The image above shows what a bank note used to be. It was a promise to pay the bearer a certain weight and fineness in gold coin on demand. This promise was dishonoured by governments around the world. Instead, bank notes became irredeemable. For a while the issuers of bank notes, the central banks, continued to ‘back’ these now irredeemable notes with gold bullion and other high quality assets. Central banks have maintained the charade that bank notes are ‘backed’, as otherwise it would expose the reality that the governments now have control over the printing press. Bank notes are now largely backed by government bonds. These government bonds are payable in the bank notes issued by the central bank itself. It is a cheque-kiting scheme, a Ponzi scheme, a magician’s trick.

Bank notes were redeemable into gold coin because gold coin is money. There are many theories as to why gold coin is money. Many people would also argue that gold is no longer money. These people tend to be ‘positivists’ who will argue a case to justify their ideology. We cannot list the reasons to you why gold is money, as all value is subjective to the individual. We cannot understand the mind of each individual in society. We can, however, point you to Carl Menger (1840-1921) who, in our view, has best described the origin of money in terms of an evolution from direct to indirect exchange. Menger introduced the Principle of Declining Marginal Utility. His theory asserted that the most marketable good – the one with the lowest level of declining marginal utility – is the present good that will be used for indirect exchange in a free market. That present good is money. Gold coin is that present good. Gold coin is money.

It is important to use the correct denominator in any calculation. If you use the wrong denominator your calculation will be wrong. For example, you would not be able to calculate the profitability of a company if you are using the wrong denominator. Using the wrong denominator leads to poor social coordination and inefficient capital formation. Your depreciation allowance will be wrong. You will be unable to determine how much money you should accumulate to replace worn equipment. At the same time other segments of the society, such as the residential housing, will experience excessive capital formation. If we use the wrong denominator we become unbalanced. Our posture becomes weak and we become unable to cope with adversity.

"The mathematician has no difficulty with the dichotomy of comparison versus measurement. He has always distinguished between two kinds of numbers. Ordinal numbers (subject to such axioms as reflexivity, symmetry, and transitivity) are only used for comparison. Cardinal numbers (subject to axioms such as commutativity, associativity of addition and multiplication, as well as distributivity of the latter over the former) are used for counting. In the barter economy values were expressed in terms of ordinal numbers. Measuring values was not possible, nor was their addition or multiplication. Only their comparison was. However, with the evolution of the monetary economy it has become possible to measure, add and multiply values according to the rules of cardinal arithmetic, while retaining the facility of comparing them as before." Professor A. Fekete.

Barter

Barter is the primitive form of exchange. It is a form of direct exchange. The primitive person is only concerned by what is evident in everyday life. He will exchange what he has in excess for such other goods that he needs. He will reject goods for which he had no need, and reject goods which he already has in excess. In these circumstances, the number of exchanges will be quite limited. He will be better off from direct exchange, but to a minimal level. People living in this form of society must be heavily self-sufficient. It allows little room for capital formation or the specialisation of labour.

Indirect Exchange

Indirect exchange is the exchange of what a person has excess of, for a good that he/she intends to use in future exchange. Money is the means that best allows indirect exchange. Money is the most marketable good - the one which has the lowest decline in marginal utility. It can be objectively observed through the stock-to-flow ratio of the good. Other methods of indirect exchange are possible, including those that rely on 'trust' or debt. However, those methods for indirect exchange are not optimal over time and space. These methods might work reasonably well for a close-knit local community, but they don't provide for optimal exchange. The ability for humans to undertake indirect exchange is one of our remarkable achievements. We must make sure that indirect exchange doesn't break down as autarky can only lead to poverty. This is why it is of upmost importance that the form of indirect exchange is optimal, and optimal indirect exchange is performed using the most marketable good.

The Capitalist & Market-Maker

The competition for income and wealth is further enhanced by the capitalist. The capitalist is able to marry the marginal entrepreneur and the marginal R&D project. The capitalist provides debt funding to the entrepreneur to allow the purchase of capital goods and also provides regular equity funding to allow R&D projects to be undertaken. The ability of the capitalist to marry the marginal entrepreneur to the marginal R&D project ensures that society benefits from the capability of both of these actors. The entrepreneurs and inventors have benefited society by bringing a range of high demand consumer goods available at affordable prices, as well as higher wages due to the increase in the marginal productivity of labour and capital.

The market-maker provides the brokering and clearing role, which ensures that the investment yield on long-term wealth (bonds and equities) is stable and low. The market-maker is the specialist in mortgages and annuities and becomes a match-maker. Through the buying and selling of bonds and equities the capitalist is not forced to be tied to the same entrepreneur or R&D project over its full term.