What is money, and from where does it draw its value? This is a question Greece is facing as its people stare into the abyss. Our turn will come.
We are not the first to wonder. The 19th century French economist Frédéric Bastiat asked and answered that question in 1849, stating that money was a promise to “Pay the bearer a service equivalent to what he has rendered to society.” Note the past tense — a product or service must be rendered before money can properly come into existence.
Just as importantly, Bastiat recognized that equivalence was not fixed or even defined. Instead, it is up to the knowledge and judgment of each individual every time he or she engages in voluntary exchange. This freedom creates the information content that is known as a “price.” It is also how economies learn to effectively allocate resources and promote growth. Adam Smith dubbed it the “Invisible Hand.”
Wealth, or capital, is simply deferred consumption that is put to work. When done wisely, wealth multiplies, leaving more to consume tomorrow.
Money’s unredeemed promise might be tokenized by a paper note, a gold coin, or a few bits in a computer database. Every form of tokenization has its strengths and weaknesses. History demonstrates that the soundness of the token is directly proportional to the difficulty of its creation, as this helps ensure stability of the money supply.
The moral claim real money places on society on behalf of its bearer comes not from the intrinsic value of the token but from the fact that the bearer had previously produced some good or service deemed valuable by others. This is what gives money its moral legitimacy.
Western Civilization has forgotten this, and we are all paying the price.
Ironically, the inventors of democracy may be the first to rediscover the moral foundations of money, as barter networks begin springing up across a demonetized Greece. Hundreds of them are now in operation, many in anticipation of the shock to come when Greece is inevitably forced to say goodbye to the euro. These networks are lubricating commerce just as jobs and euros in the formal economy are running dry.
Members of barter clubs receive Local Alternative Units, or TEMs for their Greek acronym, in return for some product or service rendered to another member of the closed community. Fellow community members agree to redeem these TEMs in kind, and are cast out if they don’t. While it sounds primitive, and it is, TEMs are real money.
Through the use of TEMs, Greeks are becoming reacquainted with the moral foundations of money. “The most exciting thing you feel when you start is this sense of contribution,” a participant reports in a recent news story. “You have much more than your bank account says. You have your mind and your hands.”
Compare this to government fiat currency, which has largely displaced real money. Manufactured on the whim of unaccountable officials and rooted in government debt rather than private assets, fiat money is circulated, pyramid-like, through a fractional reserve banking system until its connection to reality is entirely severed.
Modern fiat currency fuels the growth of both government and the financial sector because it is not a promise to repay that which has been produced. Rather, it is a threat to squeeze the taxpayers of the future, including the yet unborn. And because the tokens can be manufactured at will, governments can harness the power of inflation to pay off their debts in coin that is worth less than the currency in which those debts were incurred.
Those near the source of modern money creation are expert at its manipulation, weaving it into complex financial instruments that function more like casino chips than real money. Wealth accumulated under this system is not capital at all, but rather a pile of IOUs, the sum total of which can never be redeemed. When too many customers try to redeem these IOUs at the same time, financial institutions fail—unless these institutions are bailed out by governments, propped up with more IOUs. This can cascade until too many people try to redeem those IOUs, at which point governments begin to fail.
Which brings us back to Greece.
While more extreme in magnitude, what is going in Greece today is also going on throughout the Western world. Lined up like dominoes are other governments whose accumulated IOUs vastly exceed their ability to bully taxpayers into making good on them. Governments that squeeze producers and consumers too hard soon learn that growth suffers, making anticipated tax revenue evaporate before it is even collected.
It doesn’t have to be this way. But if we don’t learn from Greece’s mistakes we will surely repeat them. Let’s hope the rest of us rediscover the moral foundations of money before we are forced to experience barter clubs firsthand.