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Saturation, Integration and Evolution of Money

Money was first created as a symbolic representation for material things. Production of grain or discovery of gold were acts that served as the basis for the creation of more commodity money. The symbol served as a convenient medium for exchange of the commodities they represented over longer distances and periods of time. Indirect transactions supplanted direct barter exchanges. Most probably in the initial stages, only a few commonly traded commodities such as food and clothing were valued and exchanged in terms of money. Barter exchanges would have continued for many transactions. Many less commonly traded goods and services, such as a day of manual labor, a mid-wife’s services, a teacher’s knowledge or a physician’s medicine given in exchange for a certain quantity of food, may not have been assigned a monetary value at all. Over time, the number and categories of goods and services valued in terms of money increased until it saturated the full range of things and activities in the society.

This process of assigning monetary value to more and more goods and services facilitated more and more transactions, until virtually anything of intrinsic value to someone could be exchanged. It reached the point of saturation when husbands were valued in terms of the dowry payable by the bride’s family and even religious indulgences to eradicate past sins were priced in terms of money and available for sale. The ‘monetization’ of every social activity acted as a powerful stimulus for the development of other social activities. Assigning monetary value to the services of teachers and physicians encouraged more individuals to pursue knowledge in these fields and dedicate their time offering these services. Art began to flourish when it acquired monetary value during the Renaissance when every wealthy family sought the services of an artist to paint their portraits and fill their homes with other works of art. Money as a thing became fully integrated with society when everything that was valued by members of the society could be expressed and exchanged in terms of money value.

Evolution of money as transactions

Money began as a symbolic medium to facilitate transactions. When this function became saturated, the nature of money evolved. Commodity money evolved into credit money. Credit money is money created by providing credit that is repayable at a future date. Merchants who traded in commodities created promissory notes or bills of exchange as a form of deferred payment in order to facilitate a greater number of transactions. These bills of exchange were accepted in lieu of payment at the time of sale and often passed on by the seller to bankers or other merchants. The bills were backed by the commodities which were traded, but not only that. In order for a trader to extent credit to another, it was also necessary for the seller to ensure that the buyer had the capacity to resell the merchandise he purchased. In other words, the bills were backed by confidence in the capacity of the buyer to conduct additional transactions. This capacity depended on each trader’s organization – his managerial abilities and his network of customers. Of equal importance, these bills were also backed by personal trust and confidence in the buyer, his reputation for commercial success and for integrity in meeting business commitments.

As commodity money based on transactions evolved when all possible goods and services were assigned monetary value, the evolution of credit money depended on the development of two higher elements -- organization and trust. The more organized trade became, the greater the number and speed of transactions that could occur and the more the money that was created in the form of credit. So too, the more reliable the individual traders were, the greater the amount of credit that could be extended to them. These combined to multiply the number of transactions to the point of saturation.

Transactions became more organized when each element and aspect of trade was subjected to systematic functioning, such as maintenance of accurate and detailed records regarding inventories, purchases and sales; standardization of weights, measures, quantities, packaging, formats and procedures for issuance and collection of bills; underwriting to guarantee the bills; commercial warehousing for storage and hypothecation of goods; creation of permanent markets at specific locations for exchange; merchant bankers to finance transactions; commercial laws, police and a judiciary for law enforcement, etc. The organization of insurance made it possible for traders and lenders to secure the cargos they invested in against acts of nature or acts of war, thus encouraging trade with more distant lands and under less secure conditions. The organization of merchant banking made it possible to conduct commercial transactions over greater distances by relying on the professional knowledge and reputation of bankers to substitute for personal involvement of the parties concerned. The organization of laws and judiciary raised confidence in the validity and enforceability of contracts and promissory notes. The organization of wholesalers and distribution increased the demand for transactions by increasing market penetration.

