A map is not the same as reality. Anytime we describe something, we are converting what may be a very dynamic and complex process into words and diagrams on paper. And, the description will matter. It will tell us where to put our focus and constrain our thinking. Describing money is a challenge, and the way it is described has a significant impact on the way people view it and understand its role in an economy.

Money is a tool and it can be a store of wealth. But, money as wealth and as a medium of exchange cannot be described in the same terms. Money stored as wealth and not in use, is not circulating. It is not available to facilitate exchanges. If everyone stored their wealth in the form of money, there would be no money circulating. And, if money is not circulating, it’s not a tool. If money is not a tool to facilitate exchanges, it no longer has value, and cannot be wealth. And, yet, money does serve us as a tool to facilitate exchanges and a store of wealth, even though these functions inherently contradict each other.

This paradox makes it challenging to describe how money works. Money as a tool moving constantly in the economy and money as a static store must fit into a useful monetary theory, but, these two functions cannot be described in the same terms. Describing how money works is like particle-wave theory in quantum physics, which says the behavior of the basic elements of the universe cannot be fully described by either the traditional concept of particle or by the concept of wave. So, too, money theory cannot be fully described by the two-dimensional concepts of traditional, zero-sum accounting. But, it often is.

Accounting for a store of wealth

Money as a store of wealth can be described in two-dimensional terms: it is a zero sum proposition. It is mine or it is yours. I earn money. I spend money. I own or I owe. It is easy to map my finances with accounting. An income and expense statement reports on revenue and expenses for a period of time. A balance sheet reports what I own (assets), what I owe (liabilities), and my net worth at a point in time. Comparing accounts from one point in time to another can tell me whether I am increasing or decreasing my income, expenses, assets, debts and net worth. Accounts are full of useful information.

We keep all sorts of accounts. I have my accounts. You have your accounts. Every business has a set of accounts. Every government entity has a set of accounts – city, state, nation. In each of these, when spending is more than income, there is a deficit and borrowing is necessary. When spending is less than income, there is a surplus and wealth increases. In accounting, math rules and one plus one must equal two. Accounting is a zero-sum activity. Every unit of money and every transaction is counted and accounts must balance.

Using an accounting model to describe a money system, though, focuses undue attention on the function of wealth storage. If accumulating wealth is your highest value, then defining money by its ability to store wealth, and creating two-dimensional accounting maps of the money system and economy, serve you well. However, if you place a higher value on the quality of life and the quality of transactions between people, then the wealth-accounting model of a money system will not be enough. There is no place for health, happiness or sustainability on a balance sheet. And my money or your money thinking leads to false dichotomies of makers and takers and false assumptions that government austerity and debt-reduction will bring prosperity.

Tracking the use of a tool

As a tool, money functions in a third dimension that cannot be recorded as a two-dimensional, zero-sum account. Instead of one plus one equals two, as money moves around facilitating exchanges, 1+1+1+1 can equal five or ten or more. A brand new $100 bill introduced into the economy can be used for thousands of dollars in transactions. I get $100 in Social Security and buy $100 in groceries from my local store. They pay $100 in salary to my neighbor, who buys a $100 fruit tree for their yard from the nursery down the street. The nursery buys $100 in stock from a valley farmer. And, so on. So, if we are describing money in its role as a tool, how do we put that $100 on a balance sheet and pin down its value or the wealth it generates? We can’t. But economists try.

For example, one such school of thought, the Modern Money Theorists (MMT) create a two-dimensional model of money theory that divides an economy into three sectors: domestic government, domestic private, and foreign. Modeling a money system after a balance sheet, they posit that in aggregate, all the spending must equal all the income. Within their net zero-sum frame, this has a certain logic. What is one sector’s expense is another sector’s income. Then, they conclude that in the economy as a whole, the private sector can only make a profit if the government goes into an equal amount of debt, because this is the only way balance can be achieved on a whole economy balance sheet. They give this as a reason why austerity measures that cut government spending do not work; on their two-dimensional money theory map, government must go into debt so private businesses can prosper. (Foreign sales and purchases muddy the equation, but for our purposes, we can ignore them.)5

This premise of a two-dimensional money system that fits on a balance sheet – with government and the public in a two-way, zero- sum, transactional relationship, may have some uses for analyzing the flow of money in an economy, but it is a limited, special-purpose map, not a reality. In reality, money circulates and there is no clean line between government spending and individuals. Government spending is just one of many stops that my $100 makes as it moves around in the economy. Sometimes money stops in your hands and you decide how to spend it. The same money could stop in my hands and I will decide how to spend it. Taxation puts some of the money supply into government hands temporarily and government spending is what WE collectively decide to spend and purpose for the common wealth. When government spends, money goes back into general circulation. This is not a two-dimensional, three-sector transaction, as the MMT balance-sheet model suggests. What WE spend together can be a foundation for broad prosperity. Every dollar that government spends ends up in the hands of an individual.

Whoever creates the $100, and however the money is created, once it enters the economy it will operate in the two-dimensional model for each entity that keeps track of its finances – me, you, a business, or government (Money creation explained in Chapter 3.2021).

But, for the economy as a whole, money functions as a three- dimensional construct that cannot be pinned down on a balance sheet. This is such an important concept, it is worth repeating an example.

If the government created $100 and spent it into the economy on building a bridge, that $100 could buy a contractor, who buys groceries from a store that buys produce from the farmer, that buys seeds from another farmer, that pays farmhands, who buy groceries. That $100 could facilitate $1,000 in economic activity, and 10 percent of every single transaction could be paid in taxes, and go back into the WE-government spending bucket. If we increased the tax to 20 percent and spent $200 collectively, it might increase economic activity to $2,000 – benefiting everyone. This is why austerity measures do not work. It is not because a two-dimensional map of the economy says government must go into debt for businesses to profit; it is because when government spending is cut back to the bone, and taxes are cut, money pools in the pockets of the rich and does not circulate throughout the entire economy. Taxes and government spending increase the circulation of money throughout the broad economy and build the nation’s wealth, which is to everyone’s advantage. This is why some European countries with higher tax rates than the US have higher benefits for everyone and more prosperous economies.

So, if you value a vibrant economy that benefits the many, instead of the few who are very rich, then you will want a model-map that describes how money works in its three-dimensional tool function. Money as a tool that facilitates exchanges is not zero-sum. It creates an abundance of wealth and an abundance of transactions that cannot be mapped on a balance sheet. The choice of money system determines whether abundance is distributed fairly, or whether abundance goes to a privileged few. And, we make the best choice when our definitions and maps account for both the particle and the wave of money function: wealth storage and medium of exchange.

 PrevMoney Fundamentals 3.17