The cost and value of useful tools is measured in idle time, and the price at which they change hands is also measured in idle time. In this sense, because the real value of tools is measured in idle time, the real price of them is also measured in idle time, and the real currency in a trading system is idle time, and all goods are purchased with work, which is idle time foregone.
In practice, it is inconvenient to buy goods directly with work, with buyers performing work for sellers. But when a unit of one good - an axe, for example - may be purchased with, say, 3 days of labour, it is also the case that an axe will purchase that amount of labour. And so in a trading system in which horses sell at a price of 30 days of labour, and axes have a price of 3 days of labour, a horse may also be purchased with 10 axes.
In a barter economy, in which horses and axes and baskets and loaves of bread are on sale, goods may change hands using a variety of different goods, so that a horse might be purchased with, say, 6 axes, 5 baskets, and 4 loaves of bread, or some other combination. But during any process of bartering, sellers will have to examine the axes and baskets and loaves to make sure they are of good quality, such that they might be actually used.
Bartering goods using a variety of different products is likely to be time-consumng, and to reduce the idleness of the whole barter economy. The use of a single commodity as money in transactions must act to speed transactions, and so the use of money increases the idleness of a society that uses it, greasing the wheels of commerce. Money is not only a measure and a store of value, but also a useful idleness-increasing trading tool.
Work In Kind
In the examples previously shown, tools are bought with the idle time of buyers. That is, buyers pay for tools by doing work for their sellers, surrendering idle time in the process. There are two ways this can work. The first way is that a buyer first performs work equal to the price of the tool he wishes to buys, and is issued with credits along the way, and purchases the tool with the accrued credits on completion of this work. The second way is that the buyer issues a promise to the buyer to do work equal to the value the tool, and receives the tool, and subsequently redeems his promise.
The second system is the kind of money that is used in some of the early economic simulation models elsewhere in Idle Theory. In this system, buyers issue IOUs to sellers, which have written on them something like "I promise to perform X hours of work for the bearer." For the bearer, rather than for the seller in question, so that whoever holds this debt can use it to purchase other goods or services with it. So if man 1 buys tool b from man 2, man 2 can use the IOU to buy something off man 3, and it may be man 3 who returns to man 1 to redeem the value of the IOU. Man 1 doesn't really care who he works for.
The advantage of the second system is that there is never likely to be a shortage of money, because anyone can issue this sort of debt. And another advantage is that anyone can buy what they want when they want it, and don't have to wait until they've accrued sufficient credits to buy what they want. The principal disadvantage of this system would seem to be that there is not very much to prevent people from issuing IOUs far in excess of their ability to repay them, or worse still without any intention of ever repaying them. This sort of system would probably need to be backed up by debtors' prisons in which debt could be worked off, but even this wouldn't work if debtors abscond from the trading system. As this sort of bad debt accumulates in the system, sellers will start to refuse to accept the IOUs issued by known debt defaulters, while buyers will try to pass off their bad debt to unwitting sellers.
The other system, in which sellers issue credit notes for work done, is open to the same sort of abuse, except this time by sellers who issue credit notes against tools or goods which haven't been manufactured.
In both these systems, there is a source of credit or debt, and this source is also the sink. Where debt is issued by someone, in the proper operation of the system this debt is redeemed by whoever issued it.
One way of getting around the danger of spiralling bad debt is to use some commodity - a tool or other good - as the money unit.
In this system a single manufacturer - which is to all intents and purposes a mint - produces the commodity which is used as money, and so there is a single source of money. The sink into which such money ultimately disappears are the users who enjoy the value of the money commodity in its use as a tool or a luxury.
If some commodity is going to circulate as money in a trading system, and mostly not used for any other purpose, it must generally be some low price item, so that other high priced items can be purchased with integer multiples of it. Also, if it is to be repeatedly passed from buyer to seller, it should be something light and small. And if it is going to remain in use as money for a considerable period of time, it should not be something that is likely to perish or rot or rust. Historically, these requirements have resulted in gold being used as money because gold is a very useful, easily malleable metal, and because it doesn't rust, and because it can be easily divided into small, light ingots of known weight - coins -. Not only gold and silver have been used as money, but also cigarettes and cattle and cowrie shells.
In the two-person trading system considered earlier, man 1 and 2 trade axes and baskets. In case A the real price or time price of axes, Pa, was 6 days, and of baskets, Pb, 2 days. This means that one axe exchanges for exactly 3 baskets. And since it requires 2 days of labour to buy a basket, it follows that a basket will purchase 2 days of labour. So where baskets are used as money in all transactions, an axe will have a price of 3 baskets, and one day of labour will have a price of 0.5 baskets.
