The Algorithm of Economy　The Algorithm of Money

What is “Money”

When we think of “money,” we might imagine bundles of cash, large coins, or gold coins. However, the essence of “money” is labor. Since the advent of representative money, “money” has lost its use value and attributes as a physical object. Now, it is merely information, signals within a computer. The essence of “money” is numerical information.

Economic data is a shadow of economic activities projected into the monetary space. “Money” is a shadow. The reality of the economy lies elsewhere. A shadow is a shadow; without substance, a shadow cannot exist. We must not forget that “money” is a fiction and a negative force.

We have become accustomed to thinking of economic value in terms of “money.” We tend to accept that economic value is equivalent to monetary value. However, economic value and monetary value are not inherently the same, and “money” itself does not have intrinsic value. “Money” does not exist independently; it requires some substance to back its value. Moreover, “money” must be recognized as “money” by people to function. Therefore, it takes considerable time and effort for monetary value to be generally accepted.

Firstly, for a 10,000 yen bill to have value, both the issuer and the recipient must recognize its value. Next, what can be exchanged for 10,000 yen? In other words, what can be bought with 10,000 yen is the issue. The value of what can be bought with 10,000 yen is not constant. In short, a 10,000 yen bill represents an exchange value of 10,000 yen, but the value of 10,000 yen is determined when it is exchanged for some goods. “Money” only confirms its value when it is used. What “money” represents is the act of exchange.

The modern economic system is driven by “money.” When we talk about “money” today, we mainly refer to representative money, namely paper money. Therefore, when we say “money” today, we are referring to representative money.

“Money” originally stems from barter. Barter means the exchange of goods for goods. One of the goods in barter became specialized in exchange value, leading to monetization. Therefore, “money” initially had attributes as a physical object. These attributes include portability, storability, countability, and having a shape (tangible). Additionally, it must have some value. Portability, meaning the ability to move, creates liquidity. (There are currencies like stone money with poor portability, but this represents another aspect of symbolic money. Even without portability, the transfer of ownership is clear. By clarifying the transfer of ownership, it has the same effect as portability. The important aspect of “money” is the ability to transfer its function. In the case of stone money, the transfer of ownership must be possible.) “Money” is established by ownership. Without the concept of ownership, “money” cannot function. By establishing ownership, “money” becomes transferable.

“Money” originates from barter but was not intended for barter. Barter is the result. When a specific good became specialized in exchange value, it became monetized. Once monetized, “money” acquires its unique function. The unique function of “money” lies in exchange, namely buying and selling. And buying and selling become rights. By the function of “money” becoming rights, lending and borrowing are established. The root of the function of money lies in rights, specifically the right to exchange. The function of “money” is exercised through buying, selling, lending, and borrowing.

Buying and selling, namely the act of exchange, form a flow, while the function of rights formed by lending and borrowing constitutes stock. Stock prepares for payment. In the process of specializing the function of exchange, the attributes required for “money” as a physical object are homogeneity, equivalence, uniformity, countability, universality, immutability, and social acceptance.

For “money” to function as “money,” namely to represent the standard of exchange value, it must be equivalent, homogeneous, uniform, and countable. The value of “money” (as a measure of monetary value) must be universal. As a physical object, it must be immutable (not subject to decay or rust). And it must be socially accepted (trusted).

As “money” becomes rights, the attributes of “money” as a physical object gradually fade. The function of “money” shifts from physical to representative. In recent years, “money” has further evolved, becoming information and intangible.

As “money” becomes representative, names and realities arise, and their functions differentiate. The name represents numbers, and the reality represents the value of goods. Value involves evaluation. Evaluation becomes an objective reality through standards and trust. Without social trust, “money” does not function. Therefore, the standards and trust of “money” are based on agreement and contract. Agreement and contract are guaranteed by secular authority.

As something worthy of evaluation, rarity and homogeneity are essential. These form the characteristics of equivalence and anonymity of “money.” At this stage, “money” is a physical object.

The essence of the function of “money” is to mediate barter. In other words, the essence of “money” lies in the functions of exchange, evaluation, and quantification. The function of exchange forms exchange value. Exchange value is relative value, and “money” is a means of forming relative value. The value of “money” is not absolute.

The function of “money” is mediation. In other words, “money” functions through the relationship between goods and goods, and between people and goods. “Money” is a substitute. “Money” itself has no use value. “Money” circulates without being consumed. “Money” does not function independently. It requires the existence of people who need the goods indicated by “money” and recognize their necessity (value). In other words, “money” is based on the relationship between people and goods.

The anonymity of “money” purifies exchange value and is the result of “money” specializing in exchange value. Conversely, the anonymity of “money” guarantees its exchange value.

Through the function of exchange, “money” constantly seeks balance and fluctuates. The function of “money” lies in the balance of value. Its root is in the relationship between people and the actions of necessity and exchange, from which the function of balance derives.

Since the basic function of “money” is exchange, “money” exerts its utility by flowing. When “money” stops flowing, it loses its utility.

Quantification unifies value into numerical value. The unification of value promotes the unification of the monetary system. The monetary system of a single currency area is integrated into one system. Monetary value seeks one price for one item. Although monetary value seeks one price for one item, it is not based on one price for one item. This is because monetary value is a relative standard for measuring economic value and changes depending on the situation and purpose. A typical example is land prices. Land prices change depending on the purpose.

The unification of value is due to the trust in monetary value. Without a single measure, mutual comparison and contrast cannot be established. Therefore, trade between different currency areas requires exchange.

By being quantified, economic value becomes computable. Also, by being numerically quantified, value becomes subdivided. By being subdivided, the evaluation and value of the target are linked one-to-one. The value of the target becomes individualized. Each target acquires its unique value. This is the individualization of value.

Money means “money.” In other words, “money” consists of the value of gold and the function of coins. This differentiates into gold coins and silver coins, representing high value, and the function of counting value, namely, the function of quantifying value.

When “money” circulates to some extent, paper money is born from the function of “money.” The prototype of paper money is documents such as IOUs and receipts. Therefore, paper money is endowed with the characteristics of documents, namely the concepts of trust and contract.

We must not forget that paper money also has the nature of debt. Because it has the nature of debt, it exerts its utility in pairs with assets, which are positive values. “Money” does not exist independently. It exerts its utility in pairs with the target indicated by “money.” “Money” is undeveloped debt. And undeveloped claims become assets. Assets and property are different. Undeveloped claims are assets, and property is something that has value in itself.

Initially, the issuance of paper money was not unified. Authorized financial institutions and public institutions issued it at their own responsibility. As a result, they could not control the circulation volume, often causing inflation. The unification of money was considered essential for controlling the economy during the process of establishing modern marketism.

As “money” permeates every corner, the function of distribution begins to work. The function of distribution is based on the tax system. This is because the tax system is based on measuring all economic values in society. Therefore, to aim for fair taxation, it is necessary to measure all economic values domestically. From there, the function of quantifying, measuring, and distributing all economic values is required of “money.” Distribution is an important factor in total volume and ownership.

