Tuesday, 8 May 2012



Money is the greatest economic invention of all time. Money did not exist and was not discovered. Money was invented over a long period of time.

Money is not perfectly stable in real value during inflation and deflation. However, all Historical Cost Accounting world–wide is done assuming it is stable in real value when the stable measuring unit assumption is implemented for the valuation of most – not all – constant real value non-monetary items during  inflation and deflation. It is assumed, in practice, that money is perfectly stable when balance sheet constant items and all income statement items (excluding constant items like salaries, wages, rentals, etc., which are measured in units of constant purchasing power on an annual basis, but paid monthly implementing the stable measuring unit assumption) are valued in nominal monetary units when financial capital maintenance in nominal monetary units (HCA) is implemented during inflation and deflation as authorized in IFRS in the original Framework (1989), Par 104 (a).

Money is not the same as constant real value during inflation and deflation. Money would only have a constant real value over time during permanently sustainable zero annual inflation which has never been achieved in the past and is not likely soon to be achieved in the future.

The real values of monetary items (excluding bank notes and coins) would remain constant over time when the total money supply within an economy is inflation-indexed on a daily basis in terms of a Daily CPI or a monetized daily indexed unit of account with complete co-ordination. Chile (2011) inflation-adjusts 20 to 25 per cent of its broad M3 money supply on a daily basis in terms of the Unidad de Fomento which is a monetized daily indexed unit of account in use since 1967. Many countries issue capital inflation-indexed government bonds inflation-adjusted on a daily basis which protect investors against the erosion of the real value of their capital during inflation.

There would be no net monetary losses or gains and also no cost of inflation with complete daily inflation-adjustment of the total money supply with complete co-ordination. There would still be inflation, but it would have no effect in the economy.

Bank notes and coins are physical tokens of money. Unstable money is an unstable monetary item which is used as an unstable monetary medium of exchange. It serves at the same time as an unstable monetary store of value and as the unstable monetary unit of account for the accounting of economic activity in a country or a monetary union. All three basic economic items – monetary, variable and constant items – are valued in terms of unstable money within an economy.

An earlier form of money was commodity money, e.g., gold, silver and copper coins which had substantial real intrinsic value. Today unstable money is fiat money with an insignificant physical intrinsic value created by government fiat or decree.

Unstable money is an unstable medium of exchange which is its main function. Without that function it could never be money. The historical development of unstable money led it also to be used as an unstable store of value and as the unstable unit of measure to account the values of economic items.

Unstable money is the only generally accepted unit of measure that is not a stable value under all circumstances. All other units of measure are fundamentally stable units of measure, e.g., inch, centimetre, ounce, gram, kilogram, pound, etc.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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