It tests the imagination to visualize the blessings that await mankind once the balance wheel is no longer disturbed by the eccentric of primitive monetary concepts.

Notwithstanding that money is the very language of exchange, it is so little comprehended that the term itself lacks even a generally accepted definition. Prevailing concepts of money range from the multi-material to the ethereal. A prominent New York bank widely publicizes its "money" collection of some 75,000 specimens, including a wide range of commodities used in indirect barter. The author of a recent book on money, on the other hand, begins his thesis with the statement, "Money is nothing." Such range of premise creates endless confusion.

In his book, Money, Montgomery Burchard reviews "Selected Passages Presenting the Concepts of Money in the English Tradition, 1640 to 1935.” He concludes:

What does this book "prove?" In any narrow or positive sense it proves, I hope, nothing. But if the passages illustrate anything it is the broad negative thesis that, in the history of English writings on the nature and function of money, there has been, from the earliest times to the present, no observable advance.

In 1934, after years of fruitless search for a money master, my own hopes were rekindled by a press statement from Professor Irving Fisher, the renowned monetary economist and teacher, that there were "only a few persons in the world who understand the meaning of money." I asked Professor Fisher to name them, and he submitted the names of thirteen Americans and five Europeans. Of these world authorities I succeeded in getting six Americans and two Europeans to enter a symposium to be presented to the United States Congress, which at that time was debating monetary theories.*

*E.C. Riegel, Irving Fisher's World Authorities on the Meaning of Money. New York: Empire Books, 1935. Contributing authorities were Harry G. Brown, Irving Fisher, Ragnar Frisch, Von Schulze-Gaevernitz, F. Cyril James, Willford I. King, George LeBlanc, and Warren M. Persons.—Editors.

After submitting the result to the Senate Committee on Banking and Currency, I published the work in a book entitled, The Meaning of Money, concluding as follows:

The total of 176 answers to the 22 questions showed such contradictions, inconsistencies and disagreements that we feel it a patriotic duty to state that there appears no understanding of the subject of money among the contributing authorities or among others whose writings we have studied. No clear principles are established; projected theories are not demonstrable; the basis for the construction of a monetary science seems lacking.

Economics professor John W. McConnell more recently has undertaken to render a symposium of the opinions of authorities from before the Christian era up to the present. I commend his book, The Basic Teachings of the Great Economists, to all who wish to wander through the forest of economic confusion with much of the underbrush removed. He opens his seventh chapter, "Money, Credit and Banking," with the observation, " A great deal of confusion has surrounded the discussion of money in all ages." His review of writers from Xenophon onward amply proves the contention. Search as one may the literature of money, nowhere does one find a comprehension of the subject.

Confused as the picture is, there are nevertheless certain common threads running through the literature which, taken together, reveal some fairly consistent, traditional assumptions about money. This traditional view may properly be called the objective view of money, inasmuch as it represents money as an entity having some kind of an independent existence, of and by itself. By its logic, money is an entity that can be created by law, apart from trade, and that can be used as a stimulus to trade. Operating under this assumption, men naturally look to governments to be the issuing and regulating authorities for the monetary system. For purposes of discussion, this system will be called the political monetary system.

The new idea, the subjective, or integral, idea of money, is that money can spring only from trade—that trade creates money, and not vice versa. But before pursuing this idea, we shall first look into the origins of money. Let us start with fundamentals.

What is Money?

Civilization began with exchange, and exchange began with whole barter. Whole barter means the exchange of things for things, with each transaction complete in itself. Obviously such transactions require contact between two traders, each of whom has something the other wants. Such contacts are not easy to make. For a trader to find someone who has what he wants and wants what he has, requires so much time and effort that he loses much of what he might otherwise gain from the specialization of labor. Only when an escape from this limited exchange method is found, can men begin to specialize their labor sufficiently to raise their standard of living above that of a meager subsistence.

The first improvement on whole barter was indirect barter, the practice of utilizing commodities of common use as reserves to be later traded for commodities of immediate need. A list of such commodities adopted at various times and places would include salt, hides, grain, cattle, tobacco, nails, etc. The trader accepting these found them useful, and, because of their general acceptance, he was assured of being able to use them to secure desired commodities in exchange. These interim commodities tended to be perishable, however, and a major difficulty was the inconvenience when large values were to be stored or transferred.

