4. Physical Money

Nothing More Than a Communications Device


Physical notes and coins exist in the smallest number possible to facilitate day to day trades, where accounts information needs to be conveyed outside the banks' secure networks. In other words, they are simply durable, reasonably secure communications devices, carrying accounts information, hand-to-hand, across the network. The materials of which modern money is made have no intrinsic value, you could not get anything for the paper or base metals out of which they are made. But neither are they supposed to, for they exist solely to convey information. You could liken money to any other legal agreement that might be memorialized on paper; the paper on which a contract is signed has no intrinsic value either, its value lying in the information or agreement it memorializes.


Creating this kind of physical money, we would think, should be the responsibility of an accountable authority. The reason being that physical money represents the legal claim a bearer has on society, not its commensurate debt. Creating physical money free of its commensurate debt is, of course, the essence of counterfeiting. Equally, when precious metals figured to an extent within the physical money supply, accountable figures would have been expected to assure that such coins did in fact contain the weight and fineness of metals that they purported to.


Today, as we move further and further away from cash handling and make ever more use of electronic payments systems, it becomes easier and easier to appreciate that physical money - notes and coins - makes up only a very small proportion of the total money supply. And that volume is adjusted throughout the year for seasonal differences, ensuring that it really is just the minimum amount required to get the job done, minimizing cash handling and storage risks and costs.




Let’s imagine that we have a new economy, with as yet no physical money. Of course, we wouldn’t be left to stand around, scratching our heads and unable to interact with each other, simply because we had no money. We know that money is created in the process of facilitating debts and their reciprocation. And we know that no physical money at all would need to exist in order for this economy to function, albeit we would have to accept some limitations. If all transactions could be carried out by instruction alone (instructing a bank to debit this account and credit that one, for example by check, wire or chip & pin), then we have a cashless economy in which conceivably vast amounts of trade could be carried out by accounting adjustments alone. Entirely cashless economies might be a little unrealistic, even for us today, but appreciating how the system works in a cashless sense is the key to understanding how money more widely works and the role physical monies serve. The essence of money is of course debt, an entirely cashless, non-physical phenomenon. We simply need a small amount of physical objects on which to convey that non-physical information, hand-to-hand, where other forms of communication are impractical.


Let's now imagine that a physical money stock has been created and delivered or sold into the banking system where people like you and me can get access to it. If I have a positive bank balance of $1000, it doesn't mean that there's $1000 of physical money sat in the bank (or anywhere else) just for me. If that were the case, for all of us, 100% of the money supply would have to be represented by physical notes and coins - the vast majority of it just sat there, doing nothing and gathering dust, for no practical reason whatsoever. In reality, if I have $1000 in my account, then there will likely be less than about $50 of physical money in existence to represent it; such is our economy's limited need for physical money. So long as there's enough physical money such that, if I need to make a cash withdrawal, I will be able to, then the system will work. And I will be able to make that withdrawal so long as an unusual and unexpected number of others don't want to do the same thing at the same time. On an ordinary day, we can tell how much physical cash any bank or community is likely to need.


Now, in making a cash withdrawal, I am simply swapping (perhaps spending, if you like) the numbers in my account for pieces of paper with the numbers on them instead. It's the same information (my legal titles), I just now hold it in a different form. I can then use this physical money to pass my claims on to whomever I wish to trade with. Should I deposit the cash back in my bank, that process would simply reverse, swapping (perhaps selling) pieces of paper with numbers on them for numbers in my own bank account. Those pieces of paper, then, will go on to be used by the next customer who comes into the bank wishing to hold their numbers on pieces of paper too. 


The relationship between physical money and the larger body of money, then, must be seen like an iceberg, only the tip of which we can see in circulation. Everything else is nothing more than numbers in the ledgers of the world's banks. Today, the numbers of money are vastly greater than any physical stock which exists to represent them. And that's something we should bear in mind when considering historical accounts which emphasize the physical circulation and overlook the potentially far greater records of legal claims and debts which underlie it.










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