Representational Monetary Identity

Whenever debt is itself money, this money becomes a self-inflating debt principal by already being its own interest. Hence modern inflation, deflation, and eventual monetary crises. Yet why does money become debt? The concept of representational monetary identity answers to precisely this question. Such an answer depends on:

  • A new theory of commodity exchange

  • A new concept of money

  • A new theory of exchange value

  • A new concept of monetary value

  • A new theory of monetary representation

The underlying investigation begins by analyzing the process of banks loaning a fraction from their clients’ account balances to other clients than its original depositors while keeping the remainder as reserves—fractional-reserve banking.

Fractional-Reserve Banking

For example, if a commercial bank receives a new deposit of $10,000.00, then 10% of this new deposit becomes the bank’s reserves for loaning up to $9,000.00 (the 90% in excess of reserves), with interest. Likewise, if a loan of that maximum fraction of $9,000.00 does occur and the borrower also deposits it into a bank—regardless of whether in the same bank or not—then again 10% of it becomes the latter bank’s reserves for loaning now up to $8,100.00 (the 90% now in excess reserves), always with interest. This could proceed indefinitely, adding $90,000.00 to the money supply, valuable only as their borrowers’ resulting debt: after endless loans of recursively smaller 90% fractions from the original deposit of $10,000.00, that same deposit would have eventually become the 10% reserves for itself as a total of $100,000.00.

Let us further examine what is happening here. First, we have a deposit. Then, we have a loan of up to a fraction (of 90%) of this deposit. Finally, the borrower can deposit the borrowed money into another bank account, in the same bank or not. Suddenly, the trillion dollar question emerges: is the borrowed money in these two bank accounts the same?

  • On the one hand, the answer is yes: all borrowed money came from the original deposit—so it is that same original money.

  • On the other hand, the answer is no: all money deposited into the borrower’s account possibly stays in the original depositor’s account—so it is not that same original money.

How can that be?

Representational Monetary Identity

If we conceptually distinguish money from its representation, then we can clearly see what is happening in that ambiguous loaning from bank deposits: commercial banks are mistaking bank accounts for the money they represent. This way, when they deposit a loan from any account into any other, they must mistake the same loan for both accounts, hence duplicating its money, rather than subtracting it from the source account. That confusion between monetary identity (deposit money) and its representation (bank accounts) is thus what alone replicates loaned money: two deposits in different accounts must always be different money, even if one is just a loan of money from the other.

The same confusion affects a variety of monetary representations, like paper notes and metal coins. Even when sheer gold represents money, there is no inherent distinction between monetary identity and its representation. Any such inherent indistinction (confusion) is precisely what I call representational monetary identity.