token itself, we say the token has intrinsic value it is what the token would be worth if it was demonetised. With fiat money, the intrinsic value might be measured in kilojoules of warmth from a momentary flame.
That means the value of a specie currency is unlikely ever to fall below the value of its commodity; the connection to a real good helps to anchor and stabilise the value, assuming the commodity has a stable value!

One step removed from intrinsic value is when a currency is backed. It is guaranteed to be exchangeable for a fixed quantity of a specific commodity. This one dollar silver certificate assures the bearer that there is one dollar of silver ‘on deposit in the treasury… payer to the bearer on demand’. This isn’t valid currency now.
Because few people really understand money the expression ‘backed’ is often used metaphorically by people who assume that any currency must be backed by something.

So you might hear:
• financial journalist, activist and self-publicist Max Kaiser talk about Bitcoin being ‘backed’ by cryptography
• Fiat money is ‘backed’ by the ability of the government to collect taxes
• That the US dollar is ‘backed’ by the willingness of the military industrial complex to shed blood for oil.
Removing or reducing of “backing” usually means that fraud has taken place, and currency bearers need to be deterred from trying to redeem lest the vault be revealed as empty. You might notice this happening in Lesson 2.


Bitcoin backed by cryptography
22 reasons why Bitcoin has intrinsic value
Dollar backed by oil
Fiat money is backed by men with guns (Nobel economist Paul Krugman)



23. The Eight Traits of Money

Gold coin
Backing / intrinsic value
2. Nominal / face value

This gold coin from the US Mint is legal tender to the value of $50 while the specie value is over $1000 dollars.

While unlikely to be spent (Gresham’s law in extremis) such items have been used at face value to avoid taxes.

Very often in history, money has been made of base metals, precious metals, or alloys, and stamped with a value higher, or much higher than the metal value. These coins have had two values, the metal, or specie value, and the nominal value.

Nominal value is the value of a coin or note as defined by the law, and usually, imprinted on the money itself. The nominal value should always be higher than the intrinsic value otherwise someone is likely to melt the coins down and sell them as commodities, thus removing them from the money supply. This has happened a few times!
At other times authorities have increased their spending power by re-minting coins of the same nominal value but with less precious metal and more nickel, zinc, or copper. This works within the territory where the law is enforceable, but those coins of course have less foreign exchange value.

When coins of the same nominal value have differing metal content, it has been observed that the coins with less intrinsic value are circulated, while the coins with most metal are held back as savings. This is commonly expressed as Gresham’s Law – Bad money drives out good money (from circulation).

Note that, formulated that way, the more nominal coins are ‘bad’ and the more specie coins are ‘good’. Some would argue the opposite, that money which circulates is ‘good’, and money which is subject to hoarding because it has value-in-itself is ‘bad’ because it deprives the economy of liquidity.

Gresham’s Law


24. The Eight Traits of Money

silver medallion

Backing / intrinsic value
2. Nominal / face value

This American Open Currency Standard (AOCS) silver medallion is currently accepted by members at around twice the specie value. Read more…

Usually it requires the law to force the value creators to accept currency at a value higher that its intrinsic worth, but in USA a movement of silver aficionados are doing so voluntarily. They are minting and selling silver ‘medallions’ which they collectively agree to accept at a higher nominal value than the metal value.
When silver was $5 per ounce the coins were minted with a $10 face value. When silver rose to $20 and at one point to $40 they ran into difficulties and stopped printing the face value!
The AOCS also functions as a lobby group and has been vocal in its criticism of the US money system, calling for a return to all money having a precious metal component, because that would prevent the authorities from awarding themselves dollar-spending power out of nothing.


25. The Eight Traits of Money

Statue of Liberty

Backing / intrinsic value
Nominal / face value
3. Incentives / Compulsion

Sometimes a currency is not well designed or faces competition, or conditions which mean it isn’t much used, in which case incentives may be put in place, by the issuers, to help, trick, or force the currency into greater circulation.
For example many local currencies which are convertible to national currencies, are issued at a 5% discount and redeemed with a similar penalty.
Tax is the way that a government creates a demand for its currency. Everyone must pay tax, and tax must be paid in ‘legal tender’ money, so everyone needs to get hold of legal tender, regardless of how self sufficient they would like to be. Otherwise they will receive threatening messages in legalese and ultimately men with badges and batons will break into their house and take their property, with gaol the ultimate sanction for tax evasion.
Let’s have a closer look at Legal Tender as a key incentive, before moving on to the next trait of money.


