A Standard Measure
While you may have never sat down to think about it, the Dollar is a measurement unit. Like a ruler measures length a Dollar measures value. They are both standards that we all commonly agree to use to make measurements with. If you want to tell somebody how long something is you may tell them how many Inches it is. If you want to tell somebody how valuable something is to you, you tell them how many Dollars of value it has. Having a standard unit to measure value with is an essential part of the process of human exchange.
There is a difference between measuring length and measuring worth. If you and I were to walk up to a door we could easily both agree on the size of it. But, If you spend your time making doors and I need a door we could easily disagree on how much the door is worth. This is because worth is a matter of individual personal opinion. You want to sell it for more and I want it to buy for less. The price that the door exchanges for is a consensus agreement of worth between you and I.
So how much a Dollar is worth depends on the individual who possesses it and the service he is trying get from another individual in the market by spending it. As the number of Dollars a person possesses increases the significance and worth of each Dollar seems to decrease from that person’s perspective. What seems like a small amount of money to a Billionaire seems like a fortune to average people. The Dollar’s worth is truly in the eye of the beholder.
An Intermediary Credit
The point of a market is to use Money as an intermediary in the exchange of services. In an ideal barter system two people would meet to interchange services of equal value and be on their way, maybe never to see each other again. The reason we have a standard Dollar unit to measure value with is so we have a means of tracking who owes who service when we meet in the market in the future. When a Dollar flows from person to person in exchange for valuable services it is a credit. Lack of a Dollar is a debit or a state of owing your service to somebody who possesses Dollars.
When you spend a Dollar you are issuing a credit to the individual who has provided a valuable service to you. Giving your Dollar credits to somebody else places you in debit because now you owe services to someone in the market in order to re-earn the money you spent. The amount of Dollars you possess determines your level of debitedness or cerditiedness. It is these relative level of Dollars in the spender’s possession that influences the rate at which Dollars will flow. Worth of a Dollar is in the eye of the beholder.
The value of someone’s services is a matter of individual perspective, but after negotiation between both individuals, an agreement is reached. The seller’s services are worth a value roughly in the middle of both the buyer’s opinion and the seller’s opinion. The price is set and that price defines the rate at which the credit will flow in exchange for services.
So, in an ideal barter market, money is a standard measure of value that every individual accepts and is an intermediary credit that keeps track of who can get others to owe them, but there is one other factor that is imperative. Over time, prices should be stable.
A Stable Measure
If we are all going to agree to accept a standardized medium of credit to measure our values with then that money unit should remain the same throughout time. If I use a ruler today, 1 year from now, or 100 years from now the length of an inch will always be the length of an inch. An inch is a predictably stable unit of measure. In comparison, our standard unit measure-of-value, the Dollar, has been anything but predictable or stable in our past. This is because: the rate of Dollars an average individual receives has been exponentially increasing (in general) over time.
Imagine if the graph above was a depiction of the change in the size of doors produced using a standard yet changing or unstable Inch as a length measurement. Doors would have gotten smaller and smaller over the years. Some years increasing, some years decreasing, some years by a lot, others by a little. If the door jam was built in one year you would have to specify what year’s Inch the door jam was built in so that a fitting door could be produced with today’s Inches used as measurement. Absurd.
Exponentials are all about a percentage per unit of time. If you have an income of ten thousand dollars a year ($10,000/year) and receive a one percent (1%) raise every year then the rate you are paid for your services is increasing exponentially at a predictable one percent (1%) per year. From the perspective of the person hiring you, prices are increasing one percent (1%) per year. So-called “inflation” is one percent (1%) per year. You end up with a exponential “hockey stick”.
For arguments sake let’s say that over time you are unchanged. You’re not getting more productive. Your services don’t produce more widgets in a day and the widgets that you produce aren’t getting any better. The demand for you services is also unchanged. A year later you still perform the same function you specialize in. You still do it well. In that case, a percentage increase to your income rate is the same as a percentage decrease in the worth of a Dollar from your boss’s perspective. If everyone’s rate increases one percent per year (1%/year) then the worth of the Dollar will decrease exponentially over time making the unit unstable.
