Concepts should be an aid to conceive. Having clearly defined terms and concepts, even complicated relationships become comprehensible. Unclear definitions can even muddle simple facts and relationships.

Someone coming from other fields of endeavor and starts to learn about money matters will be amazed at the double talk which is prevailing in these circles.

Somewhere changes in the general level of prices get mixed up with the change of single prices and even get subsumed under the term inflation. Elsewhere profit, earnings, interest, yield and surplus value are used for the same as for different phenomena. And then checks and credit-cards are called »money« or bank notes and coins are put together with deposits and declared as »amount of money«. The stated reason is that the transfer from account to account can balance a claim, just as a change of hands with money.

What would we think of tradesmen, if they comprised nails, screws and fasteners within the term »glue« just because all of them can be used to fix two pieces of wood in a similar way as with glue? Even laymen would rightfully tell them that they are confusing everybody including themselves.

In the following we will try therefore to shed some clarity on the conceptions and functions around money, even though antiquated and deeply engraved thinking habits have to be challenged.
 
 

What Is Money?

The answer to this question alone could fill books! At first, money is quite a fantastic invention, comparable to the invention of the wheel. Just as with the help of the wheel the transport of goods was made easy in a previous unthinkable manner so made money the exchange of goods and even the production of goods for sale possible. Without money it was only possible to exchange service for service. The basket-maker, who needed new shoes, had first to find a shoe-maker, who needed a basket. This shows that without money a market for specialization and division of labor was impossible to achieve.

Looking at the exchange of services and goods, which made civilization and culture possible, money is the intermediary which frees the render of a service from being bound to one partner. Money makes it possible to sell a service to anyone interested in it and, with the received payment, unlimited by time and place, asking for a return service from anybody else. Before money came into existence these services were rendered by goods, which nearly everybody could use, such as salt, grains, tea-bricks or coca-beans. These goods could be used because of their relatively long »shelf-life« as medium of exchange but they were un-handy and lost value in time. Money, being countable and durable as well as facilitating to be carried, stored and to compare prices, brought about the development of a market economy without which the civilization of today would be unthinkable.
 
 

What Do People Believe Is Money?

This question is not difficult to answer for the common man. Money is, what he has in his wallet or at home in a drawer: coins and bank notes. On the market there are hardly any misunderstandings either: A bill is paid with money or with a transfer of deposits from an account. In practical life money is a neutral anonymous medium of exchange that circulates in economy.

With this idea of money students of economy get into difficulties after a few semesters. They are taught to count positive accounts in the banks for money, too. They talk about savings accounts, term accounts and giro accounts and comprise them within the term »book-money«. And this notion of money gets extended farther and farther. The former banker von Bethmann, whose critical analysis usually hits the target, even ›creates‹ money with every unpaid bill which will be ›destroyed‹ after the bill had been paid. »Basically nobody knows any more, where money ends«, an official of the National bank said in facing this situation. Note, these are the words of an official of the institution which is responsible for the amount of money in circulation.
 
 

How Can Money Be Defined?

The definition of money becomes more difficult if the conception of money will be extended to more and more phenomena. This difficulty is reflected in scientific statements, for which three samples should suffice:

• »Money is a general good of nominal validity« (F.Lütje),
• »Money is a creation of the money order« (F.G.Knapp) and
• »Money is what is valid« (G.Schmoelders).

In the view of such »precise« remarks the statement of a national banker (O.Issing) is almost reassuring: »Huge heaps of scientific literature show evidence that the definition of money is anything but indisputable.« But, if national bankers do not know »where money ends« it is more than doubtful that they have a concise notion of what money is. Trying to define money with its functions one can describe it as follows:

• Medium of exchange
• calculating base, price measurement or price comparer
• store of value and medium for transferring value.

Using judiciary or documentary aspects, then money is:

• a public service for the benefit of all citizens,
• an anonymous proof of service with acceptance compulsion,
• a transferable document of claim on the social product,
• sole legal tender.