“Money” is a shadow. “Money” does not have an economic substance. “Money” is a shadow of the economic substance of the object projected into the monetary space. It is a mapping. The economic substance lies elsewhere. The economic substance is on the side of people and goods. The economy is a function of “money,” goods, and time.

The character and role of “money” are thought to have been formed through the above process. From the function of mediating barter, the roles of accounting and measurement are derived. Accounting means making things countable. In other words, it abstracts the concept of numbers from the object. The premise for this requires homogeneity and equivalence. Homogeneity and equivalence are also principles of monetary units. How to maintain the homogeneity and equivalence of monetary units, that is, the quality control and homogenization of “money,” is an essential condition for maintaining the monetary system. For example, actions such as replacing the object to be counted with pebbles or wrapping a rope around a tree to mark it. It is said that numbers were born before letters. What is noteworthy is that the reason numbers were born lies in the economy. Numbers before “money” built the foundation of the economy. And numbers are the true nature of “money.” From this, it can be understood that the role of “money” is the quantification and visualization of value. From here, the attributes of recording and storing are granted. And because the function of “money” is based on the attribute of being countable, “money” becomes natural numbers and discrete numbers. Because it is a natural number, the calculation becomes a remainder calculation, and it becomes a balance principle. And because it is based on the balance, the method of additive subtraction is adopted. This forms the basis of the accounting system and double-entry bookkeeping. Because “money” is recorded, stored, and accumulated, it becomes numerical information. Numerical information comes to have value and function. By being stored and recorded, the functions of claims and debts are established. Initially, it had the attributes of a physical object, and economic value was objectified as an objective reality. By being objectified, economic value became visible and unified. Quantification gives value operability and objectivity. Economic value was objectified by “money” and became operable. Even now, when the attributes of a physical object have been lost, this character has not been lost. Rather, it can be said that it has become more prominent by being purified into the function of exchange. Goods are consumed, but “money,” as a means of exchange, is not consumed. Furthermore, “money” is divided into units by a certain number of collections. A certain number of collections form a system and constitute digits. When numbers are systematized, numbers are linked to the system. The system systematizes people and goods. By linking the unit of “money” to the system of numbers, it becomes the prototype of the monetary system. The monetary system becomes the foundation of the tax system. By linking with the tax system, “money” is guaranteed by power. At the same time, by linking with power, the value of “money” is enforced. A document consists of two elements: the object indicated by the document and the value recorded in the document. These two elements become the basis of claims and debts. Claims and debts are said to have the same monetary value on the books in double-entry bookkeeping. Although they are said to have the same value, claims represent the value of the object, and debts represent the value recorded in the document. What “money” reflects is a shadow. The substance is elsewhere. Debt is a shadow. The substance is a claim. Debt is a shadow of the claim. The financial statement is like a recorded image, and the substance is elsewhere. When a manager looks at the financial statement, it is like an actor watching a movie in a theater. Debt is a shadow. Although the substance can be inferred from the shadow, the shadow and the substance cannot be replaced. In other words, representative money consists of two functions: the object indicated by the money and the value represented by the money. By differentiating the two functions, claims and debts are established. The function as a physical object is a claim, and the display and recording as “money” constitute debt. Claims represent operated goods, and debts represent procured and prepared “money.” Claims and debts each undergo unique changes over time. This creates time value. Monetary value is established by combining the value as a physical object and the value as “money.” This is derived from the relationship between objects and numbers. The value of objects forms substantial value, and the value of “money” constitutes nominal value.

In the current economy, the movement of “money” holds the key.

To control the current economic system, it is necessary to understand the monetary economic system driven by “money.” To understand the monetary economic system, it is necessary to clarify the algorithm of “money” generation.

Today, “money” is produced through procedures. “Money” is a product of procedures. “Money” arises from the materialization of procedures.

“Money” is supplied by the expenditure of the issuing bank. Since the issuing bank is not allowed to engage in buying and selling transactions, expenditure is executed through loans to financial institutions.

“Money” circulates in the market through transactions and exerts its effect. External transactions are based on the premise of equivalent exchange, and profits arise from internal transactions. Generally, when we talk about transactions, we focus only on the movement of “money” and overlook the flow of goods. Therefore, the bidirectional function is often not recognized.

The value of “money” lies in exchange. In other words, the utility of “money” is measured by how much goods it can be exchanged for. Originally, one considers how much “money” to earn based on what one wants and what kind of life one wants to lead. It is not that one thinks about how to use “money” after having it. If there is nothing to eat, one thinks about earning “money” anyway. That is the economy.

“Money” and Mathematics

When considering the relationship between “money” and mathematics, the first thing to focus on is how “money” arises, what functions it performs, and what characteristics it possesses. Firstly, the function of “money” has developed from the act of counting. In other words, the function of “money” is abstracted from numbers. Therefore, the characteristics of numbers directly define the characteristics of “money.” Numbers have the function of classifying and unifying objects. Another point is that monetary value is composed of the collection of people, goods, and “money.” “Money” is symbolized by numbers, and numbers can be natural numbers, integers, real numbers, discrete numbers, or continuous numbers. So, what kind of number is “money”? That is the question.

Lord Bertrand Russell once said, “It took humanity an infinite amount of time to realize that the two of two pheasants and the two of two days are the same two.” The essential function of “money” is to enable the calculation of heterogeneous values, such as the value of pheasants and the value of days, in the same dimension. This function of “money” unifies economic value.

Numbers have several functions: firstly, the function of counting; secondly, the function of abstraction; thirdly, the function of measurement; fourthly, the function of classification, typification, and grouping; fifthly, the function of unifying value; sixthly, the function of comparison; seventhly, the function of mapping; and eighthly, the function of calculation.

“Money” strips away all attributes of the object and unifies them into numerical values. By unifying into numerical values, it becomes possible to add, subtract, multiply, and divide heterogeneous things.

The key function of “money” is to link objects and numbers one-to-one, classify objects based on specific characteristics, quantify them, unify their value, count them, measure their value, and exchange them.

“Money” has the function of ordering objects and comparing them. “Money” has the function of quantifying the quality of objects, making it possible to measure the economic density of objects. Economic value has quality, quantity, and density.

“Money” is a natural number and a discrete number. Goods are real numbers and continuous quantities. People, like “money,” are discrete numbers.

Furthermore, monetary value is composed of the collection of people, goods, and “money.” The collection of people and goods is a finite set, while “money” is an infinite set.

The calculation of “money,” which is a natural number and a discrete number, is a remainder calculation and follows the balance principle. Additionally, subtraction uses additive subtraction. “Money” has the attributes of a physical object, but its essence is its function as a number.

The essence of “money” is its function, so “money” alone does not exert utility. The utility of “money” is expressed as a product with the object.

People, goods, and “money” follow the principle of a one-to-one relationship.

People, goods, and “money” each play important roles in unit groups, object groups, and exchange groups. The unit group of the entire economy is based on the collection of people.

Taxes, Land, War, National Debt, and Religion

When considering the origin of “money,” the key factors are taxes, land, war, national debt, and religion.

As society expanded, productive activities and non-productive activities separated, forming power and creating taxes.