26. Incentives – Legal tender laws

“A medium of payment recognized by a legal system to be valid for meeting a financial obligation.” – Wikipedia

“Legally required commercial exchange medium for money-debt payment.” –



Any person can print some pieces of paper or stamp a nominal value on a coin, but why should the population accept such an obvious fraud as money?

The Venetian Marco Polo wrote fascinating accounts of the 13th century emperor Kubilai Khan. In one account, he describes how Khan forced his currency upon traders. “With these pieces of paper” wrote Marco Polo, Khubilai Khan “causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends. And nobody, however important he may think himself, dares to refuse them on pain of death.”

The English did the same in the laws from 1600 that we quoted earlier. This approach has evolved somewhat to now be known as is ‘legal tender’ laws. In most countries the legal tender laws specify that if the currency is presented for payment of debts, then it must be accepted by the creditor or the debt will not be recognised by a court of law. This creates an incentive for people to trade in legal tender currencies, and also forces you to accept them. Fortunately we aren’t put to death for saying no, but it could get costly if the courts never demanded we were paid. In addition, if we didnt accept legal tender, then we would have a problem when our tax bill arrived, as we discussed in the last slide.

We should note here that the Chartalist and Neo-Chartalist view that the beauty of money issued by the state is that it would never go broke is predicated on this use of state force to uphold the value of one currency.
It’s clear from decades of experiments with complementary currencies, which we will explore in lesson 4, that state-sponsored currencies are powerful monopolies, leaving very little economic room for other currencies to circulate. In principle, a government could schedule more currencies as legal tender, and there are economic reasons for doing so, as we will discover in lessons 3 and 4. But for now, on to the next trait.

Marco Polo and Rustichello of Pisa, “Book Second, Part I, Chapter XXIV: How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money over All His Country,” in The Book of Ser Marco Polo: The Venetian Concerning Kingdoms and Marvels of the East, translated and edited by Colonel Sir Henry Yule, Volume 1 (London: John Murray, 1903)


27. The Eight Traits of Money


Backing / intrinsic value
Nominal / face value
4. Payment tech

Payment technologies are how people experience the money. The easiest payment technology to use is probably still cash. But for modern legal tender currencies there are a great many ways to pay. A vast banking sector takes a large cut from every transaction for ensuring that no digits go astray as the terabytes of transactions whiz around the globe. But also systems like Paypal, cheques, the credit card are all separate systems for use in different situations.
But not all currencies are compatible with all payment technologies. For example gold coins work much better in hand-to-hand transactions.
Lack of payment technologies are a serious barrier to using a currency, but payment technologies, if they are to be ubiquitous and secure, can be expensive.
World of Warcraft gold can subsist with just the in-game widget. But Bitcoin and the other cryptocurrencies have had to build a payments infrastructure from scratch involving software and hardware.
The original bitcoin client was a little program that ran on a PC and you had to copy and paste the (rather large) code of the destination wallet. Bitcoin became very much more usable when addresses became QR codes readable with a phone camera.
The banking and payments industry continues to compete and innovate hard to make payments ever faster, more convenient, more centralised, and with more metadata for analysing buyer behaviour. This is driven by competition not only to serve the consumer, but to provide metadata to advertisers and government agencies. Another reason is that easier payments actually encourage spending, and faster circulating money is of course good for the GDP.
All this ‘fintech’ innovation is happening under the banner ‘future of money’ which is curious because money itself is not being questioned at all.


28. The Eight Traits of Money


Backing / intrinsic value
Nominal / face value
Payment tech
5. Trust in the issuer

Reassuring to see the gold is in the vault, but who’s gold is it?