Each new element of organization increased the capacity and propensity for transactions until they reach a saturation point, making possible exchanges between every field and type of activity over greater and greater distances and longer spans of time, thus more fully integrating all these diverse activities with one another. Trade, banking, insurance, manufacturing and retailing were mutually interdependent activities that developed in unison as the linkages between them became stronger and better organized. So also, commercial transactions grew more closely integrated with non-economic activities. The capacity to maintain standing armies and conduct military campaigns was enhanced by better access to munitions and other supplies from commercial sources. Money made it possible for a moving army to procure these goods from local traders even in distant lands. Governments too grew more dependent on traders and bankers for stability and governance. The English [[tally]] was a form of credit money created by the Treasury as a promissory note for future tax collections, employed as a form of currency to discharge the financial obligations of the crown, and widely accepted in commercial trade.  The saturation of transactions was made possible by the development of new organizations which more fully linked and integrated diverse activities in the society.

Evolution of money as organization

As emphasis had gradually shifted from money backed by things to money backed by transactions, at a further stage it gradually and imperceptivity evolved from money as transaction to money as organization. In the first stage, money was created purely on the basis of the material objects that backed it. In the second stage, it was created on the basis of the transactions involving these objects. In the third stage, it was created on the basis of the organizations that facilitated these transactions.

At each of these stages, the previous basis for money continued to be operative, but it was no longer the essential or sufficient basis for further money creation. Money creation based on transactions is still backed by goods and services, but a new dimension is added by the temporary creation of credit money during the time interval between sale and payment. Money based on organization continues to be backed by transactions, either in trade or in lending, but a new dimension is added – money is created on the basis of the permanent existence of the organization rather than on the transient existence of individual transactions. Money thereby gains a greater life span, greater separation from any specific object or action, and a greater sense of permanence.

The stage of money as organization is most clearly identified by the emergence of modern commercial banking. For while merchant bankers create money on the basis of transient transactions, the commercial bankers create money on the basis of the bank’s perceived strength and stability as its organization. That strength is measured by its capacity to attract depositors and leverage those deposits to issue and recollect loans to borrowers for a profit. The goldsmith bankers created money in the form of goldsmiths’ receipts that were apparently but only partially backed by gold. The creation of additional money was made possible by the perceived stability and integrity of the organization that issued the receipt. In the 18th and 19th centuries, commercial bankers created money in the form of bank notes – promissory notes redeemable in gold or silver – that were only partially backed by actual reserves of precious metal. Their capacity to do so depended on their organizational abilities to attract depositors and viable borrowers, to provide safe storage for those deposits, to maintain accurate accounts, and to enforce repayment of loans by legal or other means.

The maturation of money based on organization stimulated greater production of primary commodities, increased the type and number of transactions that occurred and vastly multiplied the amount of money in circulation. The organization of money helped the society more fully exhaust its capacity for production and transactions. The shift from barter to commodity money facilitated the expansion of trade by eliminating the required for a coincidence of needs between seller and buyer. So too the shift from trade credit to bank credit facilitated a further expansion of commercial transactions by eliminating the requirement for sellers to have intimate knowledge of each buyer who applied for credit. While trade credits depended largely on personal acquaintance between the buyer and seller, bank credit required only that the banker have intimate knowledge and confidence in those that borrowed. The money they borrowed could be used for any number of different commercial transactions with any number of sellers.

As the organization of trade eventually gave rise to the emergence of money as an organization, the development of money at this level became saturated and integrated with all other aspects of society by a full exploitation of the potentials of organization. The organization of money matured as banking became subject to legal control, standardized norms and closer regulation, and standardized banknotes. The financial strength of banks became subject to independent monitoring and measurement. Legal procedures and collection agencies developed to promote more effective recollection of loans. Mechanisms evolved for acceptance and collection of checks drawn on other banks. At a later stage measures such as central bank regulation and depositor’s insurance were introduced.

Simultaneously with this fuller development of money as organization, money became more closely integrated with other aspects of social life. The invention of the mortgage as a new monetary instrument served as a powerful stimulus for development of real estate, construction and residential housing. The issuance of industrial loans stimulated the commercialization of agriculture and expansion of manufacturing as well as investment in infrastructure. The creation of stock exchanges spurred development of entrepreneurship in trade and industry and provided capital for investment in the development and application of new technologies. These developments in term spurred demand for people with more formal education and vocational training. Education, which had earlier been considered a cultural endowment, was increasingly demanded as a condition for employment and assigned monetary value in terms of one’s salary scale, thus serving as a stimulus for expansion of education at all levels.

