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Money Facts

Simple, obvious, but neglected.


May 2008 Bob Blain, Ph.D. Emeritus Professor of Sociology Southern Illinois University Edwardsville http://hourmoney.org email:rblain@charter.net Phone 1-618-656-5706

1. Money is a note.
Here are examples.

only when they spend the money and receive a good or service in exchange for the money. Here Mary pays for a game of golf by giving a third person, call him Brian, the money.

Could anything be simpler and more obvious? Money is a note. It is a neglected money fact because no one that I know of draws out the implications of the fact that money is a note. What is a note? The dictionary I have defines note as a brief record of something, written down to aid the memory. Money is something written down to aid the memory. If so, then what is it that money is helping us to remember? We answer that question by observing how money is used.

What did the money remember? It remembered that Mary was owed something for the work she had done. In general, moneys job is to remember who has contributed to our collective household and thereby earned a right to be paid an equivalent. Notice that Brian did not need to know what Mary did to earn the money, nor was it necessary for Brian to know who gave Mary the money. Money is not a personal note. It is a general note for everyone and it is anonymous except for the markings that tell people the authority that put the money into circulation.

A person, call her Mary, produces something for another person, call him Ben, and receives money in exchange. The money is not the pay, although we always say that it is. The fact is that the person who receives the money is paid

2. New money has seigniorage.


Seigniorage is the difference between the cost of paper and ink to print a money note and its face value. A one
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dollar note may take two pennies to produce but it circulates worth 100 pennies. Seigniorage would then be 100 2 cents = 98 cents. Only the first person or organization to spend new money gets the seigniorage. After that the money circulates at face value. This money fact is simple and obvious but also neglected. Have you ever had anyone ask or tell you who gets the seigniorage for new money? If banks owned by stockholders create new money, they get the seigniorage. This can be an enormous profit considering that it takes very little paper and ink to write $100 or $10,000 or $1,000,000 in new money created as a loan entered as a new bank account. That simple act can create huge amounts of new seigniorage purchasing power. If government creates the new money, the seigniorage goes to the government and therefore to the people the government represents. How much of your money is created by banks owned by stockholders and how much is created by your government? In most countries, the lions share of new money is created by banks. They get and the government loses all that seigniorage. It was President Abraham Lincoln who is reputed to have said that government creation of money is governments prerogative and greatest creative opportunity. It is seigniorage that makes it such an opportunity. Government does not get what is produced with new money for free. People have to work to produce valuable goods and services for the money. However, the goods produced can then belong to everyone.

Banks like things the way they are. We should know better. No wonder banks are the most prosperous institutions in our societies while farmers, corporations, and governments find themselves being swallowed by debt. A government, democratically elected, should never borrow money; it alone has the authority to create whatever money is needed to mobilize people and material to add real treasure to their society, whether in water supply and sewage facilities, transportation, education, and health care. To do otherwise is to neglect the simple and obvious money facts that money is a system of notes and the first to spend new money gets the seigniorage.

3. Percentages increase inequality.


I can show you by example and with algebra the simple and obvious but neglected money fact that the use of percentages increases money inequality. Mathematically, any set of unequal numbers increased at the same percent will become more unequal by that same percent. Example: $1 + 6% = $1.06 $2 + 6% = $2.12. The initial difference of $2 - $1 = $1 becomes a difference of $2.12 1.06 = $1.06, 6 percent larger. Algebraically, if a is multiplied by b and c is multiplied by b, the difference a - c is increased by the same percent, ab cb = b (a c). Percentages are used to measure inflation. Wage and salary adjustments are then made by giving everyone close to the same percentage increase.
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Although this is thought of as being fair, it actually increases income inequality by the same percent. It would be fair if people were charged percentages when they purchased goods and services, but they are not. They are charged dollars. Suppose the dollar cost of living is $50,000. With six percent inflation, the $50,000 would need an additional $3,000 to purchase the same goods and services. With the same percentage increase, incomes below that dollar amount will fall further below that amount while incomes above that dollar amount will rise further above it. For someone with an annual income of $40,000, a six percent increase is $2,400. This person who was $10,000 short of the $50,000 cost of living is now $10,600 below the dollar cost of living. For someone with an annual income of $60,000, a six percent increase is $3,600. Therefore, this person who was $10,000 above the dollar cost of living is now $10,600 above that amount. The political corollary of using percentages for raises is that persons above the cost of living gain more discretionary income to influence public policy, the further above that cost, the greater their influence. On the other hand, persons below the cost of living