Whether a money is stamped with a nominal value, whether it is redeemable for something, acknowledging something valuable, or even if the money is precious metal, trust in the issuer is critical for the well-being of the economy. Issuing a currency usually carries different kinds of benefits depending on the type of currency, but responsibilities also: • To manage the quantity of money in the economy because that affects how fast the economy goes. Too much money leads to inflation and too little to stagnation. • The money should be first spent into the right projects, those consistent with the aims of the economic policy. Sometimes the issuer is also first spender. • The money should be of good quality, which might mean guaranteed gold content in the coins or that credit risks have been properly assessed.
In a free market, anyone would be able to issue anything for use as a currency, and trusted issuers’ money would be the most used. That is what the Austrian School economists get excited about. At some times in history each bank has issued its own notes according to its own appetite for risk. Over-extended banks would sometimes collapse which is bad for depositors but in theory it would set an example to the other banks and confidence could remain generally high – of course this is tested in practice. This theory was abandoned when banks were required to join the central bank. Banks and depositors were now protected from runs on individual banks but now there is ‘systemic’ risks of the whole system collapsing at once!
Public relations is also important. In 2008 amidst rumours that perhaps UK had sold all its gold, the Queen was shown on TV inspecting racks of gold in underground vaults. The press release didn’t say whether any of this gold belonged to Britain!
Trust in the issuer also relies on a trust in the general order of society, if the money is ubiquitous in that society. When Georg Simmel (1907) described money requiring “an element of socio-psychological quasi-religious faith” based upon “confidence in the socio-political organization and order” he was emphasising not only a trust in the issuer of money, but a general faith that current social norms are appropriate and sustainable. If most British people wanted to abolish the monarchy, the queen touring the vaults might have a different effect to the one being sought.

Simmel, G (1907) The Philosophy of Money.

 29. The Eight Traits of Money

Backing / intrinsic value
Nominal / face value
Payment tech
Trust in the issuer
6. Cultural prevalence

The British Queen touring the Bank of England vaults made an interesting story, and reflects the importance of the stories of money that we practice everyday. As sociologist Simmel noted, and Professor Nigel Dodd (2014) explores in depth, money is a social institution, involving various social processes of discourse, habit and belief. Therefore the Cultural Prevalence of money is key to its value in an economy.

A national money supply has extremely high cultural prevalence, as people accept it mostly without thinking. We accept certain levels of inflation as normal. We accept that suddenly a new payment technology is offered for the national currency, whether by plastic, online, or mobile payment. The prevalence of national money is also why we have an immediate sense of pricing of goods and services and what is an expensive, fair or cheap price.
Cultural prevalence is usually achieved through legal tender law, but in extreme cases such as the Zimbabwe hyperinflation, even law was not strong enough and the US dollar prevailed.

Currencies that are not state sponsored face greater difficulties in achieving cultural prevalence. In lesson 4 we will look at alternative and complementary currencies. Local currencies that are bought by national currency, focus on using and stimulating place-based pride to generate cultural prevalence in a specific town or region. This leads to a strong focus on the designs and images on the physical notes.

Cryptographic currencies like Bitcoin tend not to focus on local areas, and the cultural prevalence develops within communities that promote the idea that the currency expresses a political view or self-image of being technologically advanced and free thinking (Dodd, 2014).

Dodd, N (2014) The Social Life of Money, Princeton University Press.


30. The Eight Traits of Money

Backing / intrinsic value
Nominal / face value
Payment tech
Trust in the issuer
Cultural prevalence
7. Unit of value

The significance of these traits, and the way we outline their significance, can of course be argued over. Our list is not conclusive but an educational framework that we hope allows for accessible exploration of the nature of money. The seventh trait we want to describe for you is ‘Unit of Value.’

Anything that can be priced in a currency, or money, can be compared in value to everything else that can be priced in that currency. Money then, helps us to exchange between all the goods in the marketplace by helping us to agree on how much of one thing is worth in terms of another.
In weights and measures, the unit of measurement is arbitrary: measuring in centimetres or inches doesn’t affect the actual, objective length of anything. But because value is not objective, the choice of the unit of account can have various distorting effects on prices and on the market; the choice of the unit of value is therefore is therefore very political.
If a commodity is the unit of value, that means the commodity has a constant price. Being on a gold standard means that the price of gold is fixed, or more accurately, the value of your currency is pegged to the value of gold, and all other goods and services fluctuate against the gold price. This creates a strong incentive to manipulate markets by manipulating the gold price! This can be mitigated by using a ‘basket of goods’ instead of a single commodity, but even then services would fluctuate against goods.
If hours of labour is the unit that implies every person’s time has equal value.
Modern money is a purely abstract unit of value, not pegged to anything. Its purchasing power goes up when the money is in demand, and goes down when the money is plentiful. This is exactly how commodities are priced in a free market and it is one reason why modern money is considered a commodity, despite having no intrinsic value and being created from nothing.
We should beware trying to price the whole world with a single unit of value. Charles Eisenstein warns about this in a recent blog “The oceans are not worth $24trillion.” What he saying about pricing the natural world also applies to pricing experiences, relationships, integrity, and life itself. Some things just shouldn’t be compared in value to other things.
Think… what is the advantage of having a unit of value like the dollar? What are the disadvantages? What would be the alternatives?
If you have time, view this video of Robert Kennedy talking about GDP, while in your mind replacing the word GDP with money:
Eisenstein, Charles (2015) The Oceans are not worth $24 trillion;


