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Home » Glossary

Glossary

Submitted by on June 26, 2010 – 8:22 amNo Comment

Source: Canva (c)This is a glossary of terms and concepts frequently used in discussions of monetary systems or in my work.   If you do not find a word / concept that seems important to include here, please bring it to my attention.

Backed Currency

A currency whose value is guaranteed by a direct correspondence with a product or service (e.g. the gold standard for 19th century U.S. dollars, barter).   There are only 3 ways of designing a currency system:
  • fiat (i.e. without reference to anything else);
  • valued by a commodity, when its value is expressed of terms of the value of that commodity (whether or not it is redeemable in that commodity–e.g.: Bretton Woods dollar-gold equivalence standard; airline miles); or
  • backed by a commodity when the currency is in fact a claim to a given quantity of that commodity (which typically requires having a stock of that commodity on hand to meet such requests).

Barter—the direct exchange of goods or services un-mediated by any type of currency.

Booms and Busts—a recurrent cycle of growth, bust, recession, and recovery in the economic activity of a capitalist country. There have been 47 major asset boom/bust cycles since 1637, the last two being the Japanese real-estate bubble, and the U.S. high-tech stock market bubble that crashed respectively in 1990 and 2000. For an explanation of the mechanism behind boom/bust cycles and their relationship to money systems, see B. Lietaer, Mysterium Geld (Munich: Riemann Verlag, 2000), Chapter 5.

Bretton Woods Agreement—the major world powers met in Bretton Woods, New Hampshire in 1944 to organize an international monetary system that would alleviate foreign-exchange problems created by World War II. The result was the Bretton Woods Agreement, the first global monetary constitution. The World Bank and International Monetary Fund (IMF) were established there. The participating nations agreed to tie the values of their currencies to the value of the U.S. dollar.

Business Cycle—a term used in economics to designate cyclical changes in the economy. Ever since the Industrial Revolution, the level of business activity in industrialized countries has veered from high to low and back up again. The timing of a cycle is not predictable, but its phases seem to be. Many economists cite four phases: prosperity, liquidation, recession or depression, and recovery; using the terms originally developed by the American economist Wesley Mitchell.

Capital—in its narrow financial sense, capital is a sum of money from which an income can be derived. The two most traditional means for such income is interest (in the case of loans) and dividends (in the case of stocks). In broader terms, capital is a resource that enhances life, of which several types can be distinguished: financial capital, physical capital (e.g., plants, equipment), intellectual capital (e.g., patents, copyrights), social capital (e.g., relationships) and natural capital (Mother Nature).

Central Bank—a financial institution whose function is to regulate state fiscal and monetary activities.  It is responsible, amongst other things, for the issue of bills and for controlling the flow of a national currency.   Some Central Banks (e.g. The U.S. Federal Reserve Bank and the Deutsche Bundesbank) are owned by private banks; some are owned by the government (e.g.: Banque de France, the People’s Bank of China, and the Bank of England since its nationalization in the 1950s); some are mixed (e.g.: the Belgian Central Bank and the Bank of Japan).  All Central Banks are responsible for the internal stability (i.e. inflation-fighting) and external stability (i.e. value compared to other national currencies) of their national currency. They have a variety of means at their disposal to achieve these aims, including intervention (buying or selling the national currency in the market in exchange for other national currencies); interest-rate fixing; or fixing reserve requirements for the private banks. All these techniques really boil down to fixing the maximum quantity of fiat currency that the private banks will be capable of issuing and at what cost.

Chaordic—a term coined by Dee Hock, founder of Visa. It comprises a combination of chaos and order: a natural characteristic of living systems that produces synergy, growth and change.

Clearing House—a central collection place where institutions and individuals exchange checks, drafts and currencies. Participants maintain an account with the Clearing House against which credits or debits are posted.

Commodity-Backed Currency—a currency whose value is guaranteed by the physical availability of the commodity that backs the currency. The owner of a backed currency can normally ask for delivery of the physical good or service in exchange for the currency. Backed currency is typically issued by whoever owns the product or service accepted as backing (e.g., the 19th century gold standard backed by gold).

Complementary Currency—an agreement within a community to create its own currency to link unmet needs with unused resources. These currencies do not replace but rather supplement (i.e., complement) the national monetary system and provide greater functionality to money.

Countertrade—barter at the corporate, multinational level.

Currency—synonymous with money, but emphasizing the medium of exchange function of money.

Currency Crisis—a dramatic and sudden change of value of a country’s currency relative to other currencies, typically accompanied by a swift increase of the flow of capital in or out of the country.

Demurrage Charge—a time-related charge on money. It acts in a manner similar to a rental fee, which increases the longer it is held onto. For example, a 5% annual demurrage charge on $100 incurs a $5 fee, leaving a remainder of $95. The demurrage feature wields two profound effects, namely: It promotes a currency’s circulation as a trading device; and it encourages long-term thinking.

Deregulation—dismantling of legal and governmental restrictions on the operation of certain businesses. When governments want to encourage competition and make economies more productive, they often deregulate, removing restrictions on companies’ behavior.