The adoption of precious metals, such as gold and silver, as intermediating commodities reduced the inconvenience. This step reflected a growing emphasis upon facility in exchange. Moreover, the durability of the precious metals led to the realization that the actual transfer of these commodities was not required. Accordingly, a new means of completing exchange transactions arose in the practice of depositing precious metals with goldsmiths, who in turn issued warehouse receipts. Such pieces of paper were negotiable, in that purchases could be effected by their transfer.

Acceptance of these promises of future delivery marked the first real step toward the utilization of money, for it was at this point that barter was split into two halves, with the buyer receiving value and the seller only a claim. Previously, the seller had had always to receive some tangible asset from the buyer in exchange for his wares. He had received that asset even when he had no personal use for it—as was usually the case when the asset was silver or gold. Now, through an understanding among traders, one could defer his part of a transaction to another time and place and to another trader. This was the first faint glimpse of the tremendous liberating power of money.

Because of the use of precious metals during the last phase of whole barter exchange, it is natural that the first step toward money should have involved a promise to deliver these materials. The belief widely persists to this day that money, to be sound, must promise the delivery of gold or silver. The essential quality of money, however, is its promise to deliver value in any commodity or service at the choice of the holder. To comprehend the excellence of this promise, we must only inquire what the seller would most desire that the promise (money) should convey. Would he desire that it promise him gold, or silver, or any other specific commodity, or would he prefer that it stipulate only a specific value, a value applicable to any and every commodity or service? Obviously it is the latter. We see then that the ideal of money is to split barter absolutely in half, without any limitation imposed upon the seller.

Not only is the ideal of money most fully accomplished when the promise imposes upon the holder no limitation as to choice of commodity, but any concurrent delivery of value with the monetary instrument is a reduction in the sum of money conveyed. Unlike a dollar bill or a dollar check, for example, a silver dollar is not wholly money. The former are complete split-barter instruments, while the silver dollar is a qualified split-barter instrument, in that some value is conveyed with the promise. To that extent it is not money. If a silver dollar contains fifty cents worth of silver, its transference is half a monetary transaction and half a barter transaction. Or, counting both sides, the transaction is three-fourths barter, since the seller, of course, delivers his half in value. When inflation so shrinks the power of the dollar that the silver content of the silver dollar becomes worth more than its face value, silver dollars will disappear from circulation and be melted for bullion while the dollar bill and dollar check will remain. This demonstrates that money has no intrinsic value and will tolerate the use of a valuable vehicle or token only so long as the value is less than the sum of its face.

The purpose of money thus is to obviate the definitive and invoke the relative, i.e. to enable the acceptor to requisition any commodity or service at the market price. Hence we can see that money is a device that operates within the trading community for that community's own self interest. The necessity of splitting barter into halves in order to facilitate exchange is the motivating force that makes the monetary system operate.

A would-be money issuer must, in exchange for the goods or services he buys from the market, place goods or services on the market. In this simple rule of equity lies the essence of money. Money, as a monetary instrument, is an evidence of purchase that is issued by the purchaser to the seller. Since it is in the self-interest of all concerned that the monetary system continue to operate within the trading community, it is apparent that the buyer who issued the monetary instrument to the seller has made a commitment to the community that he, in his turn, will engage in business, i.e., will bid for money by offering his own goods and services in the open market. In this competitive situation, he redeems his original issue through the sale of his goods and services. Thus money is actually backed by the value surrendered by the seller and potentially backed by a value in the possession of the next seller.

To print bills and mint coins is not to issue or create money. This has no more monetary significance than if you were to write a check and leave it in your checkbook. Instruments that have not been put into exchange are nonexistent in the world of exchange and money. Money simply does not exist until it has been accepted in exchange. Hence two factors are necessary to money creation: a buyer, who issues it, and a seller, who accepts it. Since the seller expects, in turn, to reissue the money to some seller, it will be seen that money springs from mutual interest and cooperative action among traders, and not from authority. That the Government can issue money for the people, or, in other words, that there can be a vicarious money power is an utter fallacy. Money can be issued only by a buyer for himself, and he must in turn be a competitive seller to recapture it and thus complete the cycle. He must recapture to stay in business, since his issuing (credit) power is limited. Moreover, in a market conducted under free competition, he will be compelled to give the par value of his issue, since under free competition he must bid for money against all other sellers and thereby return as much to the market as he took out with his issue.