In the simple two-person trading system, man 2 makes enough of tool b - baskets - not only to use himself as a tool, but also to be able to buy tool a - axes - from man 1. He needs to be able to make one basket for his own use over the lifetime of the basket, Lb, and in order to purchase a new axe after its lifetime La, he needs to make a further 3 baskets every La. So, man 2 will work in production of tools at a rate Cb/Lb + 3.Cb/La, and at the same time he will gain the value of the two tools at the rate Va/La + Vb/Lb. At the same time man 1 will work to produce enough axes to meet the needs of both men, at a rate 2.Ca/La. And he will receive baskets at the rate of 3/La or 3 every 100 days. These he will use as tools. But since the lifetime of a basket is 25 days, he will have to go without one for 25 days in every 100, suffering a tool shortage. So the value he will gain from using tools will be Va/La + 0.75.Vb/Lb. He can only avoid this shortage if man 2 not only buys one axe from him every 100 days, but also buys 2 days of labour with a further basket. So the idle time flows in this case C are:
The above table is denominated in time rather than units of tool b. And the purchase of man 1's labour with tool b appears as the purchase of tool b with labour. The flows of tool b commodity money are all one way, from man 2 to man 1. Man 1 doesn't purchase anything from man 2 using tool b. He only uses tool b as a tool rather than as money.
In this system money is likely to be in short supply if the mint doesn't manufacture and spend enough money. If a further member, man 3, joined the trading system, money would be needed to facilitate transactions between man 1 and man 3, and they would have to do extra work from man 2 to earn the money to trade between themselves.
It isn't very likely that man 2 will be unwilling to buy labour off man 1 or man 3, because such labour results in an increase in man 2's idleness. If anything, the temptation for man 2, the owner of the money mint, would be to manufacture as much money as possible to buy all the labour he possibly could.
After its initial cost of production, the value of a useful tool of some sort, such as an axe, is not gained all at once, but as a stream of value over the lifetime of the tool, in small savings of time or increases in idleness as it is used.
And this is not essentially any different from a principal amount of invested money producing a stream of payments which are made up in part a repayment of the principal and in part an extra amount of interest. The rate at which interest is earned is tool value - tool cost / tool lifetime. Or, given tool a, it is (Va - Ca)/La.
Or to put it another way, if someone were to borrow money to buy a horse, he will be expected to repay the loan with interest over the lifetime of the horse. And he will make these repayment out of the profit he makes from the use of the horse as a labour-saving tool.
If someone wishes to buy a horse which costs 10 axes or 30 days of labour, and he only has 5 axes in his purse, he might borrow the extra 5 axes he needs to make up the purchase price of the horse, with a promise to repay the loan with interest over the lifetime of the horse. In real terms of the price of the horse is 30 days of labour, and if its value is 100 days of labour, and it lives for 700 days, then the gain in value from the horse will be Vh - Ch or 100 - 30 or 70 days, and this will be expressed as a flow of interest at the rate of (Vh - Ch)/Lh or 70/700 or 0.1 days/day or 10%. And this figure will represent the maximum interest rate he will be prepared to pay to borrow money to buy a horse.
Where a commodity such as gold is used as money, and large amounts of it are held, and there is a danger that it might be stolen or mislaid, its possessors may prefer to trust it to the safekeeping of a secure bank vault rather than keep it themselves. For this service, a bank would levy a small charge on such depositors. And in return it would issue the owners of the gold with a certificate of ownership. And these certificates of ownership of goal would very often come to be used in place of gold, if the bank was secure and trustworthy.
But since this gold might remain deposited at the bank for quite a long period of time, it would cease to circulate in the economy. It would just sit in the vault unused. However, if the bank were to make short term loans of some of this gold to individuals who could be relied upon to repay these loans, the owner of the gold might subsequently collect his gold without knowing that, in the meantime, it had been borrowed and returned by several other people. And the bank would not only earn money from holding gold securely in its vault, but from lending out that money at interest.
And rather than lend out the physical gold in its vaults, the bank could equally well simply issue borrowers with their own certificates of ownership, which could be used to buy and sell whatever they wanted, so long as they were repaid or returned to the bank with interest paid on the loan.
At the outset, such banks would most likely charge both their depositors quite high prices for safekeeping their gold, and also charge borrower high interest rates for loans of this gold. But this would attract other people to set up their own competing banks, offering lower deposit costs and lower interest rates. And in the end, an equilibrium might offer to pay interest to depositors as well as charging interest to borrowers, always ensuring that the former interest rate was lower than the latter.
The result would be a fractional reserve banking system which relied on everybody who held certificates or banknotes not all coming at once to claim the gold to which they had title. And the efect of this banking system would be to increase the amount of money in theconomy
Author: Chris Davis
First created: September 2008