Derivatives—a financial instrument that enables the segmentation of different types of risk. The main derivatives types are futures (contracted in a regulated exchange), forwards (contracted in the unregulated “over the counter” market) and options. Exotic derivatives are complex combinations of simpler derivatives (e.g., forwards and options).

Development Banks—multilateral banks that lend money toward or invest in the economic development* of countries. The World Bank* (officially called the International Bank for Reconstruction and Development) and regional banks such as the European Bank for Reconstruction and Development (EBRD), and the Asian Development Bank (ADB) are such institutions.

Discounted Cash Flow—calculates the value of a future cash flow in terms of an equivalent value today. For instance, $100 a year from now is equivalent to $90.91 today if one uses a discount rate of 10% (conversely, a one-year, risk-free investment of $90.91 at a rate of 10% will yield $100).

Dollar-Gold Equivalence Standard—a guarantee of the convertibility of U.S. dollars into gold on demand. This was established at the fixed rate of $35 per ounce by the Bretton Woods Agreement (1944),* but abandoned by the Nixon administration (1971).

Economic Development—the promotion of more intensive and more advanced economic activity through education, improved tools and techniques, increased financing, better transportation facilities, and creation of new businesses.

Elderplan—a New York-based health insurance company that accepts part of its premiums for elders in Time Dollars, a mutual credit complementary currency. Web site: www.elderplan.org

Emerging Markets—nations whose economies are transitioning or have recently transitioned from heavy state control to economic policies that are more market-oriented.

Equanomics—an expansion of conventional economic theory to encompass all relevant criteria in the assessment and realization of a more functional and integrated science concerned with the production and distribution of wealth. It formally takes into account what conventional economics considers as “externalities,” e.g., social, ecological, psychological or political effects of economic policies.

Euro—the European supra-national monetary unit, implemented on Jan 1, 2002. It officially replaced the national currencies of twelve member states of the European Union, namely: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal and Finland.

Exchange Rates—the value of currencies worldwide is provided by exchange rates that determine what each currency is worth in terms of other currencies. Just like any other commodity, a currency is now worth whatever people will pay for it. A Norwegian krone, for example, is worth a given amount of euros, dollars or yen.

Favelas—Brazilian Portuguese for slums; a collection of impoverished dwellings made from discarded materials like cardboard boxes, scrap metal, wood and plastics.

Fiat Money—money that is created by the power of an authority. Fiat Lux (“Let light be”) were the first words that God pronounced, according to Genesis. Fiat money is money created out of nothing (“ex nihilo”) by the power of the word of an authority and is not backed by goods or services. All national currencies today are fiat currencies.

Financial Deregulation—the reduction of government’s role in controlling financial markets; relying on market forces to function without governmental intervention.

Fixed Exchange Rate—rate fixed by an authority at which one currency can be exchanged against another.

Floating Exchanges—the flexible exchange rate system in which the exchange rate is determined by the market forces of supply and demand without governmental intervention.

Gift Economy—economy in which the exchange of gifts plays the key social role. Anthropological research has shown a direct relationship between gift exchanges and community building. The Latin origin of the word community itself shows this connection: cum (together, among each other); and munere (to give); hence community, “to give among each other.”

Globalization—integration of the world’s culture, economy, and infrastructure, driven by the lowering of political barriers to transnational trade and investment, and by the rapid proliferation of communication and information technologies. The term is often used in reference to the substantial impact of free-market forces on local, regional and national economies.

Gold Standard—in economics, the monetary system wherein all forms of legal tender may be converted on demand into fixed quantities of fine gold, as defined by law; having three principal aims: to facilitate the settlement of international commercial and financial transactions; to establish stability in foreign exchange rates; to maintain domestic monetary stability.

Gross Domestic Product (GDP)—the total value of all goods and services produced within a country in a year, minus the net income from investments in other countries.

Gross National Product (GNP)—the total annual flow of goods and services in monetary value in the economy of a nation. The GNP is normally measured by totaling all personal spending, government spending, and investment spending by a nation’s industry. GNP can also be calculated by the earnings and cost approach of accounting, in which all forms of wages and income (e.g., corporate profits, net interest returns, rent, indirect business taxes, unincorporated income) are added together.

Hedge Funds—only remotely related to the practice of hedging, hedge funds borrow money to make speculative investments, usually in areas from which more conservative investors shy away.

Human Wealth—the assets and capital inherent in the spirit, creative genius and unbounded potential of the ever-evolving human species.

Inflation—depreciation over time of the value of a currency in terms of a reference basket of goods and services. An excess of fiat money* supply will tend to create inflation.

Interest—time-related income for the owner of a currency, or time-related cost for the borrower of a currency. Interest is one of the ingredients in the Discounted Cash Flow.