Evolution of money as trust

Trust has been an important factor in each stage of the evolution of money. Although transactions are based on the commodities exchanged and the organization that facilitates transactions, the creation of credit money based on these transactions always involved a significant element of trust between buyer and seller. The buyer needed to have confidence in the quality and quantity of goods supplied; the seller in the capacity and willingness of the buyer to pay at some designated future date.

Trust became a much more important factor as the basis for money creation evolved from transactions to organization. At this stage, the commodities exchanged and even the individuals involved in the transactions become secondary. Primary reliance is placed on the stability, capacity, reliability and integrity of the organizations that support those transactions. That is why from earliest times organizations placed great emphasis on constructing physical premises which denoted size, strength, permanence, and financial soundness, enlisting distinguished members of society as their customers and directors, maintaining public visibility through advertising, and fostering influential social relationships.

The money created by banks was partially backed by the gold, silver and other assets controlled by the bank, but only partially. Banks leveraged those assets in some cases up to 10 or 15 times or more. Their organizational and managerial capabilities serves as partial backing for this multiplication. But the entire operation was based on a subtle foundation of trust and public confidence. If for any reason a loss of trust led the public to suddenly demand redemption of their deposits and bank notes in terms of species, no bank would be able to fully meet that demand. Public trust serves as the very real foundation for the creation of money. The same applied to trust in coins or currency issued by governments. Where the gold or silver content of a coin came under question, acceptance of coins declined. Where governments issued excessive quantities of paper money, as the American and French did to finance their respective revolutions, acceptance of the paper as payment rapidly diminished. Wherever the public comes to believe that a particular currency note is counterfeit, that currency loses its capacity to serve as money even if it is actually legitimate Government Issue.

Trust underpins every dimension and aspect of the organization of money. Development of money as organization becomes fully saturated only when trust and confidence are elevated to perfection. At this point they give birth to the next level of money, money for which the principle backing is trust itself. The phenomenal spread of credit cards and credit card money in recent decades is a dramatic example of the creation of trust-based money backed by perfect organization. Credit card money depends on the trust of the card issuing bank in the card holder, on the trust of card accepting merchants in the credit card system, on trust in the system for credit monitoring and the legal system to enforce collections. An elaborate organizational edifice has been put in place to create this trust. It has replaced trust in the individual with trust in the system. The bank that issues a card does so based on trust in the information provided by national credit monitoring systems to identify reliable individuals who maintain a good credit standing. Note that the evaluation is based on reliable information regarding the credit and repayment behavior of the recipients not on their levels of income or wealth. The merchant who accepts a credit card as means of payment does so based on trust in the credit verification system operated by organizations such as Visa or MasterCard, not on personal knowledge of either the buyer or even of the bank that has issued the credit card. So too, the creation of other forms of money such as bonds and stocks and mortgage-backed securities all rely ultimately on trust in systems, institutions and laws.

Trust is taken to the highest level in the creation of pure fiat money created by national governments, which is the principle form of currency today.  Fiat money is not backed by any specific commodity or transaction, personal relationship or organization. Rather it is backed by the totality of commodities, transactions and organizations in the society. It is an expression of trust and confidence in the productive capacities, legal, political, economic and social institutions of the nation that issues it and the international community of which it is a part. 

The saturation of trust-based money exponentially multiplies the scope for money creation. The institution of money extends itself and begins to saturate even the lower levels of the society where is has previously had only limited access. For example, money is created in the form of micro-credit to impoverished families previously outside the scope of the formal credit system. These borrowers utilize loans to produce tradable commodities and transact exchanges. In some cases micro-credit organizations achieve  a higher levels of repayment on their loans than normal commercial banks.  Simultaneously, money markets, monetary institutions and financial transactions are evolving from the national to the global level. The US dollar has subconsciously emerged as a de facto world currency and the Euro is consciously evolving as an even more inclusive and representative global money.