31. The Eight Traits of Money

Backing / intrinsic valueValue over time
Nominal / face value
Payment tech
Trust in the issuer
Cultural prevalence
Unit of value
8. Value over time


Most users of money do not spend it and earn it in the same moment. Money helps us to save up and pool our resources so we can access things when we need them. It is therefore important how the value of money changes over time.
Several factors can affect the purchasing power of money over time, depending on what kind of money it is. For example, if money increases in value over time, the longer you hold it, and the more you hold, the richer you become. On the other hand, when the value of money declines, spending is a much better way to realise wealth.
Currencies backed by commodities are in principle unstable, because their value IS the market price of that commodity. That means you never know how much of what you need you can buy with it, however you at least know how much of the backing commodity [usually gold] you will be able to buy!
What things affect the price of currency over time? Inflation, over-issuance, decay, negative interest, make it go down. Positive interest, deflation, scarcity and hoarding make the value go up. And speculation on the commodity make the price generally unstable.
The tendency of the population to spend or save is one of the things that makes economics interesting. Money which is hidden under the mattress may be ‘safe’ but it is not flowing, creating employment and hence real wealth.
Some people, (mostly not trained economists) have pointed out that different instruments could be used for spending and saving, so that these activities are not in direct opposition to one another.


32. The Eight Traits of Money

Backing / intrinsic value
Nominal / face value
Payment tech
Trust in the issuer
Cultural prevalence
Unit of value
8. Value over time (Interest)

Back in the early days of civilisation, when wealth was measured in head (capita) of cattle, when cattle were borrowed and returned, it would be hoped that the number of the herd would have increased. The earliest interest was a way of sharing the natural growth of the herd between the owner and the borrower. But Aristotle pointed out that money was ‘barren’ it didn’t grow naturally, and interest therefore was unnatural. And so all the major religions forbade it except for Jews lending to non-Jews. However when the age of expeditions arrived and large sums of money were needed to finance ‘companies’ engaged in risky shipping expeditions, and interest was the best way, the Catholic church fell silent. That is, of course a rather simplified history, and we will explore in more depth in the next lesson.

One thing that seems to consistently true about the practice of making money from renting out existing money, is that it tends towards social stratification – making the rich richer and the poor poorer.  Developed countries’ economies are based on this relationship, and social programs to redistribute wealth mitigate against this dynamic but do not compensate for the baked-in tendency towards greater inequality.

It is one thing to charge interest on money that exists. After all there is an opportunity cost to lending something which exists. It is quite another thing to charge interest on virtual money, that is, a promise to pay money. That would mean that the more money you promise to pay, the more you would earn in interest. This is the business model for modern banks, which we will explore next.

We hope you will find these eight traits helpful as you encounter new ideas about what money could be.

Visser, W. and A McIntosh (1998) A Short Review of the Historical Critique of Usury, in Accounting, Business & Financial History, 8:2, Routledge, London, July 1998, pp. 175-189.


33. Fractional Reserve Banking

The goldsmith's tale

Then watch positive money Banking 101: What’s wrong with the money multiplier? Visual explanation and debunking of fractional reserve banking (8 mins).

This monetary alchemy usually requires many explanations for students to grasp. We reccommend you reinforce your learning with this clip from Money as Debt III (9 mins).


Before we proceed to explain modern money, you need to understand how money can be multiplied when a promise of money is so solid, that it is as good as the money itself. A promise of money is a form of credit – we discussed the pros and cons of credit money already.