International Monetary Fund (IMF)—international organization, established at the Bretton Woods Conference in 1944, which aims to promote international monetary cooperation, currency stabilization and expansion of international trade. Based in Washington, D.C., with 183 member nations, the United States is the only country with veto power. Web site: www.imf.org

Legal Tender—a currency that is recognized as acceptable payment for all debts, public and private. A debt can be declared void if repayment in legal tender is refused.

LETS—acronym for Local Exchange Trading System. This is the most popular form of mutual credit* system in the world.

Loyalty Currency—a complementary currency aimed at encouraging commercial loyalty of customers to a particular company or group of companies.

Means of Payment vs. Medium of Exchange—“means of payment” is a function broader than, but including, the function of “medium of exchange”. Jonathan Williams showed that only in Western civilization has the entire focus of money been as a medium of exchange for commercial transactions. Most other civilizations used money for community-building, ritual purposes, as well as commercial exchanges.

Money—synonymous with currency or means of payment. A working definition is “an agreement within a community to use something as a medium of exchange.”

Multinational Corporation—a large company that operates or has investments in several different countries.

Mutual Credit—process of creating money by a simultaneous debit and credit between participants in the transaction. Examples of mutual credit systems include LETS and Time Dollars. The principle advantage of mutual credit systems is that they are self-regulated to always have currency available in sufficiency.

OECD—acronym for the Organization of Economic Cooperation and Development, based in Paris, France; an international organization helping governments of the “developed” or First World tackle the economic, social and governance challenges of a globalized economy. Web site: www.oecd.org

Payment system—procedure and infrastructure by which the transfer of a currency is executed from one entity (or person) to another.

Scarce—in insufficient quantity. In all national currencies, bank debt money keeps value only by its scarcity compared to its usefulness. The polarity of scarcity is not over-abundance, but sufficiency. For instance, in a mutual credit system* there is always sufficiency of money as participants create it among themselves as a debit and credit at the moment of a transaction.

Scrip—private currency initially issued in the form of a paper IOU by a corporation or individual. For example, frequent-flyer miles are evolving from a simple loyalty currency* to a corporate scrip issued by airlines.

Stock—a fraction of ownership in a business. Stock markets are the regulated exchanges for stocks of companies listed in a particular exchange.

Speciation—the evolutionary formation of new biological species, usually by the division of a single species into two or more genetically distinct ones.

Store of Value —  Money can be used as store of value, i.e. a way to accumulate value until one wants to use it. Historically, there have been many cases where money was *not* a store of value (e.g.: before the Industrial Age, the main storage of value was land, land improvements, and livestock; and today people store value in stocks in companies investing in assets that keep (or increase in) value over time, such as forests, etc.). There is a social cost in using currency as store of value, because when currency is stored it is unavailable for transactions by other people.  Demurrage is a way of encouraging people to use the currency not as a store of value but only as a medium of exchange.

Terra Trade Reference CurrencyTM (Terra TRC™)—a new, privately issued, complementary currency* designed to systematically stabilize the effects on the business cycle and re-align financial interests with long-term sustainability. This internet-based trade reference currency will be fully backed by a dozen or so of the most important commodities and services in international trade, thereby providing, for the first time since the gold-standard days, an international standard of value that is inflation-resistant. Its unit of account is the Terra TRC. It has a built-in circulation incentive via its demurrage* feature. As a complementary currency, it will work in parallel with national currencies.

Time Dollar—a mutual credit system with ‘hours of services’ as the unit of account.

Unit of Account —  One of the functions of money in many (but not all) money systems: the unit by which value is accounted and thus compared. For instance: if pears are at $3 per pound, while apples are at $2 per pound, the common unit, in this case the $, allows an easy comparison of the prices or values of the two items. Within an individual money system, the unit of account may or may not be relevant: WIR, for example, uses the Swiss Franc as unit of account, but WIR as means of payment; Time Dollars, by contrast, are both measured and exchanged as hours of service.

Usury—the practice of lending money and charging the borrower interest. Before the 19th century, any interest was considered usury; today one refers to usury typically when interest is at an exorbitant or illegally high rate.

World Bank (WB)—a specialized United Nations agency, established at the Bretton Woods Conference in 1944. The chief objectives of the bank, as stated in its articles of agreement, are “to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes [and] to promote private foreign investment by means of guarantees or participation in loans [and] to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital.” Web site: www.worldbank.org

World Trade Organization (WTO)—an international body that promotes and enforces the provisions of trade laws and regulations; established in 1994 to replace the General Agreement on Tariffs and Trade (GATT). Web site: www.wto.org

Yin-Yang—the Taoist concept of relationship between polarities.

Yang Currency; Yang Economy—a Yang currency is one whose issuance is based on hierarchy, encourages accumulation in the form of currency, and tends to generate competition among its participants. All conventional national currencies are Yang currencies, as they exhibit each one of these Yang features. The Yang economy tends to build financial capital.

Yin Currency; Yin Economy—a Yin currency is one whose issuance is based on egalitarianism, discourages accumulation, and encourages cooperation among its users.  Well-designed complementary currencies will tend to activate a cooperative “Yin economy.” The Yin economy tends to build social capital.