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Chapter 2
Media of Exchange
That thing, object or document given or taken in the process of buying or selling is properly called the medium of exchange. The phrase medium of exchange describes the function of the object: it does not describe its nature. The thing that people agree to use as a medium of exchange is, by its function, a medium of exchange.
Various items, such as gold, silver, copper, nickel, iron, beads, furs, tobacco, grain, cattle, salt, etc., have been used as media of exchange. Government notes and coins (money), bank notes, bank credit, and private person’s credit have also been used as media of exchange.
We shall divide the items used as media of exchange into two classes. In one class we will place those items in which the value as a commodity is about equal to its face value or its exchange value. In that group we find gold and some silver coins, grain, cattle, furs, tobacco, silk stockings, etc. Because these items are used in direct barter (not in buying and selling), we need not discuss them.
In the other class we will place those items that have no (or only small) value as a commodity—at any rate, the value as a commodity is much less than the face value. In that group we find copper, nickel, and iron coins, as well as government notes (money), bank notes, bank checks, credit certificates, and perhaps similar items.
The difference between the two classes is that when items in the first group are used as a medium of exchange, the exchange of goods or services is a direct barter (items of equal value are being exchanged directly). When items in the second group are used in the exchange of goods and services, that exchange is an indirect barter, commonly called buying and selling. The seller gives up an item of value for a medium of exchange, that, if bona fide, is a [p. 18] document giving evidence of a just claim for some other goods or services.
Even a non-bona fide medium of exchange is a medium of exchange as long as it is accepted by those who sell goods and services. However: a person should know the difference. A counterfeit bill is a medium of exchange as long as it is accepted by those who sell goods and services. Inflationary money also is a medium of exchange as long as people accept it and use it as a medium of exchange. However, counterfeit money and inflationary money are not bona fide media of exchange because they are not issued in good faith and do not give evidence of a just claim for goods or services. Counterfeit money and also inflationary money could exist even when no goods or services would be in existence to be offered to anyone. Bona fide media of exchange will never exist unless goods or services also exist and are being offered to the bearer of the document. There is no reason for the existence of a medium of exchange unless someone has something to offer for it. A bona fide document used as a medium of exchange comes into existence only because the one who wrote it has some goods or services to offer for it. Any document that is used as a medium of exchange is not bona fide unless it is redeemable in gold
7 or other goods or services. This applies, no matter by whom the medium of exchange is issued, no matter if it is called a note, legal tender, special drawing rights (SDRs), or certificates of any kind. Notes or certificates which are redeemable for goods or services are bona fide media of exchange.
Gold is one of the goods for which a bona fide medium of exchange can be redeemed. Gold has some advantages and disadvantages over other goods; but when the usual medium of exchange (money) is redeemable only in gold at a price set by law, the people who own gold have a great advantage given to them by law over those who do not own gold. The owners of gold then have a monopoly by law. Because those of the money system given to them by law. Because those who control the money system control all business, the owners of one commodity (gold) can then control the [p. 19] general prices of all other goods and services being offered for sale.
Any man who owns gold, including a banker, has the right (because it is his gold) to write out a certificate of credit stating that he will give to the bearer a certain amount of the gold he possesses. (He, however, has no right to write out a certificate of credit for more gold than he possesses.) In like manner the person who owns other commodities has the same right to write a certificate of credit stating that he will give the bearer a certain amount of his goods. The bona fide certificates of both of these men are acceptable media of exchange.
BONA FIDE MEDIA OF EXCHANGE
One item which will serve as a bona fide medium of exchange is a negotiable document (a contract) giving proof or evidence that the bearer has a just claim for some wanted goods or services for which it will be redeemed. That document is a certificate of credit.
(The wanted goods and services are those for which some people are willing to work, or those for which some people are willing to exchange other goods or services.)
Another item which will serve as a bona fide medium of exchange is a negotiable document issued by a governmental body, stating that the document will be redeemed in the payment of taxes and will be accepted in the payment of all other charges due that governmental body. That document is a tax credit certificate.
CERTIFICATE OF CREDIT
Let us illustrate how individuals and corporations can issue their own certificates of credit which can serve as bona fide media of exchange. They cannot and should not issue money; even the banks should not issue money; only the federal government can issue money. However, they [p. 20] can issue certificates of credit for their own goods and services. Those certificates of credit could be accepted by any governmental body as cash in the payment of taxes or any other charges and then used by it, again as cash, to pay for the goods and services it needs.
Let us say a man works for a farmer who says he will pay him ten dollars’ worth of potatoes for his work. The hired man then has a just claim on the ten dollars’ worth of potatoes because he earned it. However, he has no physical evidence to prove it. Only when the farmer writes that promise on a piece of paper, then the hired man has evidence or proof of his just claim. Now if the farmer would write on the statement that he promises to give the ten dollars’ worth of potatoes to the bearer of his statement, that note would be a negotiable document and it could serve as a bona fide medium of exchange. It would be evidence of a just claim for goods (potatoes), which are being offered to the bearer of that note. It also would be evidence of a just debt the farmer owes the bearer of that note.
