What is Money?
 Medium of exchange
 Store of value
 Unit of account
 Island of Yap and Fort Knox
 This is all inadequate. I’m still learning.
 Many, many plausible theories
Modern Money
 Where does money come from?
 Why do we accept it?
 Vertical money (government created)
 Horizontal money (bank created)
 Industrial economy
 Financial/speculative economy
 How do we design a sustainable monetary system?
Vertical money
• Gov’t forces us to pay
taxes; we must accept
money or go to jail
• Our economic production
backs money supply
Current System: Horizontal Money
& Industrial Capitalism
 What if there’s a great lending opportunity, and
bank has already lent 19$?
 Where do i (interest) and p (profit) come from?
 More loans or more vertical money required.
ECONOMIC GROWTH
 What if p<i?
 Procyclical monetary system (positive feedback
loops)
 Inherently unstable
What do people invest in
(USA)?
 ~$14 trillion in mortgages
 Record margin debt poses risk for bull market
 “The amount of money investors borrowed from Wall Street
brokers to buy stocks rose for a seventh straight month in
January to a record $451.3 billion”
 The repurchase revolution
 Companies have been gobbling up their own shares at an
exceptional rate. There are good reasons to worry about this
 Since interest paid on debt is tax-deductible, whereas
interest earned on cash is taxable, by increasing its net debt
to finance buy-backs or dividends, a firm cuts its tax bill.
 Most money is borrowed to buy existing assets, not to
create new wealth
Current System: Financial Capitalism
and Asset Inflation
 HEADLINE: Despite Drop in
Commodity Prices, Farmland Values
Rise
 Rising asset prices
 Most loans for mortgages, stocks,
other assets
 Drains money from real economy
 Companies buying back stocks
Interest Bearing Debt in US
updated
Growth and Inequality or
Collapse
 Debt is 360% of GDP and growing faster than GDP
 Interest on total debt is likely to be 15% of GDP.
Direct transfer to lenders
Credit market debt,
net of gov’t
Current System: Financial Capitalism &
Asset Inflation
 Bubble busts, banks capture assets,
stop issuing new money
Industrial economy must also collapse
Theory of Money in
Mainstream Economics
 Money facilitates barter, no other role
 Evolved from mythical barter economy
 Models banks as intermediary between lenders and
borrowers
 Basically neutral
 Largely ignores debt
Goals for the Needed
Monetary System
 Ecological sustainability
 Compatible with steady state throughput (can’t be
based on exponential growth, or else interest
payments must flow back to debtors)
 Finance investments in ecosystems/green technology
 Just distribution
 Benefits of seigniorage must flow to public sector
 Efficient allocation
 Must not promote booms and busts (instability)
 Appropriate balance between public and private goods
Sustainable System:
Vertical money, 100%
fractional reserve,
green taxes
Characteristics of desired
system:
 Money Creation
 Spent on public goods
 Easy to target unemployment, misery, poverty
 Central bank purchases state/municipal bonds
 Decentralizes money creation, fiscal policies
 Loaned into existence
 Can be deposited in banks that service community, available
for banks to lend
 Money destruction
 Auctioned Environmental Allowances set according to
ecological constraints
 Tax unearned income
 May need net creation to cover currently unpriced
transactions, or net destruction as we reduce throughput
Characteristics of desired
system:
 Countercyclical (negative feedback loops)
 Society as a whole benefits from seigniorage
 Not dependent on growth