This competitive situation, in which the trader redeems his original monetary issue through the sale of his goods and services, assures that the community's monetary system will maintain its stability. It is cooperative self-interest which maintains the parity of the monetary unit, and that same cooperative self-interest justifies the seller in surrendering value without fear of loss.

All enigma as to what causes money to circulate and maintain its power is thus dissolved by comprehending the natural law of money issue. This is that its legitimate issue is confined to personal enterprisers in the market place, since they alone, by the logic of their situation, are able to be and are desirous of being issuers of values as well as issuers of money.

It is important to note, further, that only an impecunious person or corporation can create money, as strange as that may seem. A person already in possession of money can only draw upon the existing supply—that part of it which is in his possession. The reason for this, of course, is that money is an accounting system, and under the principle of accountancy a net debit and a net credit cannot exist side by side. A person without money is neutral unless he creates money, which puts him on the debit side.

To create money one must first be impecunious, and the act of creating money is the act of paying for a purchase. There is no other way. Such payment by an impecunious buyer puts him on the debit side of exchange. The effect upon the recipient of the payment, the seller, is to create either a credit as an addition to a previously existing credit or an offset to an existing debit. Thus purchasing (and paying) either creates money or moves the purchaser nearer the creative line. Selling (and receiving payment) either destroys money by offsetting a debit or moves the seller farther from the creative line by increasing his credit balance.

Let us now consider a hypothetical community of traders who, finding the need to facilitate their exchange with monetary instruments, hire a bookkeeper to keep track of their transactions. Each member of the exchange might receive some blank pieces of paper on which he directs the bookkeeper to debit his account and to credit the account of the seller by a specified number of monetary units. Nothing need be deposited with the bookkeeper to authorize such orders. This implies that the members would be authorized to start the exchange with a bookkeeping debit or overdraft. Let us pause once again to realize that money can spring only from a debit, not from a credit. This shows that the basis of money is a pledge to surrender value on demand—to offer goods or services in the market at competitive or market price and, thereby, to give value when money is tendered.

Now if we assume that, in a trading day, the buyers issued checks in the sum of 950 units, and that each trader deposited his checks with the bookkeeper, the bookkeeper would have 950 units as a total bookkeeping entry. However, since the buyers are also sellers, there might only be a net debit of 50 units to the accounts of those who overbought, and the same amount as credits to the accounts of those who under bought. In this case the actual amount of money in existence at the end of the day would be 50 units, although monetary transactions to the extent of 950 unit’s had taken place. It is even conceivable that there might remain no debit balance, and hence no money whatever in existence, despite a healthy monetary exchange. Money is created by the process of incurring a debit and is destroyed by the process of offsetting a debit.

The volume of money extant, therefore, has no relation to the volume of business transacted in its name. The volume of money is determined by the amount of deferred spending, or "savings." In the example, those traders with credit balances have a claim upon values held by other traders. The traders with debit balances are the money issuers, and have proclaimed thereby their obligation to other traders. This demonstrates that money is but a medium of evidencing barter balances. It is a claim upon neither particular goods nor particular traders, but upon any goods in the hands of any trader. In that sense only is there a store of value behind monetary instruments. The idea that there is a reserve of value, such as gold, which can back or support the money extant, is a chimera.

Monetary Circles

Perhaps an easy way to visualize the money creation and redemption process is through the use of monetary circles. A monetary circle begins when, through a line of credit at a bank or other bookkeeper, a check writer issues a check that is accepted by a seller. With the acceptance of this monetary instrument, the check writer has issued money into circulation and stands as a debtor to the market, i.e. he has taken something of value out of the market and, in due course, must put an equal value into the market in order to liquidate his "loan" at the bank. The money issued passes from hand to hand in what may be a wide circle of traders. Each holder of money stands, to the extent of his holding, as a creditor to the market, because his holding of money is evidence of having delivered value to the market. Thus, as the result of one man's issue, a monetary circle consisting of one debtor and a number of successive creditors is created. The creditors (money holders) displace each other, while the debtor remains until, in due course, he makes a sale (delivers value to the market), thereby capturing the money with which to liquidate his "loan." This completes the circle from issue to redemption. Redemption does not imply, of course, recapture of the identical units issued, but merely an equivalent offset.

