Money Is Make Believe

1   Definition

The uses/meaning of money can be summed up as (i) a numerical medium of exchange (ii) a numerical measurement of value and (iii) a numerical standard of deferred payment/a store of value, yet these three standard definitions assume the intemporal value of money (i.e. that its value doesn't change much over time). It doesn't matter what form money takes: the Western cultural tradition is gold, whereas Africa used to use a particular kind of sea shell and historically most civilisations related monetary units to a standardised weight of grain. In other words, a standard weight of portion of food was a unit of money e.g. the British unit of weight is "the pound" which is also its unit of currency.

2   Change In Value Over Time

This absolute linkage of monetary units to weight persisted until very recently in human society: in just 1971 did the Gold Standard (Wikipedia:Gold_standard) break down, thus allowing a fully floating and "artificial" currency system where "value" is "lost" over time by a slow but constant price rise. This stands in stark contrast to the monetary history of Western civilisation where the average price level remained remarkably stable over time, though annual purchasing power varied wildly according to harvest: witness the movement of price in Britain from 1264 to 2007 (source: http://www.measuringworth.com/):

UK Retail Price Index 1264-2007 (Excel Data)

One is fairly blown away by the historical noise in annual price levels! One can also clearly see the "Price Revolution" of 1490-1620 (Wikipedia:Price_revolution) which was remarkably mild by 20th century standards - an annual average of just 1.2% - yet which provoked immense social problems at the time due to the uncertainty caused by the average price volatility of up to ten percent, plus the cultural belief that stability before all else was extremely important.

This belief in the importance of price stability was due to three main factors: (i) usury, as in lending for profit, was illegal for almost everyone and so price inflation took away wealth from those who statically sat on monetary wealth and did nothing to increase it (which was most of the richest in society the aristocracy) (ii) wages always lag price levels, so the very poorest in society saw inflation as eroding what little they did earn and (ii) fear of price rises was due in no small part to the group memory of the trauma of the end of the Roman Empire (see Wikipedia:Crisis_of_the_Third_Century) where inflation in Roman currency was the most remembered final death knell of ancient European civilisation: for example, after a long period of price stability or even deflation during imperial expansion, prices as measured by a reasonable basket of goods rose by about three times between 60AD and 220AD [1] which is an annual rate of about one percent. However, from 220AD onwards into the fourth century we see an annual rate of some 8-9% [2] with some individual years seeing a purchasing power swing of up to 100% which makes the volatility in medieval purchasing power look tame. It is often said that hyperinflation marked the end of the Roman Empire, however it was in fact the hypervolatility in prices which marked the end of Empire: the average prices themselves actually remained fairly stable as they always have done throughout human history [#].

That volatility - as shown by the second green line on the graph above - was also high in medieval Europe but declining exponentially right up until the start of the "Price Revolution" whereupon it took a major leap downwards (what is called in statistics a structural break) followed by another major leap downwards around 1530. One can now see that the "Price Revolution" was indeed the diverting of monetary wealth away from the peasantry and the aristocracy towards entrepreneurs i.e. the business class, but that it was also a major reduction in general price volatility probably due to improving trade links allowing the variability of harvests across Europe to be smoothed out in return for manufactured goods. That trend in decreasing volatility of prices has more or less progressed linearly since up until the 20th century, with the overall curve being one of a power distribution (shown as the black line, and remember that the data has already been delogarithmed).

The only other substantial price inflation outside of the 20th century in British history was during the 18th century thanks to the cost of financing the Napoleonic Wars (Wikipedia:Napoleonic_Wars) and indeed the consequent substantial turmoil caused to the entire of Europe caused short-lived severe hyperinflation in some localised regions. Nevertheless, price volatility remained low.

3   What Does This Mean?

Firstly, it means that price inflation is irrelevant in the wider scheme of things though very important in the short-term. What actually matters in the long run according to the historical record is price volatility.

Secondly, it means that European civilisation "changed gears" around 1490-1530 with another gear change around 1870. Not uncoincidentally, this maps somewhat to our own historical perception of ourselves.

Thirdly, and as is obvious from the graph above, from the beginning of the rise of the United States and the beginning of the decline of the British Empire (the recession of 1870), average general price inflation has risen inexorably and without showing any signs of slowing. The average blue line may end in 1957 but it is a rolling average of fifty years before and after, so recent low inflation has yet to make up for the severe price inflation of World War II and the 1970s. Volatility however continues to drop, and that is a very good sign.

Fourthly, due to our cultural history, our need to believe that prices should remain static is confused with them remaining steady. Even Economists, who should know better, too often see price rises as the demon rather than their volatility despite that every statistical analysis will tell you the latter.

4   Why is any of this important?

Some say that this general price inflation is a sign of our impending doom much as it characterised the decline of the Roman Empire. In some respects this may be true - as the easily transportable energy runs out, price rises in it (the Jevons Paradox not withstanding) will raise prices across the board. The important thing to do is to encourage this happening and to not to try imposing price controls or other measures which would inhibit our economy's adjustment.

Moderate inflation tends to penalise the poorest and the richest but keeps entrepreneurs and government either steady or at a slight reward - who benefits most depends on who is generating the inflation. Our BIG problem currently is that inflation greatly rewards natural resource extractors who strip the planet's resources, but this is no longer a form of entrepreneurship we can tolerate. What we need is an Economic system which rewards entrepreneurship in the "right" areas.

We have recently dumped many trillions of US dollars worth of extra money into our economy in saving our financial system - this money was effectively printed because when everyone borrows at once, lending cannot lend value from one part of the system to another and so it simply "creates" the money out of nowhere. That equals a debasement of our currency which equals general price inflation appearing into the system by around 2010 as The Neo-Capitalist Manifesto predicts. Substantial inflation penalises all economic activity because everyone wastes productive effort on keeping cash levels low (what Economists call Shoe Leather Costs). Under our current economic system, inflation of five to ten percent is probably healthy, but twenty percent is not: hence once general inflation starts to rise rapidly, they will probably have to substantially raise interest rates whether they like it or not, thus prolonging the recession and depressing all economic activity still further.

So long as we remain wedded to the notion that money is somehow real and fixed in nature we will remain constrained by these difficulties created entirely out of our own mindsets. Money doesn't exist and never has done: gold exists, but MONEY IS NOT GOLD unless you use gold as your money and that would be a retrograde step.

We propose a novel solution to these all the issues outlined above by taking advantage of the fact that money doesn't really exist: we propose Divorcing The Money Supply and knocking dead many systemic problems at once.

After all, it's not often that we can permanently rid ourselves of individual taxation forever whilst simultaneously rapidly increasing the sustainable rate of growth. The secret to achieving this is putting inflation to work for us.