So we see that a document serving as a bona fide medium of exchange gives evidence that the bearer has
8 a just claim for some goods or services from the person who issued and signed the document. It means that the one who issued and signed the document is in debt to the bearer. The document may be called a note (that is, a promise to pay), or a certificate of credit.
Suppose the hired man then goes home with his pay (the note that gives evidence of a just claim for ten dollars’ worth of potatoes). At home he finds a bill from his dentist for ten dollars. He asks his dentist if he would accept that note in payment of his bill. The dentist says “yes.” So his dental bill is paid. The dentist does not need the potatoes but he owes the garage man ten dollars. He asks the garage owner if he will accept the note for ten dollars’ worth of potatoes as payment for his bill. The garage owner says “yes.” That bill is now paid. The garage man then asks his hired mechanic if he would accept the note as part of his wages. He too agrees. The mechanic then takes the note to his grocery man from [p. 21] whom he buys eight dollars’ worth of groceries. The grocery man says, “I can use the potatoes.” He gives the mechanic eight dollars’ worth of groceries and a “certificate of credit” for two dollars’ worth of groceries, payable to the bearer. The mechanic also needs a haircut. He goes to the barber and gives his two-dollar certificate of credit for his haircut. The barber goes to the grocery store and gives up his certificate of credit for two dollars’ worth of groceries. The grocery man then destroys that credit certificate because the purpose for which it was issued was fulfilled. The grocery man in the meantime has telephoned the farmer to bring him ten dollars’ worth of potatoes. When the farmer delivered his potatoes and received his note (the note he wrote out for ten dollars’ worth of potatoes as pay for his hired man) he also destroyed it because the purpose for which it was issued was then fulfilled.
(Note the benefit that came to a number of people by the use of a bona fide medium of exchange. The farmer wrote out a certificate of credit for his potatoes. It served as a means of paying his hired man, a dental bill, a garage bill, a mechanic’s wages, a grocery bill, and a haircut)
This is a simple example of how a bona fide medium of exchange can be made and used by private persons, without the need of any help from the government and without borrowing from a bank. Let us go back to the farmer and repeat the process: only this time the farmer will take his ten dollars’ worth of potatoes to the grocery store first. The grocery man will give him a certificate of credit for ten dollars’ worth of any of the merchandise he has for sale in his store.
The farmer goes home with that ten-dollar credit certificate and pays it to his hired man. The hired man pays his dental bill with it. The dentist pays his garage bill with it. The garage owner pays it to his mechanic who in turn goes to the grocery store for his eight dollars’ worth of groceries and a two dollar certificate of credit which he [p. 22] uses to get a haircut from the barber who takes it back to the grocery store for his two dollars worth of groceries. The cycle is then completed.
In this case the farmer did not issue a credit certificate. He used the one issued by the grocer. That teaches us that it is not necessary for everyone to issue credit certificates. Some can use those that are issued by others. They would be issued only when there was a need for them. However, in order that they be bona fide they must be issued by the one who possesses the goods or services for which they are a claim.
The advantage of using credit certificates is that one does not have to borrow from the bank and pay interest. Take this last case where the grocer issued his credit certificates to the farmer for the potatoes: instead of issuing the credit certificates, he could have borrowed the money from the bank and pledged the merchandise in his store as collateral security for the loan. The money he would have received would have been no better or worse for the paying of those bills than his certificates of credit. The difference would be that he would have had to say to the banker, “Please, may I have the loan?” and then pay interest for the “use” of the loan.
Companies such as Montgomery Ward or Sears Roebuck could pay their employees with certificates of credit which could be used by them or anyone else to purchase any goods listed in their catalogs or offered for sale in their stores. Those certificates of credit could serve as bona fide media of exchange. They would be documents giving evidence of a just claim for goods for which they would be redeemed by those companies. In fact, the companies would be obligated (because they agreed to do so when they wrote out the certificates) to redeem them with their goods or services.
ANOTHER CERTIFICATE OF CREDIT
Once, when the writer was a small boy living on a farm, he accompanied his mother when she took a case of eggs to town to the general store for the purpose of buying [p. 23] the family needs. She selected all the things she wanted, but the storekeeper told her that she still had two dollars coming. He then said, “I will give you credit for those two dollars.” That credit was a just claim for any of the goods being offered for sale in that store. It could have served as a bona fide medium of exchange. My mother kept it and used it later, but it probably would have been accepted in the community by others in payment for other goods or services if that had been necessary.