Figure 2

Monetary circles may be of wide or narrow orbit, depending upon the length of turnover in the business of the issuer, and can be sustained as long as necessary to supply the needs of any business. The only essential is that the initiator be also a potential finisher. To be such, he obviously must be a personal enterpriser, i.e. one who is obliged to go into the market and bid for money. This requirement being fulfilled, his issue is genuine money.

Money as an Abstraction

With the passage of time, trade psychology has become more and more enslaved to the superstition that trade by money must be state permitted and regulated. This attitude has come about because man has not understood money. He has believed that, in passing from whole barter exchange into monetary exchange, he passes to a higher plane where, by political magic, there is conferred upon him a power that he could not exert without the sanction of the state. In truth, trade has not risen and cannot rise above barter, because it is inconceivable that one trader would surrender value without being assured of receiving value. Money does not destroy the principle of barter. It merely splits it into halves, improving it by introducing a time lag between the surrender of value and the requisition of value, during which lag the monetary instrument certifies the right of the seller to make the requisition at such time and from such trader as he may choose. The monetary instrument acquires no value; the value resides solely in the thing or things to be requisitioned.

To believe in a metallic or other "standard," or to identify money with any commodity or "backing" or "coverage" or "reserve," or to attribute value to it, is to confess inability to master the monetary concept. The monetary concept is a concept in accountancy. It is as abstract from value as mathematics. Indeed, money is the mathematics of value, and is valueless in the same sense that mathematics is valueless. No amount of value can create money. But when men form a compact to trade with each other by means of accounting, in terms of a value unit, then a monetary system is formed, and actual money springs into existence when any of them, by means of the act of paying for a purchase, incurs a debit in the accounting system. Conversely, money is destroyed by the process of selling, in which a credit is earned against a previously incurred debit. Yet value is neither created nor destroyed by the process of creating and destroying money, since money is but a concept.

Every lawyer knows when he draws a contract that the real contract exists in the minds of the contracting parties, and that the paper and ink are but the evidence of the contract. Likewise, the substance of money is a tradesmen's agreement to carry on split barter. The monetary instrument is but the evidence of, and accounting device for, the split barter exchange consummated under the tradesmen 's agreement.

It is well to realize that the monetary concept must come before the monetary instrument, and that, indeed, there may be an actual monetary exchange without instruments. When traders are able to evaluate things in terms of an abstract mathematical unit, they have conceived money, and may carry on monetary exchange without record or instruments. Of course, this is not feasible to any great extent. But we should understand that money, first of all, is a concept, and that the bookkeeping and instrumentation that follows is but the record of transactions consummated in accord with the concept.

If a farmer approaches the village storekeeper with the question, "What are you giving for eggs?" and the storekeeper answers, "A peck of corn or three yards of calico," the trading is on a whole barter basis. But if the answer is, "Thirty cents," the trading is on a monetary, or split-barter, basis. A deal may be struck whereby the farmer turns over five dozen eggs and gets credit on the dealer's books for $1.50, against which he orders merchandise, and this method might continue indefinitely without a single monetary instrument passing between them. Yet these transactions would be perfect monetary transactions. They would constitute trading by means of money simply because the traders were able to state prices in terms of an abstract value unit. It is important for us to realize that the sum of monetary instruments used in trade is far from coextensive with the sum of monetary transactions. Offsetting items are common in business, which reduce the need for monetary instruments to settle balances.

The Mathematics of Exchange

It is obvious that exchange is a mathematical process because it deals in numbers, using addition, multiplication, division and subtraction. This is true even with traders who are uneducated in mathematics. To trade, the mind must think mathematically. In the absence of a basic concept, the mind deals in physical objects, comparing one with another. To establish relativity, which is the prerequisite of exchange, we may take any valuable thing, call it the unit of value, and give it the numeral 1. Other things, by comparison, will be either multiples or fractions thereof. It is of little consequence what commodity we choose as the representative of the unit of value, but it is all-important that we realize that we are choosing the value of the commodity and not the commodity itself. For values are always in a condition of flux, moving in and out of commodities under the control of the law of supply and demand, and hence no commodity retains a fixed portion of value.