When the rate of Dollars all spenders have available to flow increases then prices increase. Each Dollar looses value and price inflation makes up for it. At the macro level the ratio of two amounts determines the average worth of a dollar to the collective: that is the total number of Dollars in existence and the total number of people in existence.
average worth of a dollar to each individual in the collective = the total number of Dollars in existence / the total number of people in existence
Assume, for simplicity’s sake, that everyone in the market’s collective has an equal amount of money. If the quantity of Dollars increase or population decreases, or both, over time then each Dollar is worth less to each individual over time. If the quantity of Dollars decrease or population increases, or both, over time then each Dollar is worth more to each individual over time.
A Limit on Debt
Of course this assumption that we all posses an equal amount of money is never the case in a properly functioning market. Extreme equality in the amount of money belonging to each individual would indicate that nobody owed anybody else anything. While that might be some kind of ideal, if it ever existed in a real market it would most likely be for a very brief duration of time or indicate a problem. If individuals are to use money, which measures someone’s debit or credit, to track who owes who in the market, then some people will have less Dollars than the average (debit) while other have more Dollars than the average (credit) in their account.
At any point in time the average collective quantity of Dollars in existence per person can be calculated. When this average increases then Dollars decrease in worth to someone somewhere which leads to “inflation” as they bid prices higher where eventually spent. When the average collective quantity of Dollars decreases then Dollars increase in worth to someone somewhere which leads to “deflation” as demand falters causing prices to drop.
This average is a powerful reference. It offers each of us a reference point. Not only does it demark a distinction between having a debit and having a credit. It is ultimately an indication of how much money is really “enough”.
In order to explain, let’s start with the imaginary world in which every person in the market equally owes everyone else nothing. Nobody has bills to pay. Nobody makes any money. No money is ever spent. Everyone is equal, self sufficient, and trades nothing with everyone else.
Money is a credit that is created by giving a Dollar as an intermediary to another person to track the debit of the spender. The Dollar is the ability of its possessor to hire another person in the market by spending it. As I spend money to buy your services I issue credit to you. Every Dollar I spend on you places me a Dollar in debit and gives you a Dollar of credit.
For simplicity, let us assume that we are the only two individuals interested in market activity. You did something valuable for me and received payment of my money in exchange for it. This effectively tracks the fact that our barter is only half complete. The implicit assumption is that sometime soon I will reciprocate by doing something of equal value for you. At which time you will repay the credit back to me thus nullifying my debit.
In practice, knowing the average amount of money in existence per individual in the market allows each of us to determine our level of debitedness or creditedness. If you have less than the average then you are in debit. An indication that you owe your services to others in the market. If you have more than the average then you have a credit. An indication that you have produced more than you have consumed. You owe the money you have to others in the market.
And this is may seem like a paradox. I have said that both the people who find themselves in debit, and those who find themselves in credit, owe those in the opposite class. Everyone is in debt of one type or the other. Those in debit owe services or real-world work. Those in credit owe money to those in debit in exchange for their services.
A Term on Credit
The paradox is a nomenclature issue. In most financial talk the terms debt and credit are used loosely and interchangeably. For example, it is common to say that a borrower with a $100,000 mortgage loan is in debt. The reality is that the borrower of the money receives a credit of $100,000 the day they sign the loan documents. Technically, it is the lender who is in debit.
When I spend I go into debit and issue a credit to you. The credit that I issue to you is a loan. So, I could say that I splend (both spend and lend) to you. The implicit idea is that you are doing something of value for me now that is in my interest, and soon I will equally reciprocate by doing something in your interest. The ideal market is a meeting of both of us at the same time to barter. We use the credit loan that we call money to add a practical time delay in the reciprocating exchange.
Ultimately, the idea is to use the standard credit between billions of individuals in the market, but for now, we keep this simple by remembering that it is only the two of us who wish to trade in the market. You owe the money I splent (both spent and lent) on you back to me. When you prepay the loan back to me I will provide my services and fulfill your interests. Your credit will be extinguished and my debit will be worked off. If you don’t prepay the loan then as you make amortized payments your credit will be extinguished and my debit will be forgiven.
The important idea is that every time we spend money it is an implicit loan of credit. These days there is no explicit loan term specified in a contract when money is spent. The result is that, theoretically, I could be waiting forever for you to return back to me the credit that I’ve previously issued to you. In a market with more than only you and I, theoretically, everyone could choose to never hire me thus leaving me perpetually in debit. That practice is far from an ideal barter market because reciprocation never occurs. How soon reciprocation occurs is a matter dependent on your need for my services and my ability to take the time to produce for your interests.