have no discretionary income to influence public policy and fall further behind the dollar cost of living. They must focus on finding ways to meet their basic needs, including crime. The persistent practice of using percentages for wage and salary increases causes wages and salaries to disperse exponentially, like stars light years from each other. Percentages help to explain why wages and salaries have grown astronomically unequal. Percentages used for charging interest on home mortgages mean as much as 90 percent of a payment goes to pay interest. Commercial banks do not lend anyones money for a mortgage. They create a reserves account and make loans based on it. A mortgage can as reasonably be considered an advance on the borrowers future earnings. As such, banks could charge a simple bookkeeping fee for creating the mortgage and registering payments. Banks may argue that they need to charge such enormous amounts of interest to cover the risk that debtors will be unable to repay their loans. Ironically, the use of percentages to calculate interest is the single biggest factor causing debtors to be unable to pay their mortgages! Charge a simple fee, a dollar
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or two per month, and most people will become homeowners and much sooner than the 20 and 30 years now typical with mortgages.

4. Money has no quantity to define its value.


The most important simple, obvious, but neglected money fact is that money has no quantity to define its value. To see this fact, we must recognize the difference between a note and the things to which a note refers. If I send you a note that our meeting will be tomorrow at 10 oclock, you know that the note is not itself 10 oclock. The note reminds you of the time of the meeting but you would never make it on time if you only had the note. What else would you need? You would need a watch, a clock, so you would know the actual time. Nor would it help very much if no one had watches or clocks, but simply judged time by trial and error. Time is based on the position of the sun, so we would have that aid but you can imagine the errors and missed meetings that would result if people had notes but neither watches nor calendars. With money, we rely on trial and error to judge the value of our money. Why? Because the numbers have no definition. We never know what our money is worth

until we spend it. That means we never know how much we are in fact being paid when we receive our paychecks. The situation is comparable to having fuel dispensed by pumps with numbers but uncertified as accurate. We would receive whatever amount the station wanted to dispense. We would learn how much fuel we had received only by how many kilometers we were able to travel on it. So it is with money. A quantity for defining the value of money exists. It is simple but not so obvious. To see it we must interpret Gross Domestic Product, not as a measure of product, but instead as a measure of the general price level of an economy. After all, GDP is compiled by adding the money prices of all goods and services produced in a year. The actual price of goods and services is labor. If money did not exist, we would still be required to work to produce them. By dividing GDP by the total number of work hours that produced it, we obtain a measure of a countrys GDP price level per hour of work. Data from the April 2008 issue of International Financial Statistics, for 99 countries, each represented by a square
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in the graph above, show GDPs per hour of work correlating R=.854 of a possible 1.00 with currency exchange rates. If all countries were exactly on the center line, their currencies would all exchange for 5.4 minutes of work, that is, they would be at exchange rate work time parity. Equal work time has been the center of gravity of currency exchange rates for as long as the International Monetary Fund has published the data.1 We can now see exchange rate disparities by dividing any exchange rate by its corresponding GDP per hour. Multiplying by 60 converts it to minutes of work. The table on pages 6 8 below shows in its far right hand column the direction that exchange rates have moved between the latest data in the Dec. 2005 and the April 2008 issues of International Financial Statistics. Exchange rates of rich countries moved further away from work time parity of 5.4 minutes of work. For example, the work time represented by Norways kroner declined from .98 of one minute to .69 of one minute, a further departure from parity of .29 of one minute. Chinas Yuan moved 41 minutes closer to 5.4 minute work time parity; from 68 minutes per $US to 27 minutes. People have recognized intuitively the close relationship between time and money by referring to them in the same terms. We spend time and spend money. We save time and money. We waste time and money, and so forth. What we may not have realized is that our intuition has been more correct than
Bob Blain, Defining exchange rate parity in terms of GDP per hour of work, Applied Behavioral Science Review, 4 (1), 1996, 55-79.
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the economics textbooks which all miss the intimate connection between time and money.