And, if one considers the above mentioned faults of money, then it is:

• An institution, the function of which as a store of value works against the original purpose as a medium of exchange,
• an institution which stands on one leg because the compulsion to accept it is not counter-balanced by a compulsion to pass it on,
• the only public service which everybody can take out of service and can legally abuse for private gain.

Within these confinements we have answered the question what money is. It is the medium to which all the definitions above apply. And this is only the case with bank notes and coins, the medium of exchange, which the state issues.

For all other phenomena which economists call money, like accounts, checks, credit-cards and so on, the definitions apply only in a few points. Consequently we should not call them money, even though we can do similar things with them as with money. Logic as well as scientific integrity should call for distinct definitions.
 
 

Which Purposes Can Money Serve?

Just as one gets money as payment for services, so it will be given away for the services of others. Money cannot only be used for buying, one can also give it away or lend it out. Or, one can just let it sit.

If you pass it on, it is gone to other hands and the recipient can do with it what he wants. If you lend the money out you give up your rights on it for only a while. If somebody just lets it sit, he postpones his right to a counter-service at a later time.With that he causes a disruption of the circulation of money. This disruption is not a single occurrence. It is like a chain-reaction! Figuring that usually money changes hands two times a month on an average, then an idle 100 DM bill prevents demand for 2400 DM a year. While by giving away, buying or lending out, the money remains circulating, the keeping of money idle will lead to disruptions which in the course of time will accumulate.

In this uncontrollable timelag between the rendering of a service and collecting the pay for it and the acceptance of a counterservice and paying for it (which is the function of money as a  store of value) lays the decisive fault of our money construction. We will later go into more details but let us state once more that one can use money for three different functions: medium of exchange, price measurement and store of value. And then one can use it as a capital good lending it out for interest.
 
 

Are Checks and Credit Cards Money?

Using checks, transfers, debit entries you can transfer credit balances from one account to another. With a check you can withdraw money from an account. For that reason you cannot call a check money. It is a paper allowing somebody to transfer a right on money to a third person or to withdraw ones own money from the bank.

Credit- and check-cards are even less money. They only guarantee the receiver that his claim will be covered by a transfer of money in due time. Magnetic cards which are either ›loaded‹ with a limited sum of money or can be used to access ones bank account are not money either. They are only technical aids to transfer money.

Money are only the bills and coins issued from the national bank, with which one can settle claims from hand to hand without bookkeeping and which after that, can instantly be given to a third party. Money is also the prerequisite of a bank balance.

Certainly, some things may be said in favour of the idea to comprise daily transferable accounts with the amount of money as is done with the M1 expression. Because of todays double function of these accounts as means of transfer or credit, this is highly problematic. We will go deeper into this later.
 
 

Why Do We Have to Distinguish 
Between Money and Other Means for Settling Claims?

Let's assume, for instance, that a plumber has performed some repairs for a baker and asks $ 100 for it. The baker can settle the bill

• either with a $ 100 bill or, if the plumber accepts it:
• with a check or transfer by using a credit card or
• with a trade of $ 100 worth of bread.

The first is the settling of a claim by payment, the second by a transfer und the third by a trade. If everything which can be used to settle a claim would be »money«, then not only the check would be money but the bread as well. If checks or bread are money, then money or checks are - bread!

Such equalizations are not only questionable in a conceptual sense, but also for practical reasons. Thus, the amount of bread can directly be multiplied by work and the amount of transferable assets increases. The amount of money (and this is the significant difference) can only be increased by the national bank (the Fed in the states).

The settling of claims by trading or transfer of assets thus depends on previous contributions of the buyer and therefore is always backed. Money itself, however, is the only medium of demand which can without backing by production be brought into circulation (by the issuing bank).

The difference between money, check and trade-goods becomes still more distinct, if you imagine that the plumber loses his payment: If he lost the bread, his claim would nevertheless remain settled. If he lost the check, his claim would still be unsettled and eventually he could ask the baker for a new one.