When money is owed it is called a loan. Any time somebody spends money they issue credit and grant the temporary use of it which is a loan. When I spend money I specify the services that I want in exchange from you. Spending is a loan of money at interest meaning that I specify in a contract how your services will benefit me. For example, If you are a baker then I may specify what type of cake I wish to receive. The interest is whatever service you, as the borrower, agree to provide to me, the lender, in exchange for the money I splend. Often the contract specifies when the ordered interest is to be delivered in the future.
In addition to whatever interest was ordered, loan contracts have a term that specify the slowest rate that the lent money (often called principle) shall be repaid. The term defines the maximum amount of time that the lender will be without her money.
Term = 1/Rate
Money is a Loan
Money is a standard unit of measure that is an intermediary in exchange and the amount of money an individual possesses tracks her level of debitedness or creditedness. When money is spent it certifies a loan contract between lender and borrower. This means that money also is a standard loan. Specifically, that money has a standard term.
Practically, what this means is that the value of your money only lasts so long. If you have a credit it’s worth will diminish over time as the transaction becomes stale. If this sounds like “inflation” to you, you are correct. “Inflation” will also diminish the value of your money over time. For example, If there is a price inflation of 25% per year then the value of the Dollars in your account will diminish 25% per year.
I lent $100 to you when I spent my money to buy your services. I needed what you produce because your specialty met my needs. Your services are the interest I will receive as specified in the loan contract we agreed to when the transaction took place. The term of the loan is a standard that has been commonly agreed upon for all money in the market. Four (4) years, for example. The principle, the $100 I am splending, is completely due in 4 years. It is due at a periodic rate that is automated by the governing financial firm because all transactions begin a loan at the standard term. The period could be yearly. That would make the rate 25%/year. The period would be as short as a day thus creating a more continuous flow allowing every day to be significant market day.
All Dollars you borrow cancel your debitedness, and once all debitedness has all been canceled, build your cerditedness. Since, in this example, both you and I began possessing the average amount of Dollars you now have a credit of $100 and I have a Debit of $100. A day later you splend the same $100 back to me reciprocating the barter exchange. I perform my specialized services. Acting in your interest, I meet your needs. That essentially prepays the $100 loan I gave you yesterday. The creditedness I gave you is extinguished and my debitedness is worked off.
Then, you decide to order another $100 worth of my goods. I accept the loan in exchange for my service in your interest. This turns the tables placing me $100 in cerditedness and you $100 in debitedness. If I decide I don’t need your services for the next 4 years I will repay my loan (automatically through the system) which will diminish my creditedness at 25% per year (due to the 4 year term) and my daily principal payments will forgive your debitedness at the daily equivalent rate of 25% per year. Your promise to work for me, or others, is perishable.
It’s a Republic
Establishing a policy which keeps the average total Dollars in existence per person in the market constant would essentially produce a stable standard unit of value. There would be one of these stable standard units in existence per person thus keeping the value of the Dollar stable.
Does the concept of one (fill in the blank) per person remind you of anything from another subject? In a republic every person gets one (1) Ballot every term. So, the average number of Dollars per person can be aptly named a Ballot. This is especially true because when you splend you are deciding who will fulfill your interests in the market and that splending establishes a contract that makes you the constituent of the representative you have chosen to fulfill your order.
Realizing the correlation between Ballots and Money by recognizing that it is individual people who give money it’s worth provides us with the liberating concept I shall call the The Ballotization of Money. Keeping the unit of value-measure proportional to the population would maintain the value of the Dollar and keep prices generally constant. But, in a world in which this proportion is unpredictably changing exponentially over time we can still use the concept of a Ballot to determine the dividing line between debitedness and creditedness. The Ballot is the unit that defines just how much is “enough.”
Establishing a policy that sets the term of a money’s credit standard for all Ballots places a limit on the amount of time that every market participant has to reciprocate exchange. The barter-like interchange of equally-valued services should be completed sooner rather than later because both credit and debit are naturally subject to continuous decay. The promise to work you issued by splending, called debit, goes stale at the rate established by the term. Both your debitedness and your representatives creditedness are diminished at this rate. Just as any republic sets a standard term for the amount of time a constituent delegates her sovereignty to a representative, the standard term of the credit unit called a Ballot can be set to four (4) years. This standard term on the credit we understand as money acts like an inflation tax, the proceeds of which produce a equal base income, the principle payments, for each individual who is entitled by the Republic’s rule-of-law to a Ballot at a continuous rate of 25% per year.