When you put $1000 in the bank, we understand that that the bank is lending it to someone else, yet we also regard our bank balance as our money ‘in’ the bank. What is important to note here is that the money in your account is not your money, but the current value of the contract you have with your bank (Bendell and Greco, 2013). This money is therefore being counted twice. And when the borrowed money is deposited in a bank and lent again, the same money would seem to be owned by 2 parties and held by another borrower. And so some measures of the money supply are counting the same money many times because of the way that banks work. If this went on indefinitely the original depositor would never be able to withdraw their money because it would be far away, so banks have a policy of keeping a ‘fraction’ of the money on ‘reserve’ to be available for likely withdrawals.

If banks judge the fraction wrongly and there isn’t enough money for depositors to withdraw, the bank is said to be insolvent. Since cash sitting around waiting for withdrawal is not profitable, banks try to keep their reserves small and lend as much as possible. This of course is risky, and its one reason that central banks exist – the lender of last resort will ensure that the bank can always access cash to pay back depositors, thus shoring up confidence in the system as a whole.

But what has happened through this double counting, is that debts are now being settled not with cash, but with bank credit. Thanks to electronic payments and widespread cash machines, we experience this credit-money interchangeably from the government-issued cash. Furthermore, banks’ promises to pay us legal tender are accepted in payment of taxes, reducing the visible distinction between legal tender and bank credit.
Note that the quantity of ‘money’ has increased many times, and that the quantity of money now depends not on government policy, but on banks’ willingness to lend. Control over monetary policy has passed from the government issuing base money, to the banks issuing many multiples of promises to pay base money.
Whether through long-term mortgages, or short term but high rate credit cards, promising legal tender money which doesn’t exist is very profitable and banks therefore are keen to promise as much money as they can, and bank credit therefore now exceeds the initial money thirty to one. Which is like saying each banknote has been promised 30 times by the banking system as a whole, each time for a fee!

Whereas fiat money enters circulation to finance government spending, commercial credit money is lent into existence to finance what banks think will be profitable with moderate risk, low transaction costs and collateral. Although banks create ‘money’, they do so for profit and do not have responsibility for the money supply, and they are not ensuring that the ‘money’ represents any real value (credible promises).
It is really important to grasp this modern means of money creation by bank issued debt, which is why this slide has 4 links. You should at least watch the last one, which explains the wizardry of fractional reserve banking, and importantly, why this amazing financial technology is an out of date description of what is limiting bank credit creation today.

Then, before moving on, take a moment to think: Some people are very uncomfortable with the idea that the same money refracted through the banking system as a whole, makes long and risky chains of debt obligations, and several income streams for the banking system. If you were a mediaeval goldsmith, what intellectual justifications might you offer for lending out your gold to more than one person at the same time?

Was the goldsmith a criminal? Could he have justified lending out your gold to more than one person at the same time? How?


34. Modern money creation

How much money can banks create? – Positive Money Banking 101 part IV
Bank of England quarterly bulletin 2014 Q1 sums up this issue without questioning any of the processes. (PDF)
A study by Professor Richard Werner (2014) , by analyzing one bank in real time, “establishes for the first time empirically that banks individually create money out of nothing.”
 Orthodox economists use the acronyms M0, M1, M2 and M3. Maybe you have heard of them. They are attempts to calculate and describe the total official money in circulation. M0 describes the notes and coins in circulation. There’s about a trillion physical USD in circulation in the world, dwarfed by the 4 trillion USD traded each day on the foreign exchange markets. That reminds us most money is not physical. In the US, M1 represents all the physical money (M0), plus quickly accessed money like that in checking accounts. M2 usually includes M0 and M1, and also savings accounts. M3 pulls in things like institutional money market funds, long term deposits, and other things rich people possess that can be spent somehow but confuse mortals like us. As of March 2006, the Federal Reserve stopped tracking the M3 money stock. Perhaps their statisticians admitted some mortality too. In the UK there’s M4, which basically means all cash and electronic deposits. They also call that broad money. The physical element is only about 2%. That’s why they call that bit narrow money.

Despite having these terms to describe all forms of money as types of money, many economists have ignored the implications of bank-created credit being new money, and refused to consider credit-creation as an independent variable, or key factor, in shaping economy and society. It might be why most economists are so poor at predicting how the economy will behave (Wray, 2013)

It is also important to note that old fashioned fractional reserve banking and the “money multiplier” is still widely taught in economics and business schools around the world as the way money is created today. Not just in 2nd rate schools, but even at Harvard University by celebrity academics like Niall Ferguson, who explains in Ascent of Money how he teaches it to MBA students (Bendell and Greco, 2013).