It is the non-productive class that needs taxes. They need taxes because they do not produce anything themselves and require power. Originally, taxes had the dual nature of expropriating harvests and redistributing wealth. Taxes symbolize power and embody the function of the state. If the nature of expropriation becomes stronger, it becomes authoritarian, and if the tendency of redistribution becomes stronger, it becomes more communal. In the process of collecting taxes universally, monetary taxes and tax money were born. Taxes are also the basis and motivation for creating a nation.

Taxes are imposed on the production, distribution, and consumption of income. In the production phase of income, property taxes are imposed; in the distribution phase of income, income taxes (individual and corporate) are imposed; and in the expenditure phase, expenditure taxes are imposed (Jun Daita, “The Expansion and Collapse of Japanese Government Bonds,” Bunshindo).

War is an economy. War expenses are extraordinary expenditures. They are different from peacetime expenditures and can sometimes exceed the total production of the country. These expenditures are non-productive and become a long-term financial burden for the country. The necessity of national debt is often due to war. War requires enormous funds, and national debt and taxes were used to obtain those funds. War is an enormous extraordinary expenditure. War is financed by taxes and national debt, sometimes leading to financial collapse and preparing for revolution. And it became the cause of creating “money.” Before the rules of trade were established, plundering, looting, usurpation, and invasion were also part of the economy. The world was lawless, only protected by treaties, which were often unilaterally broken in times of war. The economy of peacetime and wartime are different but fundamentally connected. Therefore, it is necessary to clearly distinguish between peacetime and wartime and clarify the continuity between them. War is an economy. War disrupts the economy and creates a new economy.

Both taxes and war are non-productive activities. Because they are non-productive activities, taxes and war are deeply involved in the establishment of “money.”

The most burdensome for the common people has always been taxes. Taxes are not tax money; they were originally tributes. Before the establishment of the monetary economy and market economy, the foundation of the economy and means of production was land. Because it was land, war was also a means of economic activity. What the land produced was the backbone of the economy. Therefore, the basis of the economy is territory. Before the establishment of the nation-state, the land controlled by the aristocracy and nobility represented the country. The economy was primarily a struggle for territory. Unlike “money,” land is finite. In the era when land was the basis, taxes depended on the products of the land. In other words, taxes did not increase unless the territory expanded. In that era, taxes were tributes, not tax money. In the process of establishing the modern state, tributes transformed into monetary taxes. The trigger for tributes transforming into monetary taxes was often war. War is a non-productive activity. The military is a non-productive organization. Weapons are non-productive tools. When soldiers and farmers separated, and professional soldiers emerged, military actions became completely independent of productive activities. To support the non-productive organization of the military, “money” was needed. When military expenses occupy a large part of the budget, the budget inevitably becomes strained and collapses. If the shortfall from tributes is covered by “money,” “money” becomes insufficient. When “money” becomes insufficient, the king borrows money. That is national debt. National debt eventually transforms into paper money. This relationship becomes the fundamental nature of “money.” National debt is the country’s debt. The nature of debt lies at the root of paper money. Because it is debt, financial collapse leads to revolution. The choice between war and allowing revolution becomes inevitable. Both war and revolution hide economic collapse. Taxes, land, war, and national debt expanded and developed “money.”

The impact of war on the economy should not be ignored. War should neither be sanctified nor tabooed. It is necessary to seriously consider how to prevent war by accepting it as a reality. National defense is inevitable. Doctors do not cause illness. Police do not create thieves and robbers. Fire stations do not cause fires. Laws do not create crimes. The military does not cause war. If each role is clarified and society monitors them properly, mistakes can be prevented. Ignoring their existence just because they are bothersome is the worst thing to do. Reality should be faced. Just saying you hate earthquakes does not prepare you for them. Even if you have no intention of attacking, if the other party intends to attack you, conflict cannot be prevented.

War and national debt developed the function of “money” and expanded “money” in the world. It should not be overlooked that non-productive expenditures such as war and luxury created “money.” Even those not directly involved in production could gain the right to distribution through “money.” This was originally the excess and surplus part. “Money” arose to supplement the excess and surplus part. The excess and surplus part is also the extra and wasteful part. Therefore, “money” needs to be saved. Otherwise, surplus funds will arise, disrupting the economy.

War and national debt form the basis of the function of “money.” And taxes permeated this function into the market. When the national economy is established, the basic function of taxes changes. The budget becomes independent of the court and follows the purpose and power of the nation-state. Taxes, which were for the aristocracy, are now used for the welfare of the people. As a result, “money” clarifies its function of distribution. When the function of distribution becomes clear, the nature of taxes becomes the backbone of the national economy.

What is a tax? In other words, for whom and for what purpose is the tax? Considering this, the underlying question is, for whom does the state exist? What is the state? This leads to the issue of national sovereignty. Taxes are inseparable from private property and ownership. Ancient states were inseparably linked to land. Taxes were like crops produced by the land. For rulers, people were just serfs attached to the land. The economic issue centered on territory. In that era, taxes belonged to the ruling lords and aristocracy, and the purpose and use of taxes were private matters. Not only taxes but also products and labor were the property of the rulers. The rights of private property and ownership were recognized for the aristocracy and lords but not for the people. Even today, it is said that land in the UK belongs to the royal family. It is also said that private land ownership was not recognized in communist countries. In such an era, the right to collect taxes could also be collateralized as a claim. The right to collect taxes was one of the private properties of the rulers. Even today, the right to collect taxes secures national debt. If self-sufficiency is possible, domestic production can cover taxes. In that case, there is no need to convert it into “money.” Financial difficulties mean a shortage of goods, not a shortage of “money.” “Money” is needed because resources must be procured from outside. This reflects the essence of “money.” “Money” is needed because there are things that can only be procured with “money.” In that sense, taxes and exchange rates are fundamentally the same. It is a shortage of goods, not a shortage of money, that makes the fiscal deficit and balance of payments serious. The essence of taxes changed with the establishment of the nation-state. However, the core of the tax system has not fundamentally changed. This is the fundamental reason why the tax system cannot be reformed. The fiscal deficit is inevitable. It is not a matter of the purpose or significance of taxes. It is a matter of the system and structure. As long as the system is that “money” is created and taxes are collected because there are shortages, the budget cannot escape from a shortage of funds. The fiscal deficit becomes inevitable. Unless taxes are viewed as a function and incorporated into the economic system, the fiscal deficit cannot be prevented. Taxes should be viewed as an extension of the distribution between sectors. The important thing is the balance between sectors. How to circulate “money” between sectors is crucial. National sovereignty shifted from the aristocracy to the people with the establishment of the nation-state. However, the perception of taxes has not changed. Therefore, the fiscal deficit cannot be resolved. Before the budget deficit, taxes are used to supplement the government’s shortage of resources. Even if it is for economic measures. However, the function and role of taxes in the nation-state are naturally different from those in the monarchy. Unless the idea of supplementing shortages is abandoned, the budget will not be healthy. In a nation-state based on a market economy, the tax system needs to be reformed based on the function and efficiency of “money.” Unless the function of “money” is focused on, fiscal problems cannot be fundamentally solved. Taxes are a matter of distribution.

