Money: a means of recording entitlements and obligations.

In the South Pacific islands, people in the traditional economy continue to trade without the use of money.   These people grow vegetables and fruit, produce mats and other crafts, breed chickens and pigs and catch fish.  They trade by giving these products away.  These are not acts of charity.  They give their produce to people from whom they could expect to obtain gifts in return.

So, if a fisherman were to give a farmer fish, the farmer is expected, at a later date, to give the fisherman some vegetables or something else that the fisherman may value. 

If the farmer responds with a “gift” of vegetables of equivalent value, the farmer would have settled his obligation.  If he wanted more fish and wanted to be given priority, he would give vegetables of greater value than the fish he received.  In that way, the fisherman would be obliged to give him more fish. 

These trades are not barter.  They are a complex system of placing obligations on each other.  When the fisherman gave the fish, he put the farmer under an obligation to respond.  The fisherman would have felt entitled to some reciprocal gift from the farmer. 

If the farmer does not reciprocate within a reasonable time, the fisherman may name what he wants in return.  For example, he may say, “I noticed you had a small bunch of bananas at the back of you land.  Do you mind if I have it?”  The farmer would have to grant the request, unless he can immediately come up with something that the fisherman values more and he values less.  For example, if he has too many ripe bananas for his needs, he may say, “You don’t want those.  They are green and diseased.  I have a few hands of good ripe bananas here.  Take these.”  So the trade is completed.  The fisherman would no longer have an entitlement from the farmer and the farmer would no longer feel obliged to the fisherman.

But what if the farmer spoke first and said, “Did you know those fish you gave me were bad? When we went to clean them, they stank and we had to dig a hole down the back to bury them.”  In this case, the farmer is saying that he is not under any obligation. 

The fisherman would be entitled to the bananas only if the farmer felt obliged following the gift of the fish.  This concept of entitlement and obligation is central to the trade without money.  It is also central to the concept of money.

In the above example, the parties involved in the trade kept a mental record of their entitlements and obligations.  Money is a system for recording in a more secure way, our entitlements and obligations. 

Let us revisit the trade between the fisherman and the farmer.  This time let us assume that the farmer writes an IOU for 5 kilo of potatoes in exchange for the fish.  The fisherman now has a written statement of his entitlement.  The farmer also has a written statement of his obligation. 

The IOU allows the fisherman to transfer or negotiate his entitlement.  For example, he may transfer his IOU in exchange for rope.  The rope maker accepts the IOU knowing that the farmer will honour his obligation.  If the rope maker did not trust the farmer to honour his IOU, he would not accept it.  The IOU is valuable only if the farmer will honour his obligation.  Without the obligation, the IOU is worthless.

Money is negotiable like this IOU.  It grants entitlements like the IOU.  It is valuable because it is linked to an obligation.  If there is no obligation, then money is worthless (unless it has intrinsic value such as being made of gold or silver).  Thus, if a banks loan's were to go bad, then the deposits, or money, with that bank could be worthless.  The money is only as good as the asset backing it.