Geoff Davies is right; the discussion will flounder without agreeing to definitions of terms. In particular, the relation between money, the goods it exchanges for, and credit, is clouded in confusion, which then affects the discussion of interest, inflation, and the wider economic and systemic effects.

I propose that:
1. money, in the broader sense, comprises three components: money in specie; money certificates (money substitutes backed by money on deposit) and fiduciary media (money substitutes not backed by money on deposit)
2. money in specie i.e. money properly so-called, comprises commodity money or fiat money.
3. commodity money is for example shells where shells are money, and gold where gold is money.
4. The value of commodity money comes from the market value of the underlying non-monetary use of that particular commodity, for example, the market value of shells as decoration or of gold for industrial and jewellery uses.
5. The value of fiat money comes from the stamp impressed on it by the issuing authority, not from the commodity value of the underlying medium. (If the metal value of fiat coin exceeds its stamped value, the coins will be melted down and sold for their commodity value.)
6. The primary function of money is as a medium of exchange. People get it in order to exchange it later for consumption or production goods, not as a consumption nor as a production good in itself (- except Scrooge McDuck, who gets it for swimming in in his money bin).
7. Money evolved from market transactions because of the disadvantages of barter ie direct exchange– oranges for armchairs. Better to first convert one’s product into the most generally acceptable commodity, and then later exchange that for what one wants. Thus the reason money arises, is because it is the most generally acceptable medium of exchange, the most marketable commodity.
8. No money in history ever originated by fiat. (In theory it is impossible as government would need to specify the structure of prices on the day of creation.) Fiat money always originates by piggy-backing on a pre-existing market-originating money.

Geoff,

I don't disagree with you in the abstract about money not being a store of value BUT that is the way it works in the minds of almost everyone and hence that is what we have to work with. People believe, and it is true, that if you put money in a bank it will earn interest. Hence it does have value. We cannot change this way of viewing things, nor is it necessary.

Peter,

I have debated with others over the past year or so about the definition of money and it rarely leads to much enlightenment. I think it is more productive to concentrate on observing what happens in the financial system and try to describe the "natural world of finance" much as a naturalist observes and documents what happens. The main thing about finance that has been observed but is not being acted upon is that loans are created first then money is created. This is an empirical observable fact and has profound implications. It means that the Reserve Bank has little control over the supply of money and it means that "to fix" the financial system we have to fix the way we create loans.

Pericles

My interest in all this is to get investments in renewable energy and ways of reducing the level of green house gases. The current financial system will not succeed in directing enough investment to this purpose to stop catastrophic climate change. I think there is a good chance that we can do something about it - but the first step is to fix the financial system so we direct investment (loans) in the appropriate direction.

I will put up a draft of a submission I am making to a Senate Enquiry later this evening. It will be at the URL geoff mentioned above http://stableproductivemoney.wordpress.com

I will let you know when it goes up.

The latter, Geoff Davies.

>>Do you mean we should not trial new ideas? Or just that we should thoroughly debate them first?<<

"Trialling" new ideas is fine. Except that when they don't work out.

The concept of peer-to-peer credit is attractive, for example, until someone defaults. It is not really enough to say "read the rules", when the process you propose is supposed to be somehow better than that which it replaces.

Peter Hume's suggestion is too narrow to be of any assistance.

>>I propose that... money, in the broader sense, comprises three components: money in specie; money certificates (money substitutes backed by money on deposit) and fiduciary media etc.<<

The piece missing is any justification. Why do we need to identify the forms separately? And having done so, what impact does the existence of any difference in labelling have on the use to which it is put?

Fickle Pickle, I'm with Geoff Davies on this one:

>>Money is a measure of value. It can also be a store of value. When it is a store of value it attracts interest<<

That simply does not work.

In order for the "stored" funds to earn interest, they need to be put to productive use. Lent to someone to start a business, for instance. So they aren't actually "stored", merely transformed into another transactional instrument. If they do in fact lie inert in a vault, only a selfless philanthropist would pay interest on it.

>>When you invest in shares you do not expect interest plus dividends yet that is what is asked when we invest in building new assets.<<

There are already many different ways to invest. If I issue the right sort of convertible bonds to my backers, for example, I give them a rate of interest, and an opportunity for capital appreciation, and an opportunity to receive dividends.

All in the same instrument.

I will certainly have alook at the site, Geoff Davies. I notice it talks of the Cotter Dam project, which was on my list of questions to ask Fickle Pickle when the moment was right.

A QUESTION FOR GEOFF DAVIES:

We agree that banks manufacture money as credit, out of thin air, but I don't understand how they hide all the profits they must make from that process. Sure, lots of people think banks are excessively profitable, but others such as pericles can produce figures to show that the profits declared by banks are not excessive compared with things like the capital they have invested and loans they have on their books. So, how do banks hide the super profits they must make from interest charged on their manufactured money as those profits are smuggled to the vaults of Rothschild or wherever they end up? I would really like to know.

*My interest in all this is to get investments in renewable energy and ways of reducing the level of green house gases. The current financial system will not succeed in directing enough investment to this purpose to stop catastrophic climate change.*

You could well be very wrong there, Fickle Pickle.

Green energy is in fact the new big venture capital baby in Silicon
Valley and they are throwing huge amounts of money and brains at it,
all interest free too.

But you do need to have solid ideas Fickle Pickle, they are pretty
good at weeding out those whose dreams have no substance.

The US venture capital industy has enough runs on the board, to show
that they can achieve most things, by bringing together enough brains
with enough money. Do not underestimate their abilities and
innovation.

With the imminent collapse of the US Fed dollar,Ron Paul the Congressman for Texas wants Congress to issue a new competing currency to the Fed fiat money.His new currency he wants to be backed by precious metals but there is not enough gold or silver to back it.I've suggested that they back a new currency by the total wealth of the US economy ie national parks,roads ,Govt infrastrusture etc that are redeemable by shares in public property.This will mean that the new currency is backed by substance and thus the currency can actually appreciate in value as GDP increases.

Perhaps our currency could also be backed by public assets and is redeemable in shares in these assets.Obiviously you cannot sell part of a national park but it stops the production of inflationary money.

The other issues Peter and Geoff is Pericles' concern of available capital for real productive ventures.We have to strike a balance between too much money or not enough.Not enough money goes into R&D particularily in this country.Too much goes into the inflation of share and house prices.

I'm glad to see also Geoff that we can have constructive discussions.
One thing is certain in my mind is that our present financial system is dysfunctional and I will listen to any constructive comment even from Yabby and Pericles my favourite foe.So Pericles within the confines of a non fiat currency,how do we address the possible short falls in available capital for real productive enterprises?

We have to develop a system that is fair and progressive.Presently we live in an oligarchy,where both major parties are toady boys to the large corporates.When too much power aggregates to too few hands,then we have decay.This is what globalisation is doing to us at the moment.There is more strength in sovereignity and diversity.Global mono-cultures are a disaster.