The main taxes are indirect taxes, direct taxes, and asset taxes. The reason they are called main taxes is that the classification of taxes is somewhat arbitrary and varies by interpretation. The reason for focusing on indirect taxes, direct taxes, and asset taxes is that they occupy the largest part of today’s taxes and have a decisive impact on the function of “money.” Indirect taxes (consumption tax, transaction tax, customs duties, etc.), direct taxes (income tax, corporate tax, etc.), and asset taxes (inheritance tax, property tax, land tax, gift tax, etc.) are the most significant. The difference between indirect taxes, direct taxes, and asset taxes is that indirect and direct taxes target flow, while asset taxes target stock. The difference between indirect and direct taxes is that indirect taxes focus on the distribution between sectors, while direct taxes focus on the redistribution of income. In other words, indirect taxes exert their effect on the distribution between sectors, and direct taxes exert their effect on the distribution of income.

In the past, many restaurants had to pay protection money to gangs. It was like a kind of bodyguard fee, but if they didn’t pay, they were harassed. If they paid, the gangs had territories and protected them from other gangs. Taxes originally had a similar nature to protection money. That is why the most expensive expenditure is national defense. The nature of such taxes changes with the nation-state. It changes from a tribute paid to a specific power to something like a neighborhood association fee that everyone in the neighborhood pays, aiming to protect their own lives. However, the basic point of protecting oneself from violence remains the same. If you cannot protect yourself with your own strength, you have no choice but to rely on the goodwill of others. The police that protect you from gangs must come from your own community to be meaningful.

Taxes have always been a spark for war and revolution. Why do taxes become a spark for war and revolution? It is because taxes are seen as infringing on income and ownership. Taxes are perceived as being taken. Why should we pay taxes from what we have earned through hard work? Taxes seem to symbolize state power. However, taxes originally have the function of correcting the imbalance in the distribution of “money” through the redistribution of income. They also have the function of supplementing the surplus and shortage of funds. However, in recent years, these functions have ceased to work, and taxes have instead widened the gap between people and promoted imbalances between sectors. The biggest problem is that taxes have ceased to function as taxes. Of course, there are also problems with the imbalance in the budget and the use of “money.” However, the bigger problem is that the distribution of “money” is not working well, and “money” is not circulating in the market. Originally, “money” has the nature of national debt. Taxes always carry that negative aspect. This suggests that the use of taxes also plays a significant role. People are preoccupied with being taxed and are unaware of how taxes are used. However, “money” works on both sides of income and expenditure. Even if “money” is wasted or distributed as an economic measure, increasing taxes does not positively impact the economy. Taxes should not be forgotten as a means of redistributing income.

As internet business spreads, internet charges are becoming more like taxes. Therefore, it is important to consider for whom and how they are used.

Taxes, war, debt, and land are closely related.

When considering the function of “money,” it is essential not to forget the relationship between “money” and religion, especially the connection between finance and religion.

“Money” was mentioned earlier as a means of barter. However, “money” did not originally arise for the purpose of barter. The first “money” was ceremonial or a symbol of status and wealth. Stone money is typical, but “money” did not initially function as barter. Early settlements and groups were generally based on self-sufficiency and were not intended for barter. For “money” to function as “money,” there must be mutual trust in “money” as “money.” Barter arises from the necessity of barter. Furthermore, for “money” to mediate barter, it must be trusted as “money.” Rather, “money” was established as a symbol of authority and religious ritual.

Religion may seem unrelated to “money.” Religion is sacred, and “money” is the most worldly thing. However, religion and “money” are always deeply intertwined. Religion seems disconnected from the secular world but is always deeply connected to it. By taking a transcendent position, religion has been granted economic privileges by economic organizations. By being granted privileges, religion has maintained a unique position in finance. In medieval Japan, the largest financial institution was the temple. Religion is the most human activity. No matter how enlightened one becomes, one cannot escape the activities necessary for living. Even saints need to eat and cannot remain naked. They cannot escape birth, aging, illness, and death. And to live in modern society, “money” is necessary. The most magnificent buildings in the world are palaces or temples, symbolizing the relationship between the economy and religion. The issue of interest rates symbolizes the problem of religion and “money.” It is a matter of value. It is a fundamental view of “money.” While despising “money” as base, one becomes a slave to it. This is because the function of “money” is viewed in terms of good and evil. In medieval Japan, religious organizations became the largest financial institutions, and in Europe, church taxes constantly clashed with secular power. Ultimately, this world depends on “money.” The basic nature of “money” was established by religion. And its function flows at the root of finance. Financial institutions are the priests of the economy.

The Purpose of “Money”

“Money” is a tool and a means. Therefore, the purpose of “money” is as a tool and a means. A knife can be used for murder or robbery, but the purpose of a knife is to prepare food. This is because a knife is a tool and a means for cooking. Even if a knife is used for a crime, it was not made for the purpose of committing a crime. A knife is not a means for crime. Without understanding this point, we cannot define the true role of “money.” If used incorrectly, “money” can become a weapon.

“Money” is a means of distribution. Therefore, the purpose of “money” is to promote the distribution of wealth. To understand the purpose of “money,” it is necessary to clarify how “money” is utilized in distribution. Firstly, the purpose of “money” is to unify economic value.

By multiplying the units of “money,” all economic values are once converted into monetary value. This is the preprocessing for distribution. “Money” is a medium. “Money” is a medium that converts the economic value of wealth into monetary value by being combined with some wealth.

By being converted into monetary value, all economic values are unified. The economic value of time, labor, rights, and goods can all be measured by the same standard.

Secondly, the purpose of “money” is to quantify economic value. “Money” quantifies economic value by converting wealth into monetary value, making calculations and comparisons possible.

Thirdly, the purpose of “money” is to complete transactions (settlement). “Money” completes each transaction by exchanging wealth and “money.”

Fourthly, the purpose of “money” is to universalize economic value. By converting wealth into monetary value, the value of wealth is universalized.

Fifthly, the purpose of “money” is to purify exchange value. “Money” purifies exchange value by specializing in exchange value. By being purified, exchange value becomes information. Ultimately, it separates from materiality and becomes pure information. “Money” is merely a measure of value. Just as a ruler is a tool for measuring distance, “money” is a measure. “Money” itself does not hold value. Forgetting this will lead to being swayed by changes in “money.” “Money” is merely a purified form of exchange value.

The purpose of “money” is established from the function of distribution. And as the purpose of “money” is purified by its function, the specifications of “money” become clear.

“Money” is distributed according to its function and used to procure wealth from the market as needed. This is the ultimate purpose of “money.”

The biggest problem with hyperinflation and depression is that “money” cannot perform its original functions of exchange and distribution. In that sense, inflation and deflation can be said to be extremely monetary phenomena.

The purpose of “money” is summarized in income and revenue. What income and revenue have in common is that they are means of distribution. Income means distribution to households, and revenue means distribution to production entities. And both are realized through costs.

