A Magazine about the Hudson Valley’s local economy, published by Hudson Valley Current.

What is Money?

As we develop Livelihood, a publication that is under the organizational umbrella of the Hudson Valley Current, it is entirely fitting to examine the nature of money at a fundamental level. Indeed, it was such a contemplation that led us to the design of the Current as it stands today.

There are really only three basic ways that exchanges of things of value can take place between people—namely gifts, theft, and reciprocal exchange. There is a tremendous amount of fruitful debate that can take place around questions about how various kinds of transfers should be categorized. For example, what about taxes? Are they an exchange for government services, or are they forcible appropriation (theft) based on governmental authority? A similar line of thought could be developed around the “gifts” of nature. If they are gifts, who are they from, and who does (and who doesn’t) have the right to receive them? But in any case, we human beings have long based at least some of our transfers on a notion of equal value being exchanged. It is in this arena that money arises, and money is one of the great, fundamental social technologies of civilization, for better or worse.

One of the simple definitions of money is that it is whatever a particular social group agrees to use as a medium of exchange. Even this simple formulation invites some thought. Did you, personally, agree to use the US dollar for money? Probably most people have not even thought about it. Therefore we would have to say that there is a social agreement, through some sort of customary or legal arrangement, to establish particular symbolic measurements and representations of value. And an interesting development in recent times is that people have begun to realize that governments are not the only types of entities that can establish monetary systems. Of course, this is actually not something new. Money as a social custom predates government, at least in any modern sense of the term.

A key point for any money system is what is called the “basis of issue.” For example, early paper money was often issued as a coupon for a certain amount of gold or silver. Since it was understood that the bill was redeemable for precious metal, it was far more convenient to use the paper. Some contemporary local currencies are simply coupons for the US dollar (Berkshares in Massachusetts, for example). You take your dollars to a bank, and exchange them for the local bills. That is the basis of issue.

In the study and contemplation that led to the founding of the Hudson Valley Current, we realized that a very pure and simple basis of issue is for the value of the currency to come into being in the very process of a reciprocal exchange. When Current member A delivers a good or service to member B, the recipient grants a credit to member A, which is recorded in the electronic system. That credit is a promise to reciprocate at a future time, by delivering goods or services to any other member of the system. What makes it possible for this transaction to take place? Aside from the digital accounting system of the Current, there is something more fundamental there: the fact that this is a network of human trust. Utilizing mutual credit as a basis of issue is far more powerful than a trustless network such as Bitcoin (a virtual crypto-currency). This is true even in purely economic terms—aside from the socially positive effects of localizing trade and developing conscious trading relationships. Though these social effects are perhaps the most significant benefits of the Current, the fact remains that this type of monetary design actually liberates liquidity in a trading economy. It does so by eliminating an obstacle that simply doesn’t need to be there, namely “having the money.” The money is created in the very act of exchanging goods and services.

We believe that one of the important social benefits of the whole exercise of creating and using Currents is that it is a “hands on” learning tool about the nature of money, and how money works in a social system. It’s interesting to think through what money really is, but it’s even more interesting to actually use an alternative form of money such as the Current, and see how it feels in practice!

–David McCarthy, HV Current co-founder