Conclusion
The simple, obvious, but neglected money facts we have introduced here are: 1. Money is a note. 2. New money has seigniorage. 3. Percentages increase inequality. 4. Money has no quantity to define its value. How could such simple and obvious money facts be neglected? The answer is also simple: our thinking about money today is dominated by one thought make money, more money, always and in all ways, MAKE MORE MONEY! Everyone wants more money, whether they are paupers or billionaires. Ironically, with no quantity to define moneys value, even billionaires do not know how much money they actually have. Without a known quantity, money cannot remember accurately. Work time is the needed quantity. We need to understand money as notes that we use to remember how much each of us contributes to our economic household and, therefore, how much we have earned the right to draw from it. Government, not private banks, should be using seigniorage to improve societys infrastructure. Money should be governed by simple arithmetic, not percentages, which are exponential. The best money in the world, money whose message will be clear to everyone, will be Time Money. Countries can convert to parity by using GDP divided by the total hours of work that produced it. With all nations using work time to denominate
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their monies, Hour Dollars, Hour Euros, Hour Pesos, Hour Dinar, Hour Yuan, or one World Currency of Time Money Earth Hours as adopted at the 10th Session of

the Provisional World Parliament in 2007 in Togo, Africa, we can have fair wages, fair prices, and fair trade to everyones benefit around the world.

Europe TIME MONEY An idea whose time has Prototype HUMAN BEINGS A m UNITED e N r i W c E a Af rica S

ONE Hour

Asia ONE Hour come. O c e EARTH HOURS Economic Justice a With Freedom n Wealth i And Peace. a

An Hour of Money for an Hour of Work.

15 Yuan, Reais, Liras


Circa 2007

Equal trade is sustainable trade. 100 Pesos, Baht Moneys job is to communicate equivalence.
Circa 2007

An hour of work An hour of money

An hour of work An hour of money

In 2004 the Provisional World Parliament adopted an hour of work as the world money unit. http://www.radford.edu/~gmartin/ National money: GDP per hour of work = One Hour of Time Money 50 US, AUS$, Euros circa 2007 http://hourmoney.org 1000 India Rupees

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IMF Currency Exchange Rates and Gross Domestic Products per Hour of Work for 99 Countriesi Circa 2007 Source: International Financial Statistics Country Norway Luxembourg Ireland Euro Area Austria Denmark Switzerland France Finland Sweden Iceland United Kingdom Belgium United States Italy Canada Netherlands Germany Bahrain Myanmar Australia Spain Greece Japan Singapore Israel China: H Kong Slovenia New Zealand Cyprus Malta China: Macao Portugal India Czech Rep. Korea, Rep. of Hungary Slovak Rep. Botswana South Africa IMF Ex. Rate (line ae) Per $US 5.41 0.6793 0.6793 0.6793 0.6793 5.075 1.1255 0.6793 0.6793 6.4136 71.66 0.4992 0.7593 1 0.6793 0.9881 0.7593 0.6793 0.3760 5.4787 1.26 0.6793 0.6793 114 1.5336 3.846 7.802 0.6793 1.417 0.4391 0.2916 8.006 0.6793 39.415 18.078 936.1 172.61 22.87 6.0314 6.97 GDP (line 99b) Billions 2288.69 33.9 185.3780 8853 273 1695.5 508.3 1867.9 178.76 3073.83 1141.747 1385.12 317 13,843.8 1480 1531.43 534.3 2428.3 5.031 9078.929 1003.45 1050 228.3 516372 209.991 664.764 1613 33.5418 164.713 8.3617 2.3085 115.2659 162.919 46936 3557.7 847876 25373.9 1850.971 57.1374 1741.061 Dec '05 IMF Ex Rate in Minutes 0.98 1.11 1.19 1.22 1.21 1.32 1.39 1.31 1.98 1.52 1.43 1.42 1.46 1.79 1.34 1.55 2.38 6.24 1.78 1.80 2.27 1.57 2.58 2.37 2.49 2.73 2.28 2.37 3.32 2.53 3.34 6.37 7.14 4.61 4.15 5.60 5.73 3.27 Closer to 5.4 Minute Parity Minutes -0.29 -0.18 -0.19 -0.22 -0.15 -0.24 -0.26 -0.18 -0.80 -0.28 -0.19 -0.16 -0.19 -0.52 -0.05 -0.21 -0.97 -4.00 -0.24 -0.22 -0.66 0.15 -0.80 -0.58 -0.51 -0.65 -0.06 -0.13 -0.96 -0.03 -0.76 -2.78 -2.53 -1.54 -0.94 -2.07 -1.87 0.53