National Economic Accounts

Income has the following functions: firstly, compensation for labor and other means of production; secondly, living expenses; thirdly, evaluation; and fourthly, costs. Revenue has the following functions: firstly, sales of production goods; secondly, a source of funds for costs; thirdly, recovery of investment funds; fourthly, a source of funds for loan repayment; fifthly, a source of profit (dividends); and sixthly, collateral for working capital and investment. By reversing these functions, the purpose of “money” becomes clear. If income or revenue decreases, the function of “money” also weakens.

The cause of stagnation in the modern economy is the inability to maintain proper revenue. In other words, it is because proper costs cannot be maintained. The economy has lost its vitality because the function of “money” has weakened. What is currently required is not cost reduction through discount sales but maintaining revenue and costs through proper pricing. The financial industry has lost its vitality not because of low-interest rates but because profit margins have shrunk and there are no investment opportunities that promise proper revenue. In both cases, the cause is the inability to maintain proper revenue.

Economic entities are driven by the balance of “money,” that is, income and expenditure. In short, the problem lies in the entrance and exit. The entrance is income, and the exit is expenditure. The relationship between input and output determines the movement of the economy. In other words, the direction of the economy is determined by the relationship between revenue and costs, and income and expenditure.

Collecting or saving “money” is not the purpose of economic activity. Savings and deposits are results, not purposes. This is because “money” is a means of distribution and a purified form of exchange value. “Money” does not exert its utility unless it is used. Simply saving “money” does not make it effective. The purpose of “money” is to determine the monetary value of wealth through market transactions. The purpose of using “money” is to obtain the necessary wealth from the market. Consuming the necessary wealth and living is the ultimate purpose of “money.”

Initial Conditions and Assumptions of “Money”

The reality of “money” is a historical product, and the process by which each currency is established is not uniform. However, there must be certain rules for the requirements and algorithms for the establishment of paper money. This is because paper money needs to meet certain common requirements.

The essence of today’s paper money is hidden in the process of its establishment. Paper money is a historical product. It was not built on clear theoretical assumptions or blueprints from the beginning. Rather, it was formed based on experience and the circumstances of the time. What produces paper money? It is credit that produces paper money. Paper money is established when it is recognized as “money.” In other words, “money” is created by credit. Paper money developed from receipts and promissory notes. Both receipts and promissory notes are based on credit. This symbolizes that paper money is made based on credit.

“Money” is a historical product. Based on this premise, the initial settings of current paper money are made. Regarding “money,” the initial setting for all economic entities is basically zero. In other words, economic entities do not possess “money” at the beginning. “Money” is created. General governments, financial institutions, and all economic entities are initially set to have zero money. It is necessary to clarify how “money” arises from zero.

The actual market is under the control of historical events. Therefore, it drags the remnants of past systems. However, when looking only at the function of representative money, the initial condition must be set to zero. First, the market economy does not start without “money,” so economic entities need to procure “money.” In the initial stage, the government procures “money” through borrowing and supplies “money” to the market through expenditures and public investments. The central bank issues paper money with government bonds and gold as collateral. Financial institutions borrow “money” from the central bank with assets and deposits as collateral and lend “money” to businesses, governments, and households. Setting the initial premise to zero does not mean that the accumulated assets up to that point become zero. It incorporates the past heritage into the new system while securing it.

Paper money is created by credit. This is the core. Economic value and monetary value are not inherently the same, and “money” itself does not have value. “Money” does not exist independently. It requires some substance to back its value, and it must be recognized as “money” by people to function. If people do not recognize it as “money,” it does not establish itself as “money.” First, it must be recognized as “money.” Furthermore, it is necessary to determine the value of “money.” For example, recognizing a 10,000 yen bill as 10,000 yen of “money.” However, just because it is recognized as 10,000 yen does not mean its value is determined. When you use 10,000 yen for a meal or to buy a bag, the 10,000 yen bill confirms its value as 10,000 yen. This is because the value of “money” is exchange value. Economic value is not constant and changes depending on the conditions and circumstances. The value of 10,000 yen does not exist with substance.

The above symbolizes the function of “money.” The value of “money” is not absolute but relative.

What backs “money” is credit. The value of “money” is the amount written on its face, but “money” itself does not have the value written on its face. In short, it has value because people believe the amount written on its face has value. Moreover, the value of “money” is relative. The price determined by market transactions is the monetary value. The price is the price of goods, and it exists because of goods. The function of goods as consideration is the value of money. “Money” has no substance. Therefore, credit must be attached to the function of “money.” Counterfeiting is strictly controlled because it undermines trust in money. If paper money loses its credit, it becomes just a piece of paper. However, the paper money generally used has no rarity. In short, it has no economic value.

What backs the value of paper money is claims and debts. The value of paper money is guaranteed by law with claims and debts as collateral. Claims and debts are determined by procedures. Therefore, paper money is created by procedures. What is the substance of claims and debts? It is lending and borrowing. The credit generated by lending and borrowing is the basis of the credit of “money.” However, what arises from lending and borrowing is debt. In short, debt backs the credit of “money.”

Paper money starts with lending and borrowing between the government and the issuing institution (central bank). Lending and borrowing create claims and debts. The securities of claims and debts become the basis of government bonds and paper money. The beginning of paper money is when the government issues government bonds with national assets and tax collection rights as collateral, borrows “money” from financial institutions, and uses it for public investment and administrative expenses. The central bank issues paper money with physical assets such as gold, government bonds, and deposits as collateral and lends it to financial institutions. Financial institutions initially borrow paper money with some assets, deposits, or government bonds as collateral. Financial institutions lend funds to private companies with assets or future revenue as collateral and to the government with tax collection rights and national assets as collateral. The premise of issuing paper money is that before paper money is issued, physical money such as gold coins, silver coins, and copper coins is sufficiently circulated. The government also has some physical assets and future income sources such as tax collection rights. In other words, there are things or rights that can be collateral for debt. Therefore, the monetary system is a historical product. It evolves through certain procedures (sequential structure). The central bank initially issues paper money with gold, government bonds, deposits, etc., as collateral. Government bonds include compensation for soldiers and compensation for former samurai. The key here is the creation of credit. The relationship between the government and the issuing institution is that the issuing institution issues paper money based on its credit, and the government guarantees the value of the money. Therefore, the issuing institution is responsible for the circulation of money and, conversely, for prices. Paper money cannot gain market trust by direct exchange between the government and the issuing institution alone. By involving financial institutions other than the issuing institution, paper money can gain market trust. “Money” is lent from financial institutions to the government, households, private companies, etc., and when the lent “money” is exchanged (transferred) with goods, that is, when buying and selling is established, the effect of “money” is issued. Completing the buying and selling transaction is called settlement. In other words, “money” is given the function of settlement through buying and selling transactions.

The government issues government bonds (debt) and borrows funds (assets and claims) from financial institutions. Financial institutions receive government bonds and lend funds to the government. Financial institutions borrow funds from the central bank with government bonds as collateral. The central bank can also supply funds to the market by buying government bonds. The central bank forces financial institutions to deposit “money” in the central bank’s current account as collateral. In this way, the government, financial institutions, and the central bank exchange the same amount of claims and debts, forming claims and debts, which are converted into assets and liabilities, issuing paper money and supplying it to the market. When actually supplying to the market, it is lent to economic entities other than financial institutions, that is, corporate enterprises, general governments, households, private non-profit organizations serving households, and foreign sectors. The essence of “money” is claims and debts.

