Dual Nature of Money
Discussion
Herman Daly et al. :
"Money can be used to buy goods and services; hence, money is naturally regarded as a form of wealth from an individual perspective. On the other hand, the existence of money implies a community capable of providing goods and services in exchange for money and a corresponding process of economic production, consumption, and disposal running in biophysical deficit. That process is entropic, since useful energy and materials are consumed irrevocably in its course with fewer exhaustible resources remaining after (Georgescu-Roegen 1971). Real capital produced by economic processes, such as basic infrastructure, also unavoidably decays over time at a rate in tune with its size. This decay induces further irrevocable biophysical debt through its implication of the need for maintenance and renewal processes. For all these reasons, an increase in money can be regarded from a communal perspective as an increase in future biophysical liability.
We propose to term this essential aspect of money the dual nature of money. Money can be understood both as a form of wealth from an individual perspective and as a driving force of biophysical debt from a communal perspective. It’s worth stressing that “individual” and “communal” are contextual terms that can only be properly defined in relation to each other. A nation representing a “community” at one level of analysis may be better considered an “individual” at a second level of analysis, such as when considering the interface between a nation and, hypothetically, its economic bloc.
Soddy was perhaps the earliest scholar to properly and clearly grasp the dual nature of money. To wit, Soddy (1933a, p. 222) writes: “National securities and money are both wealth from the standpoint of the individual owner and […] debt from the standpoint of the community.
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A remarkable peculiarity of money itself derives from the fact that money’s functional component can survive independently of its structural constituent. Such is fundamentally the case for all forms of money, from coinage crossing a checkout counter to savings stored at a bank. Consider the case of currency, which is most intuitive. The structural constituent of banknotes and coins are naturally subject to entropic degradation.Footnote1 Once structural decay does occur, however, the decayed constituent of currency tokens is typically freely replaced thanks to modern legal arrangements. For example, in Sect. 100.5 of the Code of Federal Regulations, United States law stipulates: “Lawfully held mutilated paper currency of the United States […] may be redeemed at face amount if sufficient remnants of any relevant security feature and clearly more than one-half of the original note remains” (NARA 2019). Money interest finds its origin in the “unnatural” perpetuation of the functional component of money, an aspect which is absent in the real goods for which money is exchangeable.
Soddy was perhaps the first to recognize quantitatively money’s inherent explosive nature, driven by the existence of interest. Soddy’s findings, being a basis of the “Macleod–Soddy–Allais” (MSA) relation, show that the present value of all interest payments between any finite point of time and the infinite point of time for a principal of A is equal to A. Money owners are thereby enabled to obtain an additional A units of interest payment over the course of redemption of the principal A. The MSA relation can be regarded as a fundamental factor of instability in modern financial markets, a factor that ultimately pushes the financial market in the direction of asset bubbles—related to the extensive creation of fictitious assets, running insolvency—a condition much more severe than running solvency, and general unsustainability. Naturally, entities entitled to issue money and money substitutes (“general liquidity”) cannot resist the temptation to issue ever more, circumstances allowing. As Soddy (1931, p. 25) put it, paraphrased by one of the present authors (Daly 1980, p. 474), “The ruling passion of the age is to convert wealth into debt in order to derive a permanent future income from it—to convert wealth that perishes into debt that endures, debt that does not rot, costs nothing to maintain, and brings in perennial interest.” Soddy’s point was that such a conversion is an illusion resulting from the dual nature of money and the fallacy of composition. While an individual can live off the interest on the debt that the individual owns, a community as a unitary whole cannot live off the interest on its members’ mutual indebtedness.”
(https://link.springer.com/article/10.1007/s10018-021-00309-7)