Saturation of trust-based money is also promoting an unprecedented integration between money and other aspects of social existence. The most dramatic expression of this integration is represented by the Internet. The Internet links people from all over the world together with every field of human activity for the purpose of communication and exchange of information. But the integration of money with the internet makes it possible to link all these people and activities with one another at the level of transactions as well. Producers or publishers of audio, video or written material can sell it to anyone in the world. Individuals with marketable skills for translation, technical writing, design, research or interpersonal relations can offer those skills to the global market. Advertisers can reach every potential consumer. Investors can buy and sell any commodity. Any individual located anywhere in the world can buy or sell used books, extra furniture, antiques, homemade products or collectibles from any other individual, thereby multiplying the number of potential transactions infinitely. E-bay, one of the largest individual transaction sites, has more than 212 million registered users who conducted transactions valued at $50 billion in 2006. We readily attribute these marvels to the advent of Internet technology, but it is the integration of money and the Internet that makes many of them possible.

The human value of money

Developing countries are still largely in the stage where their development occurs through the evolution and expansion of social organizations, though factors from the previous and subsequent stages are certainly active. The most economically-advanced nations have matured to a level at which trust has become the prime mover for further development. This stage will reach maturation and evolve into a still more advanced stage of money creation when the trust and confidence now extended to prominent social organizations is extended to every individual citizen. The proliferation of credit cards among consumers, the extension of medical and unemployment insurance to workers, social welfare benefits for the disadvantaged and elderly are a few early expressions of this evolutionary trend.  

Money was invented by human beings. Regardless of what it is ‘backed’ by, the value of money depends on human aspirations, human perceptions, human productive capacities, human ideas, beliefs, attitudes and values. Money has absolutely no objective existence or value independent of human beings. It is a subjective creation of the human imagination projected externally and given objective form as coin, currency, credit card, etc. The ultimate basis for money is not commodity, transaction or organization. Money is based on the productive capacities, needs and aspirations of every human being.  

As society has learned to ‘monetize’ commodities, transactions, organizations and even this nebulous perception called trust, it will ultimately learn to fully value the productive and non-productive capacities of each and every individual human being and create new forms of money that are ‘backed’ by that most precious of all our assets. This evolutionary transition will be accomplished by pioneering individuals who fully perceive their inherent value as human beings and discover it in all those who constitute the human collective. These individuals will acquire an unlimited capacity to multiply money for themselves and an unlimited capacity to generate prosperity for the society of which they are an inseparable part.  

Strategy for Evolution

We have seen that at each stage of the evolution of money, progress to the next level has been achieved by fully saturating activities at that stage, fully integrating money with all other social activities at that level, and striving to bring into the present level the predominant characteristics of the next level that has yet to fully emerge. Thus the transition from money as transaction to money as organization was achieved by a horizontal expansion to cover every conceivable type of commercial exchange, an integration of economic transactions with social, political and even religious activities, and a striving to apply the principle of organization to every aspect of money transactions. So too, the transition from money as organization to money as trust involves a similar process of saturation, integration and application of the higher principle of trust in the lower principle of organization.  

Thus, we arrive at a strategy that can be consciously applied to accelerate the evolution of money to the level of the human individual. It can be done by fully exhausting the potentials for building and extending trust as a principle for money creation. Extending trust to the lowest level consumer and extending the organizational basis for trust from the national to the global level will accomplish this. Next it involves fully integrating trust-based money with every other human activity. The internet is emerging as the ideal organizational mechanism for this purpose. Trust is already an established principle for internet-based transactions such as shareware as well as for non-commercial transactions such as editorial contributions to Wikipedia, which in the absence of this system would require an expenditure of tens of millions of dollars. The emergence of human-based money requires the full development of every human being. The internet is also a powerful medium for that development. It can commence by making accessible free, world-class education to every individual. Individuals can apply this strategy by developing their own honesty, integrity and trustworthiness to the highest possible level and by extending that trust to the entire network of human relationships which constitute their society.


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