[Help] Daily Life and Economics and Double-Entry Bookkeeping

[cmdicely]

Originally Posted by vicky_molokh

But actual money in hand is coin/gold owned to you by the bank. That's kinda the point behind replacing coins with money - that you want the bank (or government) to store the gold and use paper banknotes as IOUs denoting this gold . . . right?

Well, no. Money is anything used as a medium of exchange, and originally specifically referred to minted specie. And the point of replacing specie with representational currency (e.g., redeemable banknotes) was that it enabled the bank to issue (and lend, and earn interest on) more money than it actually had. And double-entry bookkeeping was pretty key to making that work as well as it did (which, of course, was far from perfect.)

[vicky_molokh]

Originally Posted by cmdicely

Well, no. Money is anything used as a medium of exchange, and originally specifically referred to minted specie. And the point of replacing specie with representational currency (e.g., redeemable banknotes) was that it enabled the bank to issue (and lend, and earn interest on) more money than it actually had. And double-entry bookkeeping was pretty key to making that work as well as it did (which, of course, was far from perfect.)

Must be a cultural difference of terminology. I remember pretty clearly from the mandatory semester of economics that 'Coins' (монети) refers to a unit of exchange made of valuable material and somehow marked to denote its value while 'Money' (гроші) referred to items whose denoted value was deliberately higher than their material value.

[Polydamas]

No, in Anglo usage money is a unit of account, a measure of value, and a medium of exchange. In low-tech contexts it can be weighed metal, volumed grain, coins, tokens, rings, notes, or several other things. People sometimes confuse the history of money with the history of coins, but that is their mistake.

[cmdicely]

Originally Posted by Flyndaran

But with the F.D.I.C., your bank held money is insured, and little chance of the government going bankrupt and running off with your money like old timey kingdoms.

Actually, the deal with the FDIC is there is little chance of the bank going broke and completely wiping out your deposits, like in fairly (in historical terms) modern nation-states (e.g., the US prior to 1933.)

[whswhs]

Originally Posted by vicky_molokh

Must be a cultural difference of terminology. I remember pretty clearly from the mandatory semester of economics that 'Coins' (монети) refers to a unit of exchange made of valuable material and somehow marked to denote its value while 'Money' (гроші) referred to items whose denoted value was deliberately higher than their material value.

I have never seen that terminology in any American book on economics or monetary policy.

For a start, the distinction between "value" and "material value" seems nonsensical to me. Here we have an ounce of gold. What is its material value? Well, gold does have engineering and artistic applications; you could talk about what it's worth in those. But the market price of gold is not based only on those; it's also based on its liquidity, that is, on people's knowledge that it's readily exchangeable, so that they can acquire it as a medium of exchange and a store of value. And people wanting it for that purpose have bid up its price above its hypothetical price as a physical material. But if you want to use it as a physical material, you have to buy it at that higher price—which limits the range of uses it can be put to; a lot more gold is going into vaults than into catalysts, or tooth fillings, or gold leaf, or high grade digital cables. You can't separate out the "material value" because of the Law of One Price. Once any commodity becomes a medium of exchange, its value increases and you can no longer identify what its value would be if you only had the practical uses.

Bill Stoddard

[vicky_molokh]

Originally Posted by whswhs

I have never seen that terminology in any American book on economics or monetary policy.

For a start, the distinction between "value" and "material value" seems nonsensical to me. Here we have an ounce of gold. What is its material value? Well, gold does have engineering and artistic applications; you could talk about what it's worth in those. But the market price of gold is not based only on those; it's also based on its liquidity, that is, on people's knowledge that it's readily exchangeable, so that they can acquire it as a medium of exchange and a store of value. And people wanting it for that purpose have bid up its price above its hypothetical price as a physical material. But if you want to use it as a physical material, you have to buy it at that higher price—which limits the range of uses it can be put to; a lot more gold is going into vaults than into catalysts, or tooth fillings, or gold leaf, or high grade digital cables. You can't separate out the "material value" because of the Law of One Price. Once any commodity becomes a medium of exchange, its value increases and you can no longer identify what its value would be if you only had the practical uses.

Bill Stoddard

In this case, difference is:
material value - melt the thing and sell the material on the local market; you get this many units of exchange.
value (of money/banknote) - the backer owes you this much gold (or whatever) when you present the banknote and want to redeem it (which, in tun is expected to be worth this many units of exchange on the local market). It is essentially a contractual obligation of sorts.

The fact that e.g. gold's price goes up due to it level of exchangeability means that it's exchange value / demand is higher, no argument there.

I actually have no idea why non-backed arbitrary money (modern) is exhibiting any level of trustworthiness at all.

[Icelander]

Originally Posted by vicky_molokh

I actually have no idea why non-backed arbitrary money (modern) is exhibiting any level of trustworthiness at all.

Because any medium of exchange is ultimately arbitrary and founded in belief, but as long as a substantial number of people continue to hold that belief, it continues to reflect reality.

Backing a currency by silver or gold is the logical equivalent of 'turtles all the way down'. The value of silver and gold is just as arbitrary as the value of pieces of paper.

It works not because of any innate value to the medium of exchange, but because humans are social animals and social conventions have enormous power over us.

[vicky_molokh]

Originally Posted by Icelander

Because any medium of exchange is ultimately arbitrary and founded in belief, but as long as a substantial number of people continue to hold that belief, it continues to reflect reality.

Backing a currency by silver or gold is the logical equivalent of 'turtles all the way down'. The value of silver and gold is just as arbitrary as the value of pieces of paper.

Sure, but for gold or silver or even some consumable good, if worst comes to worst, you can go elsewhere and hope there is at least a remotely similar demand for it. If you don't have a guarantee to any sort of exchange, the trustworthiness of a currency drops. It is not unheard of for currencies to change in exchange value 100-fold within a couple years. Do you really expect gold, U-238 and other homogenous valuables to change in value so much so fast?

[ErhnamDJ]

The reason people use fiat money is that they're required to pay taxes in it and states often require people to accept them in exchange for goods. When they eminent domain your house, they pay you in dollars, not gold.

[vicky_molokh]

Okay, this is starting to get a bit off-topic, and largely of my own fault. Back to accounting . . .