If he loses the $ 100 bill, all of his claims were for naught, even if witnesses would testify he once had owned the money. In the first case only he is hurt. In the second case, he has no loss at all. In the third case, he not only hurts himself but also the public, because he started, even unwillingly, a chain reaction which disrupts the circulation of money.
 
 

Why Is Money Superior to Labor and Goods?

Imagine three hungry and tired hikers who, late in the evening, arrive at a village and would like to get a good meal. The first of the three has a 20 dollar bill in his pocket, the second a basket of fresh mushrooms, which are worth at least 20 dollars, and the third boasts of being able to split more than 20 dollars worth of wood in one hour.

The one with the money will have no problems at all to get a meal in the next inn. The one with the mushrooms will only get one if he can sell or trade them. Still harder it will be for the third, since it seems doubtful that somebody might look for a laborer to split wood this late in the evening.

One more example which may be even more drastic: imagine the doors of a safe with 10,000 dollars inside to be closed for two weeks, or a market-hall containing goods for 10,000 dollars, or a room with ten people who normally earn 10,000 dollars in two weeks.

After opening the doors two weeks later, the ten people will probably be dead, the goods in the market-hall for the largest part spoiled, but the bills in the safe would be as fresh as before. Hence, money is - in contrast to the understanding of Marx and other economists - in no way equal to goods and labor, but much superior to those. Because of this the professor for constitutional law, Dieter Suhr, called money the »joker« in economy, the playing card which trumps all others and which everybody keeps as long as possible in his hands because that makes it rare and therefore more precious.
 
 

What Are the Dimensions in Calculating with Money?

When we talk about money we can no longer avoid speaking of figures in the millions and billions and some figures have even crossed the boundary to the trillions.

We still have a concrete idea, when we think of one-, ten- or a hundred thousand Marks. However, a figure with six, nine or even more zeros behind the first number transcends our capacity of imagination and judgement. We might get excited to learn that someone earns 20'000 Marks per month and we may find it unjust and unbearable. But if we read about someone who gets 200'000, 2 million or even 20 million a month our critical faculty dissolves and gives way to amazed awe.

Though the numbers get extended just by zeros, those zeros bear a meaning: for instance, if someone sits in front of a heap of one million of 1-DM-coins (a »1« with six zeros) and starts counting them, he will need almost 35 days to remove the heap, if he counts one coin every second for eight hours a day. Three zeros more, that means 1 billion, and it will take him 96 years eight hours a day without interruption! To become rich is similarily toiling: for instance, if you want to become a millionaire, you must for a period of 83 years put 1'000 Marks aside every month. In order to become a billionaire within the same span of time, you would have to save one million every month. And you could have been born as a billionaire, if your ancestors had started to put 1'000 Marks aside for you every month 83'000 years ago!

Since the money related billion figures of our national economy are now made up of four digits (by the end of 1993 money assets and debts amounted to around 6'000 billion DM) we should include trillions, too, in our calculation examples. However, in this book we drop that and - for easier comparison - stick to billion figures.
 
 

Where Does Money Get Its Value from?

At the times when gold or silver were used as money, the value of money was mainly determined by the value of the metal. This value in turn consisted of the desirability, the rarity and the difficulty to find the metal. Money made of gold or silver was like a good which was exchanged for another good. Today only cents might have some such value. The nominal worth of bigger coins and especially bills exceeds the cost of material and production by a wide margin.

Just as gold and silver coins derived their economic value from their scarcity, this is also the case with our paper money today. Our money gets its value from the fact that it is kept scarce compared to the goods and services offered on the market. This means that the value of money (or better: the purchasing power, because money itself has no considerable value anymore) depends on the relationship between supply and demand. In other words: the quantity of economic output divided by the amount of money determines the purchasing power.

Money which is itself actually worthless, is backed today by the products of the economy one can buy with it. It is a document of a claim to a service just as a received banknote is normally the proof of a previous service. If the national bank would double the amount of money tomorrow in the case of unchanged economic output, nobody would become any richer. The result of such a doubling of money would be a doubling of all prices and nobody could buy more than before. But on the other hand all the money accounts and the debts would be cut to half of the value. This means that the creditors would lose half of the purchasing power of their assets and the debtors could now pay their debts with half of the former real value.
 
