Musings on Money and Development Theory

  1. Premises:
    1. Money is an instrument created by human beings for social development.
    2. The value of money created is based on the productivity and wealth of the society, both past and future.
    3. Every society has unutilized development potential that is not tapped due to lack of awareness or lack of appropriate organizational mechanisms.
    4. Only a small portion of the wealth of any society is represented by money. Development of new monetary instruments increases the extent to which a nation’s present and potential wealth can be monetized and made productive.
    5. The greater the capacity of the society to assign present value to future productivity, the more money it can create and utilize.
    6. As a social organization, the value and productivity of money can be enhanced enormously by increasing the “authority”, systems, coordination and speed of financial transactions.
    7. Future social productivity is not subject to any inherent limits (in terms of how far into the future we assign present value or in terms of the potential increase in future productivity due to enhanced social capacity). Therefore there is no inherent limit to the amount of money that a society can create to support its future development.
  2. Money is a symbol – a symbol for what human beings value. The value of land, a commodity, a job or a contract is determined by people’s perception. Money is a standardized symbol with no inherent value of its own that is utilized to represent values assigned by people to goods and services.
  3. Our approach to development theory identifies human beings, not money or technology, as the primary determinant of social advancement. Money and technology are instruments created by society as tools to enhance social productivity. By facilitating economic transactions, money increases the frequency, productivity, speed and convenience of social activities. In the process of creating and utilizing money as an instrument, society has come to feel dependent on the instrument it has created.
  4. Money is a social organization or convention created by human beings to facilitate economic transactions. Like all organizations, the organization of money is capable of developing in complexity and productivity. Enhancing the systems for money transactions, standardization of its form, improving coordination of financial activities, and increasing the speed of transactions enhance the productivity of the social organization of money, increasing money’s utility and value. Introduction of computer enables financial transactions to be carried out more rapidly. A manufacturer or retailer can conduct more transactions per day or year with the same amount of capital, thereby producing and selling more goods and increasing the productivity of his money. This has an equivalent effect to creating new money by an expansion of the money supply.
  5. Like all organizations, the power of money depends on the force of its “authority”, people’s acceptance of its power to represent economic values. The more widely and consistently that authority is accepted, the greater the public confidence in the money, the greater its value. Public confidence in money depends on the peace, security, political and stability of the society that issues it as well as the society’s productivity, creativity and capacity for innovation. The value of money reflects the perceived overall strength of the social organization of the society—its capacity to defend, govern, produce and provide for the security of its members. Anything that enhances the perceived strength of that social organization enhances the productive potential of society and the value of the money it issues. Peace with its neighbors, law and order, absence of civil strife, improved health, higher education and freedom of individual action are among the determinants of currency values. The more confident the society is of its future, the more it directs its energies in productive activities that build a more developed society. The loss of confidence in Japan led to social and economic stagnation at a time when society was steeped in money. Raise the confidence of Russian society about its future political stability and its energies will be more constructively invested to accelerate its development. Putting in place social mechanisms to create greater confidence (social security, a global army to enforce peace, guaranteed employment and food security, universal education) will lead to greater development of society in future.
  6. The real determinants of the value of money are human expectations, attitudes and values. When for any reason these rise, the value of money increases. When for any reason they decline, the value of money decreases.
  7. Money exhibits primary, secondary and tertiary powers to promote social development. A primary power of money is to act as a medium for storage of surplus value and as a medium for exchange to facilitate commercial transactions. The creation of money makes it possible for people to convert their surplus production into a standardized form that can be preserved indefinitely, easily transported over great distances, and readily exchanged for other products and services. Money enhances the productivity of resources by giving them exchange value. The farmer who produces surplus perishable crops is able to exchange the surplus for money that can later be redeemed in the form of other useful products and services. This power of money has multiplied the number of economic transactions in society millions of times, expanding markets from the local to the global level.
  8. A secondary power of money is its capacity to increase the utilization of social resources. Debt or credit is a secondary power of money that enables those who have amassed surplus wealth to lend it to others, either for production or consumption. Two decades ago, former Citibank Chairman Walter Wriston coined the phrase “debt is a developer.” The US financed construction of its transcontinental railways and other productive national assets on the basis of foreign debt. China has borrowed $130 billion of surplus savings, much of it from Western nations, and utilized it to generate economic activity in the country, harnessing the underutilized human resources by generating tens of millions of jobs to produce infrastructure, products and services that would otherwise not have been created. Every society has vast underutilized resources that can be made more productive by creating new forms of money. Fresh credit for productive purposes extended to the less advanced sections of society has the greatest impact on national development, but even the most advanced levels of society can develop further by creation of additional money.
  9. A tertiary power of money is derived from its capacity to represent future productive potential. As a symbol, money was first used to represent in standardized terms the surplus created by past human energy, such as a crop of wheat. The amount of money created was limited by the surpluses human beings produced by their labor above and beyond what they needed for their own subsistence. As the productivity of society increased, the amount of money created to represent its accumulated surpluses increased as well. Over time the creation of money has been extended to represent the potential surpluses of future human energy. Banks lend money to medical students to meet the high cost of education based on their anticipated future earnings after graduation.
  10. There is no inherent limit to how much future productivity or how far into the future we assign present value. A bank which lends money to a medical student to be repaid over ten years, could by the same principle lend money to any young student to be repaid over 20, 30 or 40 years of future employment. The greater the society’s confidence in its future productivity, the longer the period of future productivity that it can monetize today.