Apr-08 Currency Kroner Euros Euros Euros Euros Kroner Francs Euros Euros Kronor Kronur Pounds Euros Dollars Euros Dollar Euros Euros Dinar Kyats Dollars Euros Euros Yen Dollars N Sheqalim Dollars Euros Dollars Pounds Liri Patacas Euros Rupees Koruny Won Forint Koruny Pula Rand

Latest Year 2007 2006 2007 2007 2007 2007 2007 2007 2007 2007 2006 2007 2006 2007 2006 2007 2006 2007 2005 2004 2006 2007 2007 2007 2006 2007 2007 2007 2006 2006 2007 2006 2007 2007 2007 2006 2007 2007 2006 2006

Employed (line 67e) Millions 2.444 0.322 2.114 101.8 3.344 2.787 3.959 24.745 2.492 4.541 0.157 28.733 4.334 146.047 23.007 16.484 7.589 39.66 0.157 20 10.19 20.356 4.51 64.91 2.034 2.573 3.412 0.854 2.156 0.357 0.156 0.3 5.17 27.206 4.825 23.151 3.926 2.302 0.279 7.911

GDP Per Hour Currency 468.23 52.64 43.85 43.48 40.82 304.18 64.20 37.74 35.87 338.45 3636.14 24.10 36.57 47.40 32.16 46.45 35.20 30.61 16.02 226.97 49.24 25.79 25.31 3977.60 51.62 129.18 236.37 19.64 38.20 11.71 7.40 192.11 15.76 862.60 368.67 18311.87 3231.52 402.04 102.40 110.04

IMF Ex. Rate in Minutes 0.69 0.77 0.93 0.94 1.00 1.00 1.05 1.08 1.14 1.14 1.18 1.24 1.25 1.27 1.27 1.28 1.29 1.33 1.41 1.45 1.54 1.58 1.61 1.72 1.78 1.79 1.98 2.08 2.23 2.25 2.36 2.50 2.59 2.74 2.94 3.07 3.20 3.41 3.53 3.80

IMF Currency Exchange Rates and Gross Domestic Products per Hour of Work for 99 Countries Circa 2007 (cont.)

Source: International Financial Statistics Country Poland TrinidadTobago Turkey Romania Saudi Arabia Croatia Peru Estonia Lithuania Latvia Chile Argentina Barbados Mexico Seychelles Russian Fed. Malaysia Uruguay Brazil Panama St. Lucia Libya Algeria Costa Rica Macedonia Belize Mauritius Kazakhstan Ecuador Bulgaria Tunisia Venezuela Albania Jamaica Belarus Colombia El Salvador Thailand Armenia Egypt

Apr-08 Currency Zlotys Dollars N. Liras Lei Riyals Kuna N Soles Krooni Litai Lats Pesos Pesos Dollars Pesos Rupees Rubles Ringgit Pesos Reais Balboas Dollars Dinars Dinars Colones Denar Dollar Rupees Tenge Dollars Leva Dinars Bolivares Leks Dollars Rubels Pesos Colones Baht Dram Pounds

Latest Year 2007 2006 2006 2006 2006 2006 2006 2006 2007 2007 2006 2006 2004 2007 2005 2007 2007 2006 2007 2006 2005 2005 2006 2006 2007 2006 2006 2006 2006 2006 2006 2004 2006 2005 2006 2006 2006 2007 2006 2007

IMF Ex. Rate (line ae) Per $US 2.435 6.3119 1.1621 2.568 3.745 5.578 3.1955 11.882 2.357 0.484 534.43 3.042 2 10.8662 5.5 24.5462 3.3065 24.4 1.771 1 2.7 1.3521 71.158 517.9 41.656 2 34.337 120.3 1 1.4851 1.2971 1.918 94.14 64.381 2140 2225.44 8.75 33.718 363.5 5.5028

GDP (line 99b) Billions 1162.903 114.474 758.391 342.418 1307.52 250.59 305.344 207.061 96.773 14.0475 77337.7 654.439 5.625 9566.32 3.8409 32989 641.499 464.802 2558.821 17.1338 2.3558 56.025 8391 11322.82 308.77 2.4273 205.786 10117.57 41.402 49.091 41.093 206.1 893.006 605.03 79267 321130 163.219 8485.2 2657.131 731.2

Employe d (line 67e) Millions 15.24 0.586 22.33 4.575 12.085 1.57 3.367 0.646 1.56 1.131 5.826 9.874 0.132 42.342 0.035 68.285 10.627 1.092 87.09 1.127 0.0623 2.96 8.869 1.654 0.598 0.1 0.496 7.34 3.859 3.11 3.005 10.234 0.933 1.086 4.402 18.072 2.686 36.27 1.0924 20.303

GDP Per Hour Currency 38.15 97.67 16.98 37.42 54.10 79.81 45.34 160.26 31.02 6.21 6637.29 33.14 21.31 112.96 54.87 241.55 30.18 212.82 14.69 7.60 18.91 9.46 473.05 3422.86 258.17 12.14 207.45 689.21 5.36 7.89 6.84 10.07 478.57 278.56 9003.52 8884.74 30.38 116.97 1216.19 18.01

IMF Ex. Rate in Minutes 3.83 3.88 4.11 4.12 4.15 4.19 4.23 4.45 4.56 4.68 4.83 5.51 5.63 5.77 6.01 6.10 6.57 6.88 7.23 7.89 8.57 8.57 9.03 9.08 9.68 9.89 9.93 10.47 11.18 11.29 11.38 11.43 11.80 13.87 14.26 15.03 17.28 17.30 17.93 18.34

Dec '05 IMF Ex Rate in Minutes 5.60 5.91 8.19 18.96 3.54 5.66 5.80 7.13 10.57 6.87 15.05 5.96 7.95 5.39 13.22 10.22 9.10 17.65 10.03 10.82

Closer to 5.4 Minute Parity Minutes -1.52 -1.52 -1.20 12.37 0.65 -0.83 -0.61 1.01 4.73 0.43 9.54 0.33 2.18 0.66 7.12 3.65 2.22 10.42 2.14 2.26 2.34 2.74 -3.46 -0.47 9.55 1.96 0.31 0.00 0.17 8.49 10.40 2.96 7.45 28.54 9.91

11.37
11.82 6.22 9.46 20.03 13.25 11.69 11.43 14.04 22.75 25.43 20.24 24.75 46.47 28.25

IMF Currency Exchange Rates and Gross Domestic Products per Hour of Work for 99 Countries Circa 2007 (cont.)

Source: International Financial Statistics Country Kyrgyz Rep. Morocco Bolivia Azerbaijan Ukraine Solomon Is. Philippines Georgia Indonesia China: P.R. Paraguay Honduras Sri Lanka Pakistan Nicaragua Moldova Zimbabwe Cambodia Bangladesh

Apr-08 Currency Soms Dirhams Bolivianos Manat Hryvnias Dollars Pesos Lari Rupiah Yuan Guaranies Lempiras Rupees Rupees Cordobas Lei Dollars Riels Taka

Latest Year 2006 2006 2006 2006 2006 2002 2007 2006 2007 2007 2006 2006 2006 2007 2005 2006 2005 2006 2005

IMF Ex. Rate (line ae) $US 35.499 8.457 7.98 0.8714 5.05 7.4571 41.401 1.7135 9419 7.3046 5190 18.8952 107.706 61.221 17.15 12.905 80.774 4057 66.21

GDP (line 99b) Billions 113.18 503.89 89.428 17.736 537.7 1.848 6651.3 13.784 3957404 24661.9 52020.4 175.74 2801.828 8706.92 82.1618 44.069 129.533 29849 3684.8

Employed (line 67e) Millions 0.506 9.954 2.118 3.85 21.561 0.051 33.564 1.745 91.647 752 2.351 2.439 7.104 47.57 1.766 1.316 1.071 5.3 44.32

GDP Per Hour Currency 111.83 25.31 21.11 2.30 12.47 18.12 99.08 3.95 21590.47 16.40 11063.46 36.03 197.20 91.52 23.26 16.74 60.47 2815.94 41.57

IMF Ex. Rate in Minutes 19.05 20.05 22.68 22.70 24.30 24.70 25.07 26.03 26.18 26.73 28.15 31.47 32.77 40.14 44.24 46.24 80.14 86.44 95.56

Dec '05 IMF Ex Rate in Minutes 26.49 21.83 33.50 52.89 49.93 18.88 44.23 61.85 52.77 67.88 44.46 41.56 45.52 62.05 51.25 77.94 26.15 141.48
Total gain

Closer to 5.4 Minute Parity Minutes 7.45 1.78 10.82 30.19 25.63 -5.82 19.16 35.82 26.59 41.15 16.31 10.10 12.75 21.91 7.01 31.70 -53.99 45.92 394.57

The Euro Area also included.