 

How Much Money Does Exist?

When we look at Germany's long term figures for the amount of money in »circulation« (cash without the cash in the banks), it amounted up to 8 billion DM by the end of 1950 and to about 159 billion DM by the end of 1990. This means that the amount of money got multiplied by the factor 20 within 40 years. During the same time the real social product got multiplied by the factor of ›only‹ 5.4. This difference between economic output and the increase of money mainly shows the loss of purchasing power of money but also in parts the change of payment habits (more use of cashless transfers).

In 1990 the per head amount would have been 2,600 DM or 6,100 DM for an average household in the old Federal Republic. The whole amount is made up of about 8% coins and 92% bills and about 1/4 of the value fall to 1,000 DM notes. In converted figures these were one and a half 1,000 DM notes and one and a half 500 DM notes as well as 26 notes á 100 DM in each household, which would add up to the mentioned 6,100 including the smaller notes. Since in reality the average amount of money in a household was only 1,500 DM, this means, that four times as much money had been circulating in economy than had been used by consumer demand.

Of course, businesses also use cash. Compared to their turnover the sums are relatively small. And the large sums that get accumulated in retail stores, eventually end up in the banks, sometimes more than once daily.

By the way, each bank note runs through the tills of the central banks (branches of the ›Bundesbank‹ = national bank) about three times a year. This is around 2 billion Marks every banking day. At this opportunity all soiled or torn bills - about 2,5 million pieces a day valued at 100 million Marks - are taken out of circulation, burnt and replaced by new ones.
 
 

How Does Money Get in Circulation?

In 1948, with the so called monetary reform (which was no reform at all, but only a new start after the last bankruptcy of the state), every citizen received 40 new Marks for 40 old ones as a »starting capital« and late in fall another 20 Marks. The employers got the same amount in addition for each employee. All other old cash as well as bank-accounts and debts were exchanged 1 to 10. Half of the bank-accounts were frozen and a few weeks later again devalued by 70%, when the government found out that there still was too much money in circulation. This means, for 10 old Marks on the bank accounts one could only get 65 new Pfennig.

As this example shows, it is the state or from the state appointed issuing bank, which brings money into circulation. In 1948 this was the »Bank deutscher Laender« as it was still called then.

The issuing bank of today, the »Deutsche Bundesbank« in Frankfurt, exists since 1957. Since then it is the only bank which is entitled to issue money. In the frame of economic necessity this is its obligation as in a similar way, it has to care for keeping the money stable. This means that it has to issue more money when the economy grows, if possible, in a precisely adequate step, which is necessary to keep the price level stable, or rather, the purchasing power of money.
 
 

How Does Circulating Money Get Expanded?

Expanding the amount of money is not done anymore by head count (even though this might be a just way!), but mainly by credits to the commercial banks.

Besides the acceptance of promissory notes (to which the discount rate is related),  the issuing bank can also give so-called Lombard credits in exchange to the deposit of certain security bonds. Today most of the provision with money is done by so-called »security-pension deals«, a variation of »open market deals«, with which the issuing bank can influence the amount of money in circulation. In these deals the »Bundesbank« buys a number of times per month different security bonds or similar assets from the banks with different values, expiry dates and interest levels.

It is important to keep in mind, that these are usually very short term credits and must be paid back or prolonged frequently. With this the Bundesbank has a tool of changing the terms and conditions of these credits at will.

The drawback of these ways of expanding the amount of money by credits is, that they are always connected with interest which the banks have to charge their customers. Part of the interest which the Bundesbank collects, is used for its huge administration with a total of almost 18,000 employees. The rest goes into the treasury of the state.

Another kind of putting money into circulation, for instance, is to take foreign currency in. An expansion of the money in circulation is primarily then connected with it, when export exceeds import as is the case in Germany most of the time. If the Bundesbank accepts the foreign currency as a result of surplus, it has to put German Marks in circulation for it even though the extent might surpass the necessities of the economic growth.

