Fungibility Of Money Is Cardinal

Money is merely an “I owe you” (IOU) that you and I could issue to one another. It is a bilateral asset-liability token, document or certificate. It need not have a physical form. It could merely be a word of honour in its simplest form.

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Money as an IOU emerges when an economic transaction occurs between, say, a blacksmith and a farmer. The blacksmith “sells” a new plough to a farmer. The farmer “buys” this new plough. The farmer issues an IOU. This IOU could be in one of many forms: a word of honour, a written document, a plastic token, a metal token or a digital token.

A fungible, multilateral IOU would make both the farmer and the blacksmith better off. A non-fungible, bilateral IOU would make both the farmer and the blacksmith worse off. They will refrain from transacting in the absence of a fungible, multilateral IOU. Then - eventually - the farmer will have to stop growing grain for want of a plough. The blacksmith will go out of business for want of a customer for the plough.

There will be repercussions. The steel mill that makes metal plates and rods will go out of business. Everyone will be hungry. Hence, everyone needs a fungible, multilateral IOU. They, therefore, look up to government to issue fungible, multilateral IOUs.

Money derives its immense utility and vitality by being moved out of its bilateral shackles and suffocating shell. Money derives its immense utility and vitality by being made as a multilateral IOU. There is a mover and a maker: government.

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Mover and maker

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Government issues money as a multilateral IOU. It may appear that the central bank issues money. However, without the guarantee of the government or the sovereign treasury, it would be worthless. The dependence of the central bank on government is another story. We will return to that later. We will return to that sooner than later.

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We will focus on government’s pivotal role in making money fungible and multilateral. Consider the Chola kingdom in India. Its history goes back to the third century before the Christian era (3rd century BCE). The Chola kings issued metal coins. These metal coins were the IOUs. They obligated the Chola treasury. The coins were liabilities in the books of the Chola treasury.

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The Chola treasury paid farmers, soldiers, teachers and traders in Chola coins. The Chola coins were assets in the hands of farmers, soldiers, teachers and traders.

The Chola treasury received taxes from farmers and traders in Chola coins. The receipts and obligations cancelled one another. The Chola treasury, thus, created a two-way, pay-and-receive monetary system. The Chola IOU was issued, honoured and accepted by the Chola treasury.

There is another story here. Monetary actors and fiscal actors cannot be separated from one another. Monetary institutions and fiscal institutions cannot be separated from one another. We will discuss this sooner than later.

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The Chola treasury became the common counterparty to farmers, weavers, blacksmiths, brickmakers, solders, teachers and traders. The Chola treasury had its skin in the game. The Chola treasury issued metal IOUs. The Chola treasury got the IOUs back when it collected tax.

The Cholas did not waste time and intellect discussing and debating the need for an independent issuer of IOUs. The Chola treasury issued IOUs as a monetary actor. The Chola treasury got the IOUs back as a fiscal actor when it collected tax.

It accepted Chola coins as taxes. It respected what it issued at face value. Therefore, others respected the Chola coins. When it comes to money, “skin-in-the-game” triggers and sustains the economic flame.?

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Inane and irrelevant

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Compare this with the private issuers of private cryptocurrencies. They have no model for creating a two-way, pay-and-receive monetary system. Worse, they have no use for a two-way, pay-and-receive monetary system. Why?

These private issuers of private cryptocurrencies do not provide governance. They do not run schools. They do not protect airspace, coasts and land boundaries. Private issuers of private cryptocurrencies are irrelevant nonentities. They have no skin in the game. It is up to you, me, and our families and friends to trust the private issuers of private cryptocurrencies. It is most likely that you, me, and our families and friends will discharge the private cryptocurrencies into the digital dustbin of history.

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Bilateral is bad

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The genius of the Cholas needs to be celebrated. They instinctively understood that money is an IOU. Further, they realised that bilateral IOUs are inimical to economic activity. Why?

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The bilateral asset-liability token has limited utility. This blacksmith is constrained. The farmer-issued IOU could be used to buy grain from this farmer. First, the blacksmith’s entitlement is limited to buying grain from this farmer.

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Second, grain cannot be bought from another farmer. This stifles competition and the pursuit of efficiency. Bilateral tokens will spawn captive buyers.

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Third, the blacksmith will not be able to use the farmer-issued IOU to buy steel plates and steel rods. The blacksmith will soon go out of business. Steel ploughs cannot be made from wheat and rice.

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The farmer will not get new ploughs. The grain output would dwindle and eventually stop. Moreover, the steel mill – metallurgist – too would go out of business when there are no buyers of steel plates and rods.

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Similarly, the seller in every bilateral pair of counterparts in every transaction would be constrained. When sellers are constrained, there will be no production in the future. Then the market for new inputs, new services and new consumables will collapse. This will set off a chain reaction. The economy will collapse: no grain, no ploughs and no steel.

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Fungibility sustains activity

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An economy is a wonderful universe of specialists with a purpose for each one of us. The farmer is a specialist. The blacksmith is a specialist. The metallurgist is a specialist.

They belong to a multilateral economy. They buy inputs from one another. They sell output to one another. But the competence and product flows are very clear. The blacksmith does not grow grain. The blacksmith does not make steel. The farmer does not make steel. The farmer does not make ploughs. The steel mill does not grow grain. The steel mill does not make ploughs. Each of them buys what the others make. A common, fungible IOU brings them together.

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Government is the pivot

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Fungibility is the result of government’s pivotal role. The government’s treasury creates and sustains a two-way, pay-and-receive monetary system. The Cholas created metal coins. The metal coins were issued, honoured and accepted by the Chola treasury. The metal coins were used and reused. The metal coins were issued and reissued.

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Metal is heavy and has a cost. Paper is light and is inexpensive. But both need to be secured against counterfeiting. Digital money is lighter. It can be extremely inexpensive. It need not consume billions of kilowatt-hours of energy.

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The role of money would be the same regardless of the medium: paper, metal or digital. The role of the government too would be the same regardless of how money is issued and circulated: paper, metal or digital. The purpose, principles and practice of monetary economics will not change. They will just be the same and justly so.?

The government creates a multilateral universe. It brings the farmer, blacksmith and metallurgist together. It then does something powerful: it issues fungible IOUs that all three could use. The fungible IOUs can be used and reused, issued and reissued, and received and given.

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The blacksmith could use the IOU given by the farmer to buy steel plates from the steel mill. The steel mill could use the IOU given by the blacksmith to buy grain from the farmer. Then the farmer could use the IOU given by the steel mill to buy a plough from the blacksmith.

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Everyone is then busy. Everyone creates utility, value and well-being. Fungibility triggers and sustains an economy. A flourishing economy is the result. Fungibility is a cardinal property of money. Government is the pivot that makes fungibility possible. Government is the pivot that makes money fungible.