When “money” is borrowed with assets other than “money” as collateral, the value of the assets is determined, and the asset value is confirmed.

Bank of Japan

In this way, when “money” flows from financial institutions to the market, claims and debts of the same amount as the flowing “money” are derived. Claims and debts increase or decrease depending on the direction of the flow of “money.”

Financial institutions specialize in lending and borrowing relationships with other economic entities and do not engage in buying and selling transactions themselves.

The means of procuring “money” is that the government can issue “money” in cooperation with the issuing institution. Other sectors can either sell their assets, borrow “money,” or receive “money.” When borrowing “money,” collateral is required. Collateral can be assets (including intangible rights) or future income. By linking physical objects with lending and borrowing, monetary value gains substance. The limit that the household sector can collateralize is either their assets or lifetime income. Companies collateralize capital and future income. The government collateralizes national assets and tax collection rights. For foreign countries, it is foreign currency reserves and tax collection rights. The mutual restraint of lending and collateral sets the upper limit of the circulation volume of funds.

The market economy does not start unless a certain level of “money” is distributed to all households. Private companies, which are the production sector, procure funds through borrowing from financial institutions and investment from other economic entities. The means of production form asset value by being collateralized.

The Nature of “Money”

“Money” has a nature similar to water. Like water, “money” spreads and fills the market. This is because “money” is a means of distribution. Whether it becomes cryptocurrency, cashless, or electronic signals and data, “money” remains a means of distribution. Therefore, whether it is cryptocurrency or cashless, the function of “money” is still strongly influenced by the total amount of “money” circulating in the market. Thus, the function of “money” is like the water level, where the levels of prices and income, as well as distribution, become important indicators.

Just as water conforms to the shape of its container, “money” conforms to the shape of the market. Just as water flows from high to low, “money” flows according to differences in height. The surplus or shortage of “money” creates the flow of “money.” Just as water can be dammed and stored in a lake, “money” can also be saved. The economic system is driven by the flow of “money.” “Money” expands by adding the power of credit.

The nature of “money” is formed by its function and the process of its establishment. The first characteristic of “money” is that it is specialized in exchange value. Secondly, “money” exerts its utility by flowing. Thirdly, “money” circulates without being consumed. Fourthly, “money” unifies value and makes calculations possible. Fifthly, “money” quantifies value. The units of “money” are natural numbers and discrete numbers. Being natural numbers, calculations become remainder calculations, and the balance principle is applied. Sixth, “money” is based on trust. Seventh, “money” itself does not hold value; it is a substitute. “Money” exerts its utility through exchange. Eighth, the essence of “money” is its function and information. Currently, “money” is in the process of becoming more informational, and in this process, its attributes as a physical object are being lost. Ninth, “money” preserves value. Tenth, “money” is debt and constitutes nominal value. Eleventh, “money” does not function alone; it exerts its utility in conjunction with the object it indicates. Twelfth, economic entities operate based on the inflow and outflow of “money.” The utility of “money” is exerted through its flow. The flow of “money” is created by the surplus or shortage of “money.” The surplus or shortage of “money” is created by income (inflow) and expenditure (outflow).

Monetary value is created by claims and debts. The fact that monetary value is created by claims and debts has a decisive impact on the formation and nature of “money.”

The fact that monetary value is created by claims and debts plays a decisive role in the process of generating “money,” especially paper money. In essence, the nature of money is lending and borrowing, not buying and selling. This point implies the relationship between government bonds and paper money. Lending and borrowing alone cannot exert the utility of money. Money exerts its utility when used in buying and selling transactions. This forms the premise of the relationship between lending and borrowing and buying and selling. Lending and borrowing and buying and selling are two sides of the same coin.

The foundation of the monetary system is based on the relationship between claims and debts. In other words, “money” is claims and debts, and at its root is lending and borrowing. Paper money itself is a developed form of promissory notes and bonds. Therefore, the issuance of paper money means an increase in debt and an increase in stock. Without understanding this point, the relationship between government bonds and paper money cannot be understood. Flow is established through buying and selling. The function of “money” is exerted through buying and selling. In other words, the utility of “money” is realized through buying and selling transactions. From this relationship between lending and borrowing and buying and selling transactions, the functions of flow and stock are formed. Stock stabilizes through balance with flow. The expansion of stock pressures flow.

“Money” exerts its utility by circulating. The function of “money” is exerted by its flow. The monetary system regulates the function of “money.” Economic entities operate based on the inflow and outflow of “money.” The inflow and outflow of “money” represent cash flow.

Economic entities and the market move based on the inflow and outflow of “money.” The inflow and outflow of “money” become cash flow. The inflow and outflow of “money” are income and expenditure. Expenditure is outflow, and income is inflow. The function of “money” is based on inflow and outflow. Therefore, the fundamental function is binary and discrete (digital).

When “money” is used, surplus funds are generated. Depositing surplus funds in financial institutions forms deposits. Deposits sometimes function similarly to cash. In national economic accounts, the sum of cash and deposits is considered the total amount circulating in the market.

“Money” is a conceptual product. In other words, it is created by human consciousness. “Money” is established by agreement. Therefore, “money” does not exist without trust. The value of “money” is a matter of recognition, not existence. Therefore, it is relative.

“Money” is a symbol and information. “Money” is “money” because you say it is “money.” In a sense, “money” is a product of illusion. “Money” exerts its utility only when trusted in the market. Paper money is established by market trust. Trust is created by the system. That is the credit system. “Money” is anonymous. “Money” itself does not hold records of its past history or ownership. “Money” functions as “money” because it is anonymous.

Furthermore, “money” is established by transactions. “Money” cannot exert its utility unless used. “Money,” which is based on exchange, does not exist independently. Therefore, a single institution cannot establish paper money. The executive branch alone cannot issue paper money. Therefore, an independent institution separate from the government is necessary to establish paper money.

“Money” circulates through taxes. By making tax payments in money, the value and function of “money” are trusted and guaranteed by the government. By standardizing the tax payment period, the unit period of “money” is determined, and time value is given to “money.”

The Function of “Money”

To ensure the smooth functioning of the market economy, it is necessary to control the circulation of “money” according to supply and demand. It depends on how the relationship between the position and movement of “money” is perceived. In other words, it is a matter of the vector of the function of “money.”

“Money” is a conceptual product. In other words, it is created by human consciousness. “Money” is established by agreement. Therefore, “money” does not exist without trust. “Money” based on agreement cannot be created alone. There is always a counterpart. All transactions and exchanges begin with mutual interaction. If there is a buyer, there is a seller. If there is a borrower, there is a lender. This relationship is symmetrical. Just as men and women exist to leave descendants, the system that creates “money” also has male and female aspects. This represents a principle.

The essence of “money” lies in its function. The function of “money” is exerted by its flow. The flow of “money” is created by the surplus or shortage of “money.” The flow of “money” includes the flow of transfer and the flow of settlement. The transfer of “money” generates claims and debts and functions as long-term funds. Long-term funds stay in the market for a long time, preparing for payment and ensuring the circulation of “money.” Transfers include capital transfers and current transfers. Settlement completes transactions.