The same often not covered effect of expansion is given with all purchases of foreign currency for supporting the exchange rate. In this last mentioned way most of the surplus money was brought into circulation during the 70ties. By the end of the 70ties this occurred by accepting securities and during the 80ties it was done for the main part by profit transfer to the treasury, according to former Bundesbank President Poehl.

The only expansion of the amount of money that makes sense, is the expansion in context with a growing economy. If the commercial banks ask for more money, it is hard for the Bundesbank to decide, however, whether this results from expanding output of the economy or from changing habits of payment or from increased liquidity.

Of course, the Bundesbank could the necessary money for the economy give away, for instance, as a gift to the state, which nowadays receives most of its profits anyway. Or it could send every citizen 100 DM a year by mail which would approximately be the amount, that corresponds with the necessary expansion of the money amount every year. Even better and more just would it be to sponsor every newborn baby with 5,000 or 10,000 DM. This could be understood as a small compensation for the fact, that each newborn baby now finds an economic debt in his cradle of about 80,000 DM, of which 20,000 DM are from the state and for which he has to pay one of these days (1993 figures, now much higher).
 
 

Where Does the »Bundesbank« Get Its Money from?

Paper money is printed in special print-shops, which means that the Bundesbank gets its money for the cost of printing, which is near to nothing. All that is needed is paper and printing-ink. A bill costs about 25 Pfennig and a 1,000 DM bill does not cost more than a bill with »10 DM« imprint.

Some people believe that the Bundesbank can pocket the difference between these costs and the nominal worth of the bills. This would be the case if it would put money into circulation by buying goods, but this is only done in case of buying security bonds or other currencies, which it, until they get sold again, just keeps on hold. Most of the newly issued money goes its way via bank credits. This means it is only lent out and brings nothing besides interest.

According to current law, the coins cannot be produced by the Bundesbank, only the state is entitled to do so. This is ancient law and when the Bundesbank needs coins, it buys them from the state with bank notes at their nominal worth produced by the Bundesbank. Because the cost of minting coins is (with the exception of the one Pfennig coins) much lower than that, the state makes a few hundred millions with this deal.

The yearly expansion of the amount of money is not all that great. Between 1975 and 1985 it amounted to only 5 billion DM or about 6%. Per head of the population it was 80 DM a year. In the following years it got increased. Between 1985 to 1988 it amounted to 200 DM . In 1989 it decreased to 72 DM. In 1990, by including the new states, it went up to 148 DM, 1991 to 163, 1992 to 355(!) and in 1993 to 140. The causes and the upshot of these fluctuations we will treat later.
 
 

To Whom Does Money Belong?

Whoever produces a thing is normally the owner, even when he gives others - with or without charge - the right to use it.

If for instance the railroad supplies their customers at the stations with carts to carry their luggage, they are still owned by the railroad and the travelers are at the most temporary users. One should think, that it would be the same with money which the Bundesbank leaves to the public for use. But here - although money is a public institution - it appears, as if everybody, who has a bank note in his hand, is its owner. This view might have been correct at times, when money was made of gold and silver and therefore was a good with its own value. But today it is outdated.

The problems that are associated with this idea of ownership we will examine later. Fact is, that today everybody can do with a bank note whatever he wants to do except duplicating it. Not only the claim for an economic good, documented by the bill, is his own according to today's understanding, but also the bill itself. And, since everybody can do with his possession, whatever he likes, everybody can deface a bill or can even destroy or burn it (which hardly anybody will do), although the state had provided this bill to the public as a medium of exchange and had expenses for it.

Above all, everybody can, without having to fear consequences, pull this bank note out of circulation thus preventing others from using it.

If we compare this with the carts of the railroad, it will become comprehensible that disfiguring them would hardly impede their usefulness. But if anybody could take these carts out of circulation, it would not only hurt the traveler who would look for a cart in vain, but it would prevent a whole chain of transports. This example makes clear what negative consequences are associated with the right to hold money back.