We cannot have a productive national dialogue if we think we are talking about money when we’re really talking about governance or economic policy. The beginning of a useful dialogue is to ask, What are we talking about?

The field & the rules

A money system and an economic system are not the same thing. They are interwoven and have an impact on each other, so it is helpful to be clear which one is the subject of discussion.

Money theory is about the kind of money and its creation. Think of the money system as the playing field. There are rules about the playing field. Money has rules like, whoever creates the money supply, rules.

Economic systems are about the game that’s played on the field. There are rules of the game. Economics is about how money is best entered into an economy and it is the study of how it moves around in society. Economics has rules like competition is good, and an economy is complex and what is good for one person, may be bad for another. Economies can have rules about who owns the means of production, and whether there are standards, rules, and regulations about how people exchange goods and services. Finance, a subset of economics, is about how we manage our money. Finance has rules like buy low–sell high; don’t spend more than your income. And think of government as the system for deciding what money and economic systems prevail.

Think of a spiral-bound children’s flip book with an assortment of heads, torsos, and legs. You can flip each section to make different combinations. Keep this in mind when you talk about money (the playing field), economic and financial policy (the rules of the game) or government (the decider).

Like the children’s flip book, the money system, economic policy and type of government can exist in various combinations. If we focus on only one of these three, without regard to the other two, it is impossible to have a productive discussion. Too often, people associate one system with another, arguing about the money system, when they are really addressing economic policies or governance. Distinguishing is crucial. An enormous body of economic punditry discusses the rules and the outcomes as if the playing field does not matter, or as if there is only one way money, economic policy and government can intersect.

For example, gold has been used as money in at least two different kinds of money systems: as 100% commodity money or as a fractional reserve money, or some combination of the two. A variety of gold money systems have been used by all kinds of governments from dictatorships to democracies. One cannot discuss a gold money system as if there is only one kind, as if it alone will determine the nature of economic policies and governance. In a discussion about money, it is critically important to determine whether everyone is talking about a specific kind of money system, economic policies, or governance.

This book is not a comprehensive volume on all the different kinds of money, economic, and political systems, but you should know there are many of each, and many combinations. There are so many there could be a flip book for each of the major categories: money, economics, and governance. Within each kind of system there are many variables that can be switched around with significant impact.

Here is a sampler to give a taste of some of the characteristics of these systems and to show how important it is to be clear about what is on the table for discussion.

Kinds of money systems

100% commodity money (e.g., Gold money)

Money created/produced:

  • by private individuals or businesses
    • unregulated or
    • regulated and/or controlled by government
  • by local, state or federal government

Money authenticated and guaranteed:

  • by private individuals or businesses
    • unregulated or
    • regulated and/or controlled by government
  • by local, state or federal government

Fractional reserve money creation

Money created:

  • by private entities
    • unregulated or
    • regulated and/or controlled by government
  • by local, state or federal government

Reserves consist of:

  • land
  • commodities
  • wealth held in common
  • IOUs for land, commodities or for wealth held in common
  • IOUs for value to be created in the future

Money authenticated and guaranteed:

  • by private individuals or businesses
    • unregulated or
    • regulated and/or controlled by government
  • by local, state or federal government

Kinds of economic systems

Means of production (factories, business)

  • Owned by government or
  • Owned by a wealthy, hereditary elite or
  • Owned by anyone in the private sector who can afford to buy them
    • unregulated or
    • some sectors regulated (e.g., to prevent monopolies) or
  • Owned jointly by those working to produce

Production quantities and allocation

  • Determined by private owners or
  • Determined by government:
    • local, state or federal? or
  • Determined by a combination of private owners and government

Consumer choice in the marketplace

  • No limitations, or
  • Some standards and limitations imposed by government, or
  • Determined by government

Kinds of government

Based on the decisions of an individual, or a few:

  • Military dictatorship – rule by physical power and force
  • Hereditary dictatorship – rule by cultural or religious edict
  • Monarchy – rule by a single person or by cultural or religious edict
  • Plutocracy – rule by the rich
  • Oligarchy – rule by a few

Based on an ideology

  • Theocracy (authority resides in religious leaders and their interpretation of texts)
  • Authority from the writings of exalted thinkers

Based on law (republic)

  • Monarchy
  • Aristocracy/oligarchy (hereditary decision-makers)
  • Oligarchy-plutocracy (wealth based elite)
  • Democracy (about 40 kinds!)

The intricacies of money systems, economic systems, governments and their relationships to one another is enough to make one’s eyes glaze over. I hope we can understand enough to make us humble and conscientious about being clear when we discuss baggage-laden words like capitalism, socialism, and even democracy. As we now know, the meanings of such words will change when the money, economic, and government systems exist in various combinations. Further complicating the discussion are the emotional attachments many people carry with their incorrect or incomplete understanding of these words. Keep this in mind as we move on to the fundamentals of money.

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