This is a post that continues a casual series about debt (here is the previous post).

Most money in circulation today only exists because someone took out a debt from the banking system, which promptly created the money from nothing. The simple way to express this is it is just like giving someone an IOU: If you want to trade with someone and you have nothing you can promise them something in return – so your promise is a debt to the person who gave you something of value in return for your promise. This is the concept of debt money.

Alternatively we can have money that is based on the value of something that is stored away. For example at one stage money used to be issued when you stored gold in a ‘bank’ (a bank being a store where things of value could be kept). Let’s call this ‘banked asset money’ – when you give the money to someone, they effectively become the new owner of the item kept in store.

I’ve commented on the problems of debt – that you become endebted to someone, you owe them and you are therefore controlled to some respect by the need to pay them off. However, most of our money in circulation is based on debt, by holding some money you are either in debt to someone (because the money is a loan) or someone else is (because the money is a loan).

It is my preference to not owe the loan myself, but to hold money that exists because someone else took out a loan and spent it and the money came to me (eventually). Is this a tacit acceptance of debt? Hmmm. I’m not sure that it is, but how about using ‘banked asset money’ where there is no debt at all?

The problem with ‘banked asset money’ is that there are loads of assets sitting in a bank doing nothing! Rather unproductive and inefficient. In this scenario it costs a lot more to have money because of the overheads of storage and the fact that stored stuff doesn’t get very well used.

I just had an email in about gold and the ethical problems of gold production. Much gold is basically stolen from the people of the country that it was mined in and also a lot of pollution is produced to create gold. If you have gold based money you are necessarily causing gold to be mined – as if you mine some gold you can exchange it for money. Using precious things as money tends to stop that material being used for useful purposes as it has an exchange value far in excess of its useful value (value to do something useful).

Most gold spends its time being valuable either as ingots or as jewellery (which has status because of its value) – only a small proportion of gold spends its time being useful – perhaps in electronic goods or dental fillings. (I’m basing this judgment of how gold is used based on this info: http://www.goldsheetlinks.com/production2.htm which states there is probably 3/4 of an ounce of gold per person and I reckon that an average person does not typically use that much gold for utilitarian purposes – I know that I have some electronics, but it won’t have that much gold in – therefore most gold must be used as a store of value instead.)

If gold is used to back money then we are poorer because it reduces the amount of gold being used for more useful purposes that would make us wealthier (in a practical way).

Storing grain instead of gold isn’t an ideal answer for ‘banked asset money’ either as storing grain has costs, unless you happen to be storing it anyway.

So using asset based currencies aren’t necessarily the right answer to the debt question.

To be continued…