MORE CERTIFICATES OF CREDIT
Let us suppose General Motors did not have much money, but had a large number of automobiles on hand ready to be sold, and GM needed money to pay their employees. They could borrow bank credit money with interest, pledging the unsold cars as security for the loan. Then they could use that bank credit money to pay their employees. Note: the real backing of that bank credit money was the cars which were being offered for sale. The bank credit money was not redeemable for gold or silver or for any goods owned by the bank. Though only the banker knew it, that bank credit money was backed only by “evidence of a claim” on those unsold automobiles. As soon as the automobiles were sold, the bank credit money had to be returned to the bank and be destroyed. It had served the purpose for which it was issued. However, interest was paid for the “use” of it.
(A company can only pay its employees with the product it makes. If a company pays its employees with a medium of exchange, it obtained that medium of exchange by selling its product for it)
Now, instead of General Motors borrowing bank credit money, they could issue certificates of credit with which they could pay their employees. Each certificate would be issued for a certain number of dollars’ worth of credit toward the purchase of any of their products. Those certificates of credit would have the same backing as the bank [p. 24] credit money that was borrowed from the bank. The public as well as the bearer would know what the backing was because it would be stated on the certificate. However, they would not know what backing, if any, there was if bank credit money were used. Those General Motors certificates of credit could be used as bona fide media of exchange because they would be evidence of a just claim for their products.
GIFT CERTIFICATES
Another item that could serve as a bona fide medium of exchange is a gift certificate. A person may buy one from many business places. It is usually intended to be given as a gift. A gift certificate is a written document giving evidence that the bearer has a just claim for a certain amount of goods or services from a certain store. It is a certificate of credit used as a gift. The store could pay the wages of its employees with it and they in turn could use it for gifts or buy goods and services with it from all who would accept it.
TOKENS
Tokens also can serve as a useful medium of exchange. Let us suppose that in the United States we, for some reason or other, would have a severe shortage of dimes. And let us suppose that only dimes can be used to make a telephone call at a pay telephone owned by the American Telephone and Telegraph Company. The telephone company could and probably would make metal tokens to serve the same purpose as dimes for making telephone calls. The company would sell these tokens for ten cents each or ten for one dollar. The company would announce that these tokens would be accepted also as payment for any telephone bills. Each token would be redeemable for ten cents worth of the company’s services. If the shortage of dimes continued, those tokens would soon be accepted and used in place of dimes by many people all over the country. They would not be government-issued [p. 25] or bank-issued money, but they would be a bona fide medium of exchange because they were evidence of a just claim for an available service—the paying for a telephone call or a telephone bill.
(We will digress a little here and say, suppose the telephone company loaned those tokens, at six percent interest per year, instead of selling them, and required the people to pay them back after one year, with six more tokens for each one hundred tokens they received. How could the people pay back 106 tokens when they received only 100 tokens? They could not. All the people could do would be to borrow more tokens or go without tokens. If they continued to borrow they would go more and more in debt.
The interest on the tokens just borrowed would be added for each year they would be kept or used to the interest on the interest tokens with the result that the people would go more and more in debt. There never would be enough tokens in existence to pay off the loan and all the interest as well. That very important fact would be concealed from the people as long as they kept on borrowing.
What occurs when the people borrow tokens is exactly what occurs when the people borrow money or bank credit that is to be used as the medium of exchange.)
The people, including the officials of the telephone company, would soon see how well the tokens served as a medium of exchange. The company officials also would see that they could even use the tokens to pay part of the wages of the employees. The employees would use the tokens as a medium of exchange when buying the goods and services they wished. The general public would find that it no longer would have to go to the telephone company to buy tokens. There would be enough tokens available from change made at ordinary business places.
Because the company was still selling its tokens for [p. 26] cash, it decided also to redeem those tokens for cash as well as for the payment of its services. Those tokens then were a very acceptable bona fide medium of exchange. The company then could pay its employees all of their wages and salaries with tokens. The people and the company might find it a little inconvenient to have so many tokens to carry around; it therefore could issue, in lieu of tokens, certificates of credit, each of which would be worth a specific number of tokens or dollars in the payment of telephone services, or it could be redeemed for cash. Note again: This medium of exchange came into circulation by being sold or as payment for wages. It was not loaned to anyone. The telephone company did not borrow this medium of exchange from a bank. Also it was not issued by any governmental body. The telephone company was selling telephone services and had the right to issue the tokens and the certificates of credit. The company also had the obligation to redeem those tokens and certificates of credit.
TAX CREDIT CERTIFICATES
Let us illustrate how a governmental body can create the bona fide medium of exchange necessary for its operations. This applies to the federal, state, or local governments. Let us show how a city would operate without money and without borrowing.
The city employees render services which are necessary for the health, safety, and general welfare of the people. When payday comes the city clerk will be instructed by the Council to pay each employee his wages with a tax credit certificate in the amount the employee earned. If he earned one hundred dollars, the tax credit certificate would have written on it, “This certificate will be redeemed for one hundred dollars in the payment of city taxes.” It will be signed by the proper city officials.
