Eric Lonergan has been cranking out some good stuff on money and language in the last few weeks which got me thinking again about “moneyness” and the network effect of a money system. I wrote a piece on Moneyness back in 2012 that I think describes a realistic operational scale of the utility of money. In short, we use the most credible form of money that has the most utility accessing the payment system.

Now, this concept is rather different from most academic views where money is viewed more like a hierarchy. In a hierarchical sense government money is usually the highest in utility and everything else is “credit” built on top of this. It’s all basically some version of the money multiplier where private sector entities don’t create the real money, but simply leverage the “real” government money. Basically, all private sector forms of money are convertible into government money. It’s an extension of gold standard thinking where all money was convertible into the real thing, gold. The difference with most academic theory today is that the government makes the “real” gold from thin air (cash coins and reserves) and promises to redeem your lesser money into this. From a practical perspective I think this is exactly backwards. Most of us do not care about having access to government money (cash, coins, and reserves) and in fact, most government money just facilitates the transfer of bank money. And in reality, we just want something stable and convenient. In fact, if current trends towards a cashless society continue then we could be on the verge of a world where government money has no utility for the household sector.

The potential for a cashless society is super interesting because it would mean that the banking system has essentially wrestled away the control of the printing press from the government. In fact, I’d argue that this is basically the case already. We have a private banking system that creates money that is every bit as trustworthy as any money the government can create. And so the banking system has become so embedded into the legal structure of our monetary system that it is a totally private system acting with all the security of a government controlled money system.¹ If you’ve been a banking lobbyist for the last 100 years you’re pretty proud of yourself.