Wealth is completed by consumption. However, “money” is not consumed; it is only exchanged. “Money” is not a consumable good. “Money” does not rot. It can be burned, melted, or decomposed. Although it may deteriorate slightly, “money” is not consumed. “Money” is not consumed but circulates. By circulating, economic entities are maintained. Without the function of circulation, economic entities lose their centripetal force and disintegrate.

The utility of “money” is exerted by its flow. “Money” flows according to the surplus or shortage of funds. The relationship between the real aspects of non-financial corporations and households and the surplus or shortage of financial funds can be seen in the following equations (from “Introduction to Money Circulation” by the Economic Statistics Division, Research and Statistics Department, Bank of Japan, Toyo Keizai Inc.):

The financial and non-financial transactions of non-financial corporations are expressed by the following equation: Corporate revenue + amount of funds raised = real investment + amount of funds managed (financial investment)

The above equation is organized into real and financial aspects as follows: Real investment – corporate revenue = amount of funds raised – amount of funds managed Real investment means investment, and corporate revenue means savings. Basically, the value obtained by subtracting corporate revenue from real investment means a shortage of funds.

The transactions of households in the real and financial aspects are as follows: Consumption + real investment + amount of funds managed = disposable income + amount of funds raised

The above equation is organized into real and financial aspects as follows: (Disposable income – consumption) – real investment = amount of funds managed – amount of funds raised The value obtained by subtracting consumption from disposable income means savings. Households have a surplus even after subtracting real investment from savings. Japanese households usually have surplus funds.

Non-financial corporations subtract the amount of funds managed from the amount of funds raised, and households subtract the amount of funds managed from the amount of funds raised in reverse because, before the financial crisis of 1997, non-financial corporations were basically entities with a shortage of funds, and households were consistently entities with a surplus of funds. However, since 1999, non-financial corporations have shifted to entities with a surplus of funds. The direction of the flow of “money” has changed.

“Money” is established by transactions. “Money” cannot exert its utility unless used. Savings are preparations for payment and do not exert utility. “Money” is a function. The function of “money” is established because there are those who act and those who are acted upon. Market transactions are basically concentrated in buying and selling and lending and borrowing. There are also transactions called transfers, but transfers are basically included in buying and selling transactions. The utility of “money” is prepared by lending and borrowing and exerted by buying and selling.

Paper money must meet eight requirements: symbolism (nominality), exchange (transaction), credit, measure of value (determination of market value), invariability of nominal value (preservation of value), payment preparation, anonymity, and numerical information. “Money” is a means of distribution. “Money” exerts its utility by circulating. Conversely, it means that it needs to be circulated. Paper money is established by lending and borrowing and realized by buying and selling.

The Value of “Money”

The value of “money” is its exchange value. Today’s “money” has no substance; its value lies in the function of exchange. The function of “money” is neither production nor consumption; it is exchange.

“Money” is not consumed. “Money” is the function of exchange, and therefore, the nominal value of “money” is preserved. Because the nominal value is preserved, “money” circulates.

Exchange means that the function of money has bidirectionality.

One important point is that exchange value is a relative value determined by market transactions. Therefore, exchange value fluctuates. In other words, it is a variable.

“Money” is a symbol and information. “Money,” as a symbol of exchange value, is created through lending and borrowing transactions. If goods could be exchanged directly, “money” would not be needed. “Money” is needed because lending and borrowing intervene between goods. “Money” is produced through symbolic actions and procedures. These actions symbolize lending and borrowing transactions. Whether lending and borrowing or buying and selling, market transactions do not stand alone. Some counterpart is needed. The market is established by counter-transactions between the transaction entity and the transaction counterpart. This is an important factor in producing “money.” Here lies the essential role of financial institutions. Financial institutions are the mirror of market transactions.

The algorithm of financial institutions’ businesses involves not only the creation of money but also the process of creating credit.

“Money” is “money” because you say it is “money.” One characteristic of “money” is anonymity. “Money” is trusted because it is anonymous. Because it is anonymous, “money” itself must guarantee its credit. Counterfeit money undermines the credit system, which is the foundation of finance. Therefore, counterfeit money is strictly controlled.

The trust of the people establishes the credit of “money.” If the trust of the people is lost, “money” cannot function as “money.” In the early stages, the credit of “money” was guaranteed by some assets like gold. This was convertible paper money. However, guarantees by physical assets reach their limit as the market expands. Once the economy reaches a certain scale, monetary value management shifts from guarantees by physical assets to management through mutual checks between the issuance of banknotes and the issuance of government bonds. This is the managed currency system. The managed currency system is fundamentally based on a mutual guarantee system between the government and the issuing bank. The government and the central bank, which is the issuing bank, mutually guarantee and check each other, thereby controlling the market scale and the economy. If the mutual check function ceases to work, the system itself will collapse. The economy can be controlled because it has bidirectional functions, and if only unidirectional actions work, the system itself cannot be maintained.

What must be noted is the function of “money.” “Money” is a means of distribution. For “money” to exert its function as a means of distribution, the total circulation of “money” must be finite. The finiteness of “money” is a necessary condition for “money” to be trusted. This is the same for virtual currencies. This is because “money” is a means of adjusting the necessary amount and production amount. Market prices are determined by the equilibrium point of the quantities of people, goods, and “money.” The problem is that monetary value is open-ended without any restrictions. Therefore, some restrictions must be placed on the upper limit of the circulation of money. A cap must be placed.

“Money” is a means of distribution. “Money” is a medium for market transactions.

“Money” is a medium, and changes in the amount of “money” do not move the substantial part of the economy. Increasing the circulation of “money” may change the appearance, but it does not improve the real economy. Prices are determined by the supply and demand of goods and “money.” The circulation of “money” is a standard when determining prices. However, this is a matter of scale, not substance. Adjusting the supply amount will cause prices to rise or fall, but it does not change the substance of the economy.

The function of “money” has long-term and short-term functions. The long-term function builds means of production, and the short-term function appears as consumption. The long-term function is realized through lending and borrowing, and the short-term function is realized through buying and selling. The utility of “money” is completed through buying, selling, and settlement. Lending and borrowing are considered mere fund transfers compared to buying and selling. Lending and borrowing generate claims and debts, and claims and debts derive securities. These securities become the prototype of paper money. Lending means depositing “money,” and borrowing means receiving “money.” Therefore, the essence of deposits is lending and borrowing. Capital can also be considered a type of lending and borrowing relationship. Means of production form fixed assets, liabilities, and capital. Liabilities, capital, and assets form stock.

Income and Expenditure

The economic system is composed of economic entities. What drives economic entities are inflows and outflows of money. Inflows represent income, and outflows represent expenditure.

Economic entities are groups of individuals and organizations. These organizational economic entities have an inside and an outside. Economic entities operate based on the inflow and outflow of money. The inflow and outflow of money generate internal and external transactions. Transactions between economic entities and the outside are symmetrical and balanced, meaning they are zero-sum. Internal transactions are asymmetrical and unbalanced. Profit arises from internal transactions because they are asymmetrical and unbalanced. External transactions are converted by internal transactions. Periodic profit and loss are not zero-sum.