However, before any such certificates are given out, the city Council must pass a non-revocable tax assessment, on the taxable property, equal in amount to the value of [p. 27] the tax credit certificates to be issued. (That is exactly what the Council must do when it borrows bank credit money or real money from a bank.) The tax credit certificates or any borrowed money can be paid back only with the taxes the city collects from its taxpayers. By using tax credit certificates the city would not go in debt and would not have to pay interest.
If the city officials decided to issue tax credit certificates with which to pay for a municipal building, such as a city hall, over a five year period, the Council would have to levy a non-revocable tax for one-fifth of the cost of the building for each of those five years just as they might do if they borrowed money from a bank.
POSTAGE STAMPS
The United States Post Office could pay their employees with postage stamps instead of money, because those stamps are evidence of a just claim for postal services. They are redeemable for postal services. They are bona fide because the services are available to the bearer of those stamps. Some years ago, Sears Roebuck and Montgomery Ward used to accept postage stamps in lieu of checks or cash for small mail orders. In 1863, postage stamps were widely used as a medium of exchange in the United States. So if people use stamps in the buying and selling of goods and services, the stamps then are a bona fide medium of exchange.
REQUIREMENTS OF A BONA FIDE MEDIUM OF EXCHANGE
The medium of exchange we are talking about is either a document giving evidence of a just claim for goods or services or a document receivable as payment for taxes for which it will be redeemed. The requirements are the same as those necessary for ally other bona fide document.
- It should be a complete document with all the information written on it necessary to prove that the bearer has a just claim for certain goods or [p. 28] services, or that it will be redeemed in payment for taxes.
- It should be issued by the possessor of the goods or services for which it is a claim, or by the governmental body that will redeem it in the payment of taxes.
- It must be issued by an honest person.
- It should be issued and paid in such a way that the owner of the document will not suffer a loss if the document is lost, stolen, or destroyed.
ADVANTAGES OF USING A BONA FIDE MEDIUM OF EXCHANGE
When the people of any country use documents that are bona fide media of exchange, they will have the following advantages:
- They will have all the media of exchange they need for the buying and selling of all the wanted goods and services that are produced. Furthermore, they will have it without paying interest for the “use” of it.
- There will not be inflation and deflation (booms and busts). Business, in that sense, will be normal. When the media of exchange are borrowed, times are never normal. There is always a fear of inflation or deflation.
- No one will have a monopoly in the issuing of the media of exchange. Each corporation and each governmental body will be able to issue it and use it independently of other corporations or governmental bodies.
- The price of goods and services will not be able to be raised or lowered by the banking system. (The banking system now, by increasing or decreasing the amount of bank credit, can cause the general price level to go up or down in an artificial manner.)
- By using a bona fide medium of exchange it [p. 29] will be more difficult for dishonest people to use it to pay for bribes, illegal drugs, and other illegal purposes.
- Anyone who would attempt to counterfeit or forge or steal such media of exchange would easily be caught, just as those who steal or forge checks are easily caught.
- No one will receive any of the media of exchange unless the goods or services for which the certificate is issued are on hand, or unless in the case of a tax credit certificate, taxes are levied for which it will be redeemed.
- People, including government officials will be more apt to understand just what money really is. They would know that when the government asked for more taxes, it would be asking for the people to work harder to produce more goods and services. That is because bona fide money earned for taxes would only come from the taxpayers who must work harder to produce the goods and services for which the bona fide money is a claim. There is no bona fide money unless it is first earned by someone.
Government officials as well as others, who expect the government officials to take something from everyone to give something to all, might- just might-learn the meaning of justice and they just might think about practicing it.
- The mystery of what money is would be gone. All credit certificates would be redeemable either with goods and services or as payment for taxes. Each certificate would have all the information written on it that was necessary so that the bearer would know the thing for which it was a claim.
- People in foreign countries who received our certificates (money) for the things they would sell us would also know the items for which they could redeem those certificates. There would never be a balance of payments deficit or surplus. [p. 30]
- There would be no such thing as a government debt.
- The local backs would serve the people just as they now do when they accept and loan earned money. The savings accounts and the checking accounts would all be deposits of bona fide media of exchange and the barks would always make loans of bona fide media of exchange: that is, bona fide credit certificates. Those credit certificates would be used in the same manner as the gold and silver certificates were formerly used.
(Those gold and silver certificates were certificates of credit redeemable with gold and silver. The credit certificates referred to in this book are redeemed with other goods, services, and in the payment of taxes.)
The banks would also perform all the other valuable services which they now perform and for which they would charge a deserved fee. The bankers may also enjoy more independence and freedom than they now have in the conduct of their business. [p. 31]
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