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How To Make Money:  Introduction

To understand how to make money we need to understand what money is. In Money we learned that money is value and requires real products and services. Currency quantifies money or value but for money to eixst value has to exist. Currency can be created but unless back by value it has no true value in that it cannot access goods and services that do nt exist.

This is obvious enough yet it so often happens that banks and governments create currency that has no value to back it up. Money is represented in the value contained in the currency used by a market. Unless the market controls the supply of money it cannot match the amount of money in circulation with the value created.

How To Make Money:  The Exchange Method

Exchanges are the only way to create real money. Real money is the quantification of value. Markets create value and value is measured by money.

At this point the discussion becomes somewhat metaphysical but it cannot be helped because if we are to understand money we have to understand its intrinsic link with value.

Because money is quantified value it is possible to barter chickens for pork and help with moving house with a short term loan. We exchange goods and services informally all the time and often engage in barter. We can do this because we all understand value and have an innate capacity to quantify value. To barter a chicken for pork we have to have some common denominator and this is money. Originally money was a product that was infinitely divisible into actual units of value. Gold is of course the epitome of a product that can be turned into currency matching money or with natural value.

A gold coin may then be worth one chicken or five pounds of pork which is another way of saying a chicken is worth five pounds of pork.

Gold is however, scarce and using it as a currency only contributes to its scarcity. So, eventually paper bills came into use. But the quantity of paper bills created is a function of the frequency with which the printing press is used and bears no direct relationship with the amount of economic activity taking place. Banks similarly produce credit without regard to wealth created, though because they have the desire to be paid back banks usually only lend money where the borrower has the means to generate sufficient wealth to repay the loan. Though this does not always occur especially when governments insure the banks against borrower defaults.

Exchanges create money in the same way that it creates value because money is pure money or pure value.

In an Exchange a person who buys a product or service creates a debit. If bank money was being used the buyer would owe the bank the cost of the purchase in the sense that every dollar used is dollar owed to the banking system. In an Exchange the money spent is owed to the market itself.

How To Make Money:  Scenario one

Bill and Sue are part of an Exchange. The market controls the money supply. Bill buys a dozen eggs from Sue for m5.00. m is used here as a symbol for money issued by the Exchange.

Bill may or may not have an actual note. He may or may not have an account with m5.00 in it. The important point to realize is that when Bill buys a dozen eggs from Sue the market creates m5.00 and gives this to Sue or more correctly creates it from the negative balance created by Bills purchase.

Another way of looking at it is that m5.00 of value is taken from Bill and transferred to Sue to balance the transfer of Sue's m5.00 worth of eggs.

Anyone can buy from or hire Bill. When Bill gets paid his debt to the market will be eliminated.

Money is made and unmade as values are transferred from one person to another.

Secuity issues or the issue of risk is dealt with elsewhere.

April 22, 2013