The Money Action-Problem-Solution Fallacy

By Marc Gauvin (c) 13/11/2013

Rev. 1 16/04/2014, Rev. 2 11/09/2015, Rev. 10/6/2018

Reproduction expressly granted provided attribution and original link are given.

Money as a Measure:


Fig. 1. Value Transaction 


Money" is defined here as a commonly referenced standard measure of divisions of the “value” of goods and services in terms of Price (an information input) corresponding to unique instances of transacted goods and services.  Each transaction produces account entries recorded as a negative account entry to the buyer (Debt) and corresponding positive account entry of equal magnitude to the seller (Credit).    Note input "Prices" can become "Money" only through a transaction of goods and services, this transaction function can act on price to multiply or sum to it or it can be passive  (output equal or less to input). 


System Overview


Fig. 2. Market and Individual Transactions

Transactions in the market are the only common influence on Price negotiation as only they can provide a common perception of fair "cost"  that on the one hand the seller wants to maximise and on the other hand the buyer wants to minimize.   It is worth noting that in terms of competing with other producers,  sellers also aim at offering the best cost to quality ratio, such that overall,  there is greater bias towards lower prices rather than higher prices. 





Fig. 3. Reciprocal Passive BIBO Stable Transactions

Here in Fig. 3., Transactions of goods and services (wealth) reciprocate one another such that as wealth is traded, “Money” in the form of account entries, is “created” and “cancelled”,  the outstanding money in the system represents the sum of unreciprocated debt (i.e. system balance can only be negative or zero),  with absolute value in this Passive BIBO example, always equal or less than the sum of input Prices.  The first Transaction creates an initial unreciprocated system debt of -10 that John is responsible to the community for.  The second Transaction reciprocates John's debt with the system but then creates a new debt with Jim so the unreciprocated system debt remains at -10.  Finally and only when Mary redeems her positive balance by receiving wealth from Jim,  is all value reciprocated and all balances return to zero.  For a fuller discussion on transaction types and system balances see:  Transaction Types and System Balance dynamics  and Effective Decentralised Credit Control for Passive BIBO Currency Systems.


The key feature in this example, is that output "Money" accounted as Debt and Credit entries is always less than or equal to input Prices,  without any scarcity of units nor requiring any control over access to units and without having to predetermine the nature or type of transactions.   Yet the function of liquidity is provided to all and to any extent required and the system is Passive BIBO compliant such that the Stable Currency Unit Theorem holds.  Also,  units do not  circulate!  Since both parties to transactions have a common "cost" reference no single party can unilaterally determine price.


Conclusions for money as a measure:

  • Money is an annotation of value expressed in common units and only comes about as a result of transactions.
  • There is no circulation of units.
  • There is no supply and demand of units (therefore,  money cannot be "charged" for in terms of the size of balances, so that ANY compounding of value in terms of money is entirely precluded).
  • Each transaction  generates its own independent units that are later resolved against existing balances.
  • The sum of money in the system at any given point of time,  represents all non reciprocated value and at all times is equal or less than the input prices, thus conforming to Passive BIBO criteria for sampled LTI Systems.
  • Value expressed in “Prices” are never unilaterally determined.
  • Individual perception of the unit value is determined by interacting with the collective and a common perception of fair costs.
  • Relative value is determined by the sum of transactions within the collective.
  • There is no possibility of unilateral manipulation of the value represented by the unit.

Today's Money Transactions:

Todays transctions


Fig. 4. Conventional Transaction in Today's Troubled World

The first problem here is that if Money is a measure, then it (annotation of measure) cannot arise independently of transactions of goods and services it measures, however for Money to be an input it must arise independently of Transactions.  Secondly, unless the amount of Money input is determined by Prices, then the Money supply will determine Prices independently of the perception of cost by the parties to transactions.   But Prices are the measure of value as determined by the common reference to cost in past Transactions in the market, thus any systematic influence over Prices such as scarcity of or inaccessibilty to units, will distort the process of common value measure.   If to this,  we add the notion that money is an object that requires an industrial "supply" i.e. is scarce,  so that it is subject to being sold, lent and rented, then the measure of value of real goods and services that Transactions must incorporate becomes distorted as a function of its (money's) unit "cost"


In essence, the Money problem is the quintessential Action -> Problem -> Solution, i.e. an unfounded action of using money as the sine-qua-non input to transactions destabilises the process of measure of value,   this in turn generates the illusion of the need to control money to counter instability of Prices converting money into a product of primary necessity rather than just a mere reference of measure. 


It is evident how by the simple error of presenting a logical output as a required input,  we undermine an inherently fair and Passive BIBO Stable process and subsequently generate an arbitrary problem that requires a solution.  Finally,  the confusion between whether money is an input or an output to transactions of goods and services, is grounded in the ontological inconsistency of defining money as both a measure of value as well as a commodity whose value changes as a function of its relative scarcity.


Note: The Bank of England has recently produced a document confirming that money is an output not an input to the system fully substantiating the model presented here, see this document.



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