Isn’t the basic economist’s explanation of money as a medium of exchange, store of value and price setting mechanism? (Though price setting mechanism would seem to be inherent to being a medium.)
It’s easy to see how this came about, but it also explains our bloated financial sector.
Money largely functions as a contract, as you describe, in which the asset is backed by a debt. Though in our culture, it is basically seen as a commodity.
As such, it makes a very effective medium of exchange, as history shows, but as store of value, it means sufficient debt has to be generated to back the assets. There seem to be two primary ways to create the debt.
One is to squeeze the money flowing through the general economy, forcing it to take on more debt and thus drawing the saved, “investment” money back into circulation. Which naturally creates a centripetal effect, as positive feedback draws the asset to the center of the community, while negative feedback pushes the debt to the edges. Since finance serves as the value distribution system for the entire community, this is analogous to the heart telling the hands and feet they don’t need so much blood and should work harder for what they do get. The Ancients used debt jubilees to reset this process, but we are not yet at the end of the rope.
The other method is having the government as debtor of last resort. It’s extremely obvious that the capital markets could not function, without the government siphoning up trillions in surplus money. Where would it go otherwise? Derivatives? The secret sauce of capitalism is that public debt backs private wealth.
Consider the US federal debt started with the New Deal, so not only was Roosevelt putting unemployed labor back to work, but unemployed capital, as well. Then it took off with WW2 and the military has been a significant beneficiary of this stored value ever since.
Presumably Paul Volcker cured stagflation with higher interest rates, but that mostly reduced the flow of money to those willing to borrow it and grow the economy, such as buying houses, starting and building businesses, school loans, etc. While those with more than they had any immediate use for, were compensated with higher interest on the saved money.
It wasn’t until Reaganomics pushed the deficit over 200 billion, in 82, that inflation started to come under control and the economy started to grow again.
One primary method the Federal Reserve has to raise interest rates is to sell the debt they bought to issue the money in the first place. So the only difference with the Treasury issuing fresh debt, is the collected money is used to “prime the pump,” not just retired.
Since the government isn’t going to spend this money in direct competition with the private sector, for actual investment, with potential returns, much of it is spent in ways the private sector would never dream, like military spending. Which might explain why we seem to have endless, strategically inept wars and no one is ever held to account, if their real purpose is to spend the money, in order that more can be borrowed.
The fact is that a medium and a store are not interchangeable. Blood is a medium, fat is a store. Roads are a medium, parking lots are a store. The hallway is a medium, the hall closet is a store. The average five year old has that figured out, but economists seem to lack that level of insight.
The functionality of money is in its fungibility. We own it like we own the section of road we are using, or the air and water flowing through our bodies. It functions as a public utility and needs to be treated as such.
It’s an economic lubricant, not a fuel. The problem is not so much injecting it where it’s useful, baring overwhelming levels of corruption, but extracting the excesses back out, before they tear the system apart. Logically the government could tax out what it currently borrows, but since we view it as property, not a contract between the community and the individual, this is impossible.
The fact is that there just isn’t the amount of productive investment potential to save the amounts required to make people feel secure, but we do save for many of the same reasons, such as housing, healthcare, raising children, retirement, etc. If these could be invested in as community assets and organic networks, rather than everyone trying to save for them individually, we would have stronger communities and healthier environments, as stores of value and not just resources to be mined.
This isn’t socialism, just acknowledging the fact that society has both private and public functions, like a house has family and personal spaces and these need to be sorted out as to what works best. People would then learn to store value as tangible assets and more organic reciprocity, not just in an extremely speculativemetastatic financial sector. Banking could return to more of a system of accounting. Voucher systems.
Government was private once, but when monarchs lost sight of the fact they served a function to society, in order to be served by it, they were usurped. Banking is having its, “Let them eat cake.” moment.
Not that finance could be a direct function of government, as politicians live and die on the hope they inspire and we experience money as quantified hope, so there is a strong incentive to print money for politcal ends and not just economic ones. Like the head and the heart, they are separate organs, serving different functions.