Raw materials purchased from outside are processed internally and sold as products. In this process, money is distributed through stages such as purchasing, raw materials, costs, products, inventory, and sales. Purchasing and costs involve expenditure, while sales involve inflows. Liabilities and capital constitute inflows, that is, income. Assets are formed through expenditure.

Income is a cost and expenditure for production entities but becomes income for households. Consumption involves expenditure for consumption entities and becomes revenue and income from the perspective of production entities. The inflow of production entities is the outflow of consumption entities, and the inflow of consumption entities is the outflow of production entities. In essence, inflows and outflows change depending on the position and perspective. Inflows and outflows are always two sides of the same coin. Therefore, the total of external transactions is zero. Because it is set to zero, both the market and economic entities are balanced. This is the action-reaction principle of the economy.

The function of money is transformed by economic entities. Money inflowed into production entities is allocated to assets and costs and converted into operating surplus/mixed income, employee compensation, property income, and taxes on production and imports.

Money circulates by repeating inflows and outflows with economic entities. Through the circulation of money, production, distribution, and expenditure are interconnected. Production, distribution, and expenditure are integrated. This brings about external vertical and horizontal balance. Revenue flows into costs, costs flow into income, and income flows into consumption and savings, transforming the function of money. Furthermore, it is converted into disposable income and current transfers, and through households, it is converted into final consumption expenditure and savings.

Basically, economic entities are connected by the inflow and outflow of money.

When money is inflowed into corporate enterprises, the trajectory of money is allocated to total assets, total capital, revenue, and costs, balancing production and distribution. This is internal accounting. However, total assets, total capital, revenue, and costs are functions that occur due to the flow of money, and money is only the balance as an asset. In households, inflowed income is allocated to consumption expenditure and consumption investment (including savings). Revenue means output and sales, not production. Sales are the product of sales volume and unit price. Unsold products that remain are either discarded or become inventory. Inventory is recorded at cost.

Intermediate input, gross production, gross income, and gross expenditure represent cost, production, distribution, and expenditure. Intermediate input, total assets, gross income, and gross expenditure represent the total amount of money that has flowed. Just because an amount is recorded as money does not mean there is a corresponding amount of cash. Accounting is the residual image of the trajectory of money. Just because an amount of one hundred million yen is recorded does not mean there is one hundred million yen in money; there is only land or assets bought with one hundred million yen. Even if it is said to be fifty million yen in net assets, it does not mean there is fifty million yen.

Intermediate input, gross production, gross income, and gross expenditure are connected by the circulation of money and functionally represent the cross-section through which money flows. Therefore, the three-sided equivalence holds. The functions of intermediate input, gross production, gross income, and gross expenditure control the entire market. By sequentially converting input, production, income, and expenditure, the economic system becomes structurally integrated. If input is separated from input, production from production, income from income, and expenditure from expenditure, the economic system cannot be controlled integrally. The three-sided equivalence is not a result but a structural factor and foundation.

The economic system operates through the flow of money. What creates the flow of money is the surplus or shortage of money. If money is used, the amount of money held decreases. If money is insufficient, it can be supplemented by breaking into savings if there are any. However, if there are no savings or they are exhausted, it becomes impossible to live in modern society without replenishing money. The problem is how to obtain income.

Money exerts its utility by repeating inflows and outflows. What moves money is the necessity of money. Money moves because there are always those who need it. The utility of money is the movement of money, that is, the flow of money. The flow of money is created by the surplus or shortage of money. The surplus or shortage of money arises because money is used. Using money means outflow, that is, expenditure. If money is used, it disappears. Therefore, without inflows, it will eventually be exhausted. Inflows mean income. Without income, one cannot live. Not only will one be unable to live, but one’s dependents will also be unable to make a living. The problem is the means to obtain income. It is not acceptable to do anything to obtain it. Stealing, threatening, deceiving, hurting, killing, and robbing are crimes. Basically, the means to obtain money is to work.

Economic entities are always in a state of money shortage. In other words, economic entities are always hungry for money. This creates the desire and craving for money. This desire for money drives the economy. However, the desire for money sometimes drives people crazy. When people go crazy for money, they forget the original role of money. It is people who are bad, not money. Money is a tool. As a tool, money can become a weapon or a useful tool depending on how it is used.

Economic entities operate based on income and expenditure. For production entities, income is the source of revenue, and expenditure is the basis of costs. Revenue and costs are responsible for distribution. In households, income becomes earnings. Expenditure generates consumption. The part of income that is not linked to consumption expenditure is turned into savings.

Income and expenditure are two sides of the same coin. If there is someone who spends, there is someone who receives, and if there is someone who receives, there is someone who spends. By repeating inflows and outflows, the flow of money is created. The economic system is driven by the created flow of money.

The source of revenue for financial institutions is the interest rate differential.

What drives economic entities is what they want and how to measure income. The principle of the economy is to measure inflows and control outflows.

The Circulation of “Money”

The foundation of the current market economy can be said to be the system that circulates “money.” How to circulate “money” evenly and continuously throughout the entire market is the key to making the market economy function.

“Money” exerts its power by circulating. Conversely, how to circulate “money” determines the success or failure of the market economy.

The circulation of “money” stems from its original role and purpose. “Money” is a means of distribution, and the market economy is established by distributing “money” to all citizens. It is similar to the function of blood; just as parts of the body where blood does not flow become necrotic, parts of the market where “money” does not flow cannot receive the distribution of production goods. In today’s market economy, this means economic death. The current economic system does not allow self-sufficiency. Therefore, it is the responsibility of the nation-state to continuously and evenly supply “money” to all people periodically. The nation-state is based on the premise of continuously supplying “money” to all citizens. This is a contract between the nation-state and its citizens. This is because if “money” is not continuously supplied to all citizens, the lives and property of the citizens cannot be guaranteed. In other words, the nation-state is established by the system that circulates “money” and continuously supplies it to all citizens. When this system collapses, the nation-state also collapses. The reason why continuous supply is necessary is that “money” disappears when used. And “money” does not exert its utility unless used. The circulation of “money” is driven by the flow of “money,” which is caused by the surplus or shortage of “money.” “Money” flows due to its shortage. The market economy always needs parts where “money” is lacking. Therefore, the shortage of funds is created by the necessity of the market economy.

Therefore, circulating “money” is an absolute condition for the nation-state.

The liberal system does not directly distribute “money” to all citizens but indirectly distributes “money” through economic entities. Instead of directly distributing “money” to all citizens, the liberal system determines consumption units and distributes “money” as income according to the work of those consumption units. In such a liberal system, to continuously supply “money” evenly and periodically to all citizens, it is necessary to define and set evidence units.

The market needs “money” to flow continuously like blood in the body. If the circulation of blood stops, death occurs, and similarly, the economy will cease to function. The force that circulates “money” in the market is the periodic surplus and shortage of “money.” Economic entities are driven by repeated inflows and outflows. Repetitive inflows and outflows create periodic surpluses and shortages of “money.” Periodic surpluses and shