Honest Money
What It Is and What It Isn't

Money Part III - Savings and Credit

Douglas V. Gnazzo
March 31, 2006

Savings

With the continued growth of commerce and the division of labor, the economy oscillates between supply and demand, buyers and sellers, producers and consumers.

When through the course of wise and prudent commerce, man produces more than he consumes, an individual will begin to accumulate their excess production - the fruits of their labors.

The same holds true for the group, society, nation, and world. This is commonly called savings or the accumulation of wealth.

A saver of money over time knows the importance of the quality of his money versus the quantity of it.

The prudent man saves his money for the future, for his later years in life, when he will not be able to work as hard to earn the money needed to pay for life's necessities, when his income will be less.

In the later years of life, man uses his saved money or accumulated wealth to turn back into income, to obtain the necessities of life: food, clothing, shelter, and healthcare.

The more the saver's money has retained its quality or purchasing power, the wealthier, and better off he will be. He will be able to procure by exchange more of the things he needs to maintain his survival and standard of living with.

This is why savings is so important. This is why the quality of money is so important, although there are other reasons as well. For now, these will suffice.

Credit

Once society chooses a common medium of exchange, commerce increases to the point that people want to borrow or lend the common medium of exchange, money, to further increase their ability to trade goods and expand commerce.

The quality theory of money emphasizes the functions of money as a standard of value through time, and as a store of value over time.

A lender of money or credit wants to be repaid with money that will be worth, as much in the future as it was when he lent it in the present, which soon becomes the past.

If a lender of money does not have faith that the money he lends will retain its value or purchasing power in the future, he will charge extra to loan the money out, to make up for the perceived or expected loss of future purchasing power of the money.

He will have a greater interest in being made whole, and will charge accordingly. The interest rate cost of borrowing money increases to make up for the perceived future risk of loss of purchasing power. Risk versus reward is of the essence.

Time Preference

With the advent of credit, man takes a leap into the future. What had originally begun as direct exchange in the present now became indirect exchange, not only in the present, but in the future as well. This involves present goods and future goods.

Money involves time preference - the present and the future, as man's life involves the present and the continuance of the present into the future as survival or living.

Money is the standard of value that according to the consensus of society is most likely to continue to exchange in the future, at the present ratio or value. In other words, money is a standard of value through and over time.

The word credit comes from the root credere, which means to believe in or to have faith...

... Read the full report on Doug's new website.

-Douglas V. Gnazzo
email: Douglas V, Gnazzo
website: HonestMoneyReport

Honest Money: What it is and what it isn't
Part I : Part II : Part III : Part IV : Part VI : Part V : Part VII : Part VIII

Douglas V. Gnazzo is CEO of New England Renovation LLC, a historical restoration contractor that specializes in restoring older buildings that are vintage historic landmarks. He writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME).

©2006 Douglas V. Gnazzo. All Rights Reserved.

321gold Inc