When we have adopted a unit, which we designate as the figure 1, and approach the mental process of evaluating in terms of mathematical relatives, we have conceived of money. This is the monetary concept. As we have seen, it is possible to conduct a monetary exchange without going any further. Therefore the concept is money, and the instrument or record that follows is also money, but in another sense of the word. Thus, we do not give money in exchange for things, we give values (represented by goods and services) for values. We give things for things, mathematically evaluating them in terms of the unit, and then we give checks or currency as evidence of an accomplished exchange. It is important to note this so as to preclude the false idea that money ever buys anything or is a thing of value. Indeed, it is mistaken to attribute purchasing power to money, for it has none. It is merely the conduit through which purchasing power flows, such purchasing power lying in the commodities or values exchanged.

Money, the concept, is the determination of value by mathematical relativity of the unit of value. Money, the manifest, is the evidence of an accomplished unilateral exchange transaction through the monetary concept.

Monetary Rationale

Let us now formulate a definition of money that we can refer to as we consider the workings of monetary systems. Only by turning our backs on the muddle of past monetary economics can we fully understand the subject of money. We must reject such irrelevancies as metallic and other standards, managed currency, bullion and specie redemption, quantity theories, legal tender, and other issues, which have consumed endless hours of debate. Let us simply apply our common sense to the rationalization of the subject of money. Error has labyrinths; truth is an obelisk.

  1. Money is a Receipt for Value
  2. Expressed in Terms of a Value Unit, and is
  3. A Transferable Claim
  4. For an Equivalent Value
  5. To be Determined by Competitive Exchange
  6. In Which the Issuer is an Active Vendor
  7. Whose Issue Conforms to the Customs of a Convention of Participants in the Monetary System.

a) Money is a Receipt for Value

A receipt for value implies an exchange. Hence, money springs out of exchange and not vice versa. It cannot be created by political statute nor by any action that is independent of trade.

b) Expressed in Terms of a Value Unit

The value unit may be the equivalent of any measure of any commodity at the time the unit is adopted. Thereafter the value unit must be divorced from identity with the commodity selected since, under the law of supply and demand, the value content of all commodities is constantly changing. The selection of amount, commodity and time serve merely to provide a reference point for the value unit, i.e., an initial value. Thus a new monetary unit might be established by making it par with an existing unit, but its parity at launching would not imply continued parity, inasmuch as the values of the two units would thereafter depend upon the monetary policies of their respective administrations.

c) A Transferable Claim

Transferability is of the essence. Hence, there can be no promise, in the ordinary sense of the word, involved in money, for if the fidelity of a monetary instrument depended upon the credibility of a given promisor, its transferability might be severely limited. Monetary credit must be a social credit, backed by all participants in the exchange system but identified with none.

d) For an Equivalent Value

This implies stability of the unit, which is necessary for a viable monetary system.

e) To be Determined by Competitive Exchange

There is no way to assure the holder of money that he will receive a value at the time he buys equivalent to the value he gave at the time he sold, other than by free competition. Only under free competition can the requirements of trade equitably regulate the value of money.

f) In Which the Issuer is an Active Vendor

Only as an active bidder for money under competitive exchange can the issuer of money justify his issue power. He who would create money to buy goods or services must be prepared to produce goods or services with which to buy money. Since personal enterprisers are dependent upon reciprocal buying and selling, it may be seen that they are compelled, by self-interest, to be redeemers of money as well as issuers. It should readily be seen that governments are not under such necessity, since they have the taxing power. Such services as they render are not subjected to the choice and evaluation inherent in free trade. Hence governments are not qualified to issue money.

g) Whose Issue Conforms to the Customs of a Convention of the Participants in the Monetary System.

The rules and regulations prescribed in the convention of the participants must be honored, to assure fidelity of issue. This implies a formally structured monetary system and authority that establishes the monetary unit, prescribes the issuing process, its limits, the implements to be used, and such other mutually acceptable rules as will give dependability to the unit and to the system.


The purpose of money is to facilitate barter by splitting the transaction into two parts, the acceptor of money reserving the power to requisition value from any trader at any time. .

The method of money is to employ a concept of value in terms of a value unit dissociated from any object.

The monetary unit is any adopted value, which value is the basis relative to which other values may be expressed.

The monetary system is a cooperative agreement among traders to regulate the issuance of monetary instruments, to express and exchange values in terms of the monetary unit, and to keep account of such exchanges.

Monetary instruments may be any evidences of monetary transactions that serve the convenience of trade and the purpose of accountancy.