So how much money can banks create today? Based on the work on Modern Monetary Theorists like Professor Wray (2013) and Professor Werner (see Ryan Collins et al 2012)), the organisation Positive Money has produced a clear explanation of the process in this video. They show that in times of economic confidence, there is essentially no limit on how much money (and of course, how much debt) the banking system can create, as the only restriction is a ratio between a bank’s capital reserves and the deposits they are promising to clients, yet a bank’s capital increases the more business it does!

Do watch it before moving on, and if still in doubt, read the latest Bank of England report on the topic.
Then we recommend you reflect on arguments for and against this current state of affairs. Is money a public good? Could the arguments for privatising public services apply to money creation?

Bendell and Greco (2013) Currencies of Transition, in The Necessary Transition, McIntosh ed (2013), Greenleaf Publishing.
Wray, L. R. (2013). Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. New York: Palgrave Macmillan.
Ryan-Collins, Josh; Werner, Richard; Jackson, Andrew (2012). Where Does Money Come From?: A Guide to the UK Monetary & Banking System (2nd ed.). London: New Economics Foundation. p. 178. ISBN 978-1908506238. OCLC 816167522.


35. Read now

There will be no seminar this week but an online forum. Before completing your assignment, read David Graeber’s (2011) chapter “The myth of barter” [pdf] or listen to it here & then read Professor Yamat’s (2013) “Essays in Monetary Theory and Policy” here.

You have completed this lesson 1 of the Money and Society MOOC! We have rushed through several layers of understanding about where money comes from. From the essential types of money, to the role of the state in creating fiat money with legal tender laws, to the much misunderstood role of banks, not as intermediaries between savers and borrowers, but as profit-driven state-backed guarantors on people’s credit. You might be wondering how it came to be like this and what different types of money and currency have existed in history, which is the subject of our next lesson.

At the end of each lesson we recommend you spend a couple of hours doing some additional reading or listening, and then prepare a written answer to a question that you will submit to the Money and Society online forum. Only after you submit your answer will you be able to see other participants’ answers and then interact with each-other. We are looking forward to the interaction. After lesson two we will then have a webinar on the content and assignments of both this lesson and the next.

The assignment questions are intended to give you the opportunity to think critically about what we have presented, and be imaginative in seeking an integration and application of the knowledge and ideas we have shared. This week, we want you to prepare up to 400 words on the following.

“You have inherited $300K. Your financial advisor tells you that you have the opportunity to include the currency Ven your portfolio, for a 5% discount on the currency trading price of Ven, if you make a commitment to hold it for minimum of 5 years with no guarantee of earnings. He asks if you want 0%, 1% or 10% of your savings in Ven under these terms. He asks you to look at their website, before deciding. After researching the currency, what decision would you make, and why, and what information, if any, would you ask your financial advisor to obtain?”

This is your assignment, max 500 words.  Submit soon on the forum:

36. Further study?

Full books:

Werner, R., Jackson, A., 2012, Where does money come from: a guide to the UK money and banking system, 2nd edition, NEF (New Economics Foundation): London

Simmel, Georg, The Philosophy of Money (1907)
Dodd, N, The Social Life of Money, (2014) Princeton University Press.

Riegel, E. C, The New Approach to Freedom (1976) PDF, audiobook

Online readings or audio:

Debt the first 5000 years audiobook
Wizards of Money Episode 1
The Cobden Centre, many writers with a broadly Austrian perspective


Grignon, Paul, Money as Debt III: Two kinds of money 6 min

Chris Martenson, Crash Course:
Chapter 6 – What is Money
Chapter 7 – Fractional Reserve Banking
Chapter 8 – Government money creation with treasury bonds

Kindly remastered by Ken Royall and Pal Grabbein. This lesson can be used for non-commercial purposes if clearly stating: Adapted from Bendell, J and M. Slater (2015) Money and Society, free course,


When you’ve submitted your assignment please be sure to read and comment on some other assignments – we’re all in this together!

Lesson 2 will be on ‘The History of Money.’


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