  11. Money represents a certain portion of the present and potential wealth of society that is converted into a liquid form, but the wealth of a society is not confined to that portion that is measured in monetary terms. Initially the amount of money created was limited to that which represented readily exchangeable commodities. But as society became more sophisticated, it created new types of money and new systems to monetize a greater part of its social wealth. Untapped natural resources, underutilized productive capacity of land and factories, a young aspiring population, social skills, scientific knowledge, organizational capacity, health, peace and social stability are all aspects and determinants of a society’s real economic wealth.
  12. Mortgage is a system that enables a person to enjoy the present use of property ownership based on anticipated future income and property values. Before the system of mortgage was invented, a farmer had to be able to invest the total cost of the property he wanted to farm. With mortgage, he can borrow a large portion of that money, utilizing the land as security for the loan, and invest the rest of his money in advanced farm technology to increase production. This enables him to make the land more productive. The bank that lends the money sells a package of mortgages (a new form of money) to other investors to raise more money for lending and then is able to lend a multiple of the value of the capital it has raised. The mortgage system supports development and fuller utilization of social resources based on their future productive power. Securitization of mortgages is a system that creates a larger market for mortgages and more money by packaging mortgages together and spreading the risks of default among several shareholders.
  13. Lease or hire purchase is a system that also creates money that can be utilized for development. It enables an entrepreneur to buy a productive asset such as a bus based on the future earning capacity of that asset. The lease is secured by the asset. The asset becomes productive. Bus producers have higher sales.
  14. A nation’s wealth includes not only its present assets but also its future productive potential. New forms of money are constantly being created to convert a larger portion of this wealth into monetary terms. More developed societies convert into money a larger proportion of the wealth of the society, including its wealth of future human productivity and creative ideas.
  15. India’s huge savings in the form of gold has taken hundreds of billion dollars out of circulation. The government’s new gold bond scheme enables a gold holder to deposit that gold with a bank in exchange for interest. The bank can then lend a multiple of the value of the gold deposit to others. The result is creation of new money by converting a part of the nation’s unmonetized wealth (gold) into money value.
  16. Corporate shares can play this role. A new Internet startup company needing access to high speed telephone lines for its business but lacking the capital to purchase them could offer to give a national phone company shares in exchange for use of the phone company’s surplus line capacity. The startup is able to create new products and services and the phone company is able to utilize an asset for which there is insufficient market demand. An entrepreneur who wants to start an exciting new high tech business, but has insufficient capital, could offer low salaries plus shares in the business to his new employees as part of their compensation packages, so he is able to get started with less money. The shares are a proxy for money, i.e. form of money whose value is based on the employees’ perception of the future value of the company (the commercial value of the idea). The new money enables jobs to be created and new goods and services to be produced.
  17. Complementary currencies give value to resources that the national money system does not assign value to, such as the knowledge and skill of most people in retirement. It is an extension of the monetary system to tap unutilized social resources and has the potential to grow to 10 or 20% of the total present money supply. The creation of complementary currency is made possible by the development of new social organization. For example, a group of under-capitalized, startup web companies could join together to create a complementary currency. Half of the group (employers) could offer jobs to underemployed people to provide phone support and data entry services over the web in exchange for the group’s e-money. The other half of the group (marketers) could agree to accept the e-money from the web employees in exchange for the products and services it offers. The employer group could then sells its services to the marketer group in exchange for e-money. The new money would enable more people to be employed and more goods and services to be produced and sold.
  18. To overcome a projected future shortage of science lecturers and researchers, a university could create openings for 1000 new science students and offer scholarships to 1000 science students in exchange for commitments to work for the university for a minimum of five years after graduation at salaries that are 10% below market value. The scholarships become a proxy form of money. They enable students to get an education they could otherwise not afford. They create more demand for the university’s current courses. The university in effect ‘loans’ money to the students in the form of reduced tuition fees, which constitutes a loss of additional current revenue at some marginal cost to the university, but not an actual cash outflow equivalent to the value of the scholarships.
  19. Any group of people with confidence in themselves and each other can create money. An individual with self-confidence can create money. A quarter century ago the Garland Canal plan to link the seven major rivers of India was seriously promoted as a means to dramatically accelerate national development. The plan would have created tens of billions of dollars of additional GDP for the country from agriculture, power generation and cheap inland transport, but Government of India never took it up because it perceived that the cost in excess of $15 billion was far beyond its means. Let us consider a possible scenario for financing the project. The government agrees to “sell” lease rights to public lands situated along the canal at five times their previous market value (their value enhanced by access to water transport and irrigation) in exchange for materials and services needed to build the canal and to raise sufficient cash to cover the interest charges on the bonds. It is projected that the canal will stimulate a 10% increase in the country’s GDP and contribute an addition 10% to the Government’s annual tax revenues, sufficient to retire the bonds within the ten years. Villagers living along the route of the canal can offer their labor in exchange for access to water rights from the canal. The project creates 10 million new jobs and $30 billion of additional GDP. The increased demand for cement and steel enables the cement and steel industries to utilize their underutilized capacity. Lands adjacent to the canal are converted from dry into irrigated fields with twenty times greater value. Subsidiary activities associated with the project generate greater production even before the canal is operational. This development is made possible by the country’s faith in its own future.
  20. In sum, societies are largely unaware of their vast unutilized potential in the form of energy, skills, ideas, creativity, organizational capacity, etc. When people become aware of their potentials, they mobilize their energies, skills and resourcefulness to create their own development. Money comes to support the development activity in the form of loans or it is created by some organizational mechanism based on faith in the potential that is being developed.
  21. We conclude that money, which has been a scarce commodity throughout history, can be created by society in any quantity needed to support its further development.