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AC/DC Money and a missing Donkey

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on 1/12/20, 6:11 AM 298 views

By P S Jervis

In 1803 a French economist Jean-Baptiste Say promulgated a law; “Supply creates its own demand”. Called Say’s Law, it means that there is always sufficient demand in the market place to buy the whole of production.

This is obviously true in a barter economy because both the supply and the demand are the same pool of products (or services), and this means that recessions and depressions must be impossible. And they are in a barter economy.

However we are not now in a barter economy, but in a money economy, and recessions are a regular occurrence. Indeed, without regular annual increases in the money supply issued as various forms of new extra debt to our banking systems, recessions would be permanent. Some would contend that given that most businesses appear to be permanently operating at less than full capacity than if there were more demand at current prices, recession may also now be permanent to some degree.

Disavowing the conventions of presenting economic dogma in the hope of introducing a little mild humour into the dismal science, I hope not merely to entertain, but to provoke the adoption of the intransient nature of modern moneys as a factor in the dearth of aggregate demand and disequilibrium, without any obligation to acknowledge so unscholarly and scurrilous a source.

I wonder if we might consider pursuing an AC/DC sort of idea about money? It won’t present you with a cure for “The whole trouble with the world!” unfortunately, even though we all know that we need one. You won’t be able to see the whole donkey in the picture-puzzle by looking through this porthole, but you might see his tail, half his nostril, or the end of his ear.

It may give you a start. Starts are important because Confucius he say “The longest journey begins with the first step” and you are right on the very cusp of the longest journey you will ever make, which is of course, the rest of your life.

This (thus far uninteresting) idea holds that originally commodity moneys, such as existed in the 19th Century (usually though not always gold), were permanently charged with an ability to liquidate debt. They may suffer wear from human hands, be lost in such as shipwrecks, or through being saved, be taken for a duration out of circulation. This is the most familiar model of what money is, still even pretty much until today. This is “around and around” money, DC or Direct Currency money, as it were, and a unit of this money might exist in use for centuries, though in fact it has long now been taken out of circulation, and so no longer exists in use anymore.

Modern money is AC, that is, Alternating Money. It alternates in and out of existence. It began with the custodians of wealth lending the “right to claim a certain commodity money”, and accepting the return of same with increase in repayment. This “right to claim something” money, once repaid, cancelled the claim, and of course this amount of money was also cancelled, leaving no residual.

This has left many in confusion, and blaming the advent of AC money, money as a claim and not as an actual existing commodity, as the culprit in monetary affairs. But the creation of AC money was inevitable and also unavoidable. No commodity can by value be representative of all commodities. Even oil, the most traded commodity on earth, if money is created on a 100% reserve basis upon it, is inadequate in value for the trading of all commodities, real estate and other tangible and intangible assets. The second most traded commodity, coffee, and several others might be added as DC monies being issued on a 100% reserve basis. They would still be of inadequate value to serve full commercial needs, and would carry all the inconvenience of juggling many currencies simultaneously in contractual commerce.

The thing that really changed with the change from DC to AC money is as follows:

When gold was loaned to industry for a productive purpose, a debt and a cost upon the resulting production were created. Upon repayment the debt was liquidated, but the gold still existed somewhere to meet the cost of consuming the production so generated.

When AC (fiat) money was loaned to industry for a productive purpose, again a debt and a cost upon that production were created. Upon repayment of the debt, however, this form of money is no longer in existence to meet the cost of the production so generated. This form of money is simply a claim upon wealth, and once the claim is met by repayment, there is no residual money existent.

Now debt and costs have different lifespans. Fiat money lasts only until the debt which created it is repaid. Costs are passed forward from their occurrence through all intermediate stages of production until at last, they are part of an end consumer product. Only proper person consumers in the act of consumption bring an end to costs, as they, and they alone, cannot pass them on.

Banks will always insist upon loan repayment within a definite period. Costs, on the other hand are in part, and potentially, eternal. It all depends upon the lead times of the production of the various inputs into the final proper person consumer item. All costs (defaults and bankruptcies excepted) only die with the consumption by proper persons; they can’t then pass them on.

Corporations can and do consume electricity, but they do not consume its cost. They transfer its cost on to the next stage towards an ultimate personal consumption. A mine may pass it forward with its ore to the refinery, the refinery with its metal to building an industrial shed, which passes it on to a machine manufactured in the shed, which passes it on to the cost of the machine digging a ditch, ad infinitum.

Depreciation may usually only last on average for say, five years, but here we are talking about depreciation upon depreciation, upon depreciation, upon depreciation etc. where every generation has an average life span of about 2½ years.

Anybody paid a wage for performing part of this long chain of economic processes, and who has used it to pay off his mortgage, doesn’t have it years later for buying the consumer item when it is eventually offered for sale, and nor does anyone else have it. Some of this aggregate of AC money disappeared before (or partially during) the period from its creation until consumer products were offered, and some (especially in large capital long leads-time projects) was paid to consumers in wages and salaries years before product eventuated.

This has brought into play the prospect of a disequilibrium between the rate at which money is being created and destroyed, and the rate at which costs are flowing from producers to consumers. This is the conundrum which Central Banks have now to deal with in maintaining an operative system. Quantifying this may only be done with the establishment of National Balance Sheets and National Profit and Loss Accounts, but these are nowhere done.

The evidence of disequilibrium is obvious in such as depressions and recessions, in the acceptance by industry that advertising is so necessary in competing for insufficient purchasing power for their products, and in inflation during “booms”, and much else.

Until some money (and the right amount too) is created without debt, thus cancelling debt, enabling purchasing power to be adequate to meet the cost of production, and eliminating the cost-push inflation coming from excessive debt, there can be no resolution.

Postscript: Everyone reads this and after a while says “But, but….” and rightly so, because much of the donkey is still missing. But it is a part of the donkey, and without it, notwithstanding the inadequacy of or difficulties with what it offers, the whole donkey can never be present.


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On 3/22/20, 1:54 AM

A theme of your essays would appear to be that while costs and incomes are usually born simultaneously (for example in wage payments for capital works), they travel to the market place at different rates and are extinguished at different times, and thus occasion a propensity for disequilibrium. If a fullness of costs is met with only a remnant of the inducements to produce called incomes, an excess of product costs over consumer purchasing power results; thus the appearance of a profit being turned. Keynes saw this of course and suggested ever increasing debt as the remedy.

It is the only practical option. Politicians will not see that money can be created as a type of societal IOU to meet an excess of industrial costs, and then be cancelled as those industrial costs are met. Any jaundiced look from “high finance” makes politicians nervous.

William J.


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Asked: 1/12/20, 6:11 AM
Seen: 298 times
Last updated: 3/22/20, 1:54 AM