Economic Myths: Money is something which actually exists

There is a general belief that money is somehow "something", the quantity of which can be increased or decreased, or which has "velocity" or which "flows" from some places to other places.

I cheerfully admit that I too talk in these terms, by saying things like "I have saved up some money" or "I have some money in the bank" or "I moved some money from one bank account to another" or "I spent some money" but that is just shorthand or laziness.

Truth of the matter is, money is not a thing in itself, it is a unit of measurement. Kilograms are not weight (or mass), they are a unit of measuring the same. There's no point saying "I have ten kilograms" unless you say of what. Miles are not distance, they are a unit of measuring distance. Nobody says "It is ten miles" without saying from where to where, and so on.

I've spent my life doing accounts, and I am very good at it, but let's not forget that accounts are not a thing in themselves any more than a book is a thing in itself. The numbers in the accounts merely represent the cost or value of real things; in the same way as the words in the book merely represent real things (or help the reader to envisage or understand real things).

Q: So what is "money" a measurement of?

A: It is a measurement of indebtedness.

1. What kick starts the process is if somebody somewhere is prepare to run up debts, i.e. if you pay in the shops with an IOU, or if the government prints bank notes (or runs a deficit) and so on. That means that debtor wants to consume (or invest in real assets) today and is prepared to hand over some of his earnings in future until the debt is repaid.

(Let's ignore the sort of loans which the lender knows the borrower will never be able to pay off because of compound interest, i.e. doorstep loans and the loans which Western banks make to African countries).

2. So if one man has £1 in "money" (be that an IOU issued by a good borrower, coins, notes, bank account, corporate bonds, government bonds, whatever) he has a financial asset which can only exist as long as somebody else has a financial liability of £1 (be that the person who wrote the IOU, the Royal Mint, the bank, the corporation, the government, whatever). The zero is split into an asset and a liability, and the two can merge back into nothing again when the loan is repaid and the cash withdrawn and spent.

3. If nobody ever wanted to borrow, then it would be impossible for anybody to save "money", they would have to save real things (by buying a load of tinned food and storing it in the cellar etc).

4. Borrowing doesn't have to be in money of course, you can feed your neighbour's pets while he's on holiday on the tacit understanding that he "owes you a favour" which he will "repay" by watering your plants while you are on holiday etc. That type of indebtedness, while informal, is in principle exactly the same as financial indebtedness.

(Banks love splitting the zero of course, because they can charge the borrower more interest than they pay the depositor, and they hate it when loans are repaid and deposits withdrawn. Separate topic.)

5. So what the man who thinks he has £1 "money" really has is the ability to consume £1's worth more of goods and services in future, in the same way as the borrower will have to consume £1's worth less of the wealth he generates (his earnings).

6. Which is why it hacks me off right royally when people write articles explaining what a central bank could or should do, or what it should target. The new vogue is that central banks should target nominal spending.

7. Apart from this being a veiled excuse to run deficits, stoke inflation, depress interest rates, bail out banks and prop up the land price bubble etc, I ask myself "How?" and "Why?" Above and beyond providing the core functions of the nation-state (itself very important and A Very Good Thing, but only a small part of what modern governments actually do), all central banks and governments do with all their fancy meddlin' is to transfer wealth from some groups to other groups (i.e. reduce the future consumption opportunities of one group and increase the consumption opportunities of the other group); with the general trend being to transfer wealth from the productive sector to the unproductive sector; from savers to borrowers; from future taxpayers to today's taxpayers; from tenants to landowners etc. In principle they could do the reverse, but that appears to be firmly off the agenda in this country.

8. And what also hacks me off is when people say that "there are X trillion dollars in tax havens". No there bloody well aren't. There are real people in real countries who are in debt and other real people in real countries who have additional future consumption opportunities. The fact that the numbers are only recorded on a computer somewhere in the Bahamas is nigh on irrelevant. They could be recorded on a computer on the Moon for all the difference it makes; there would still be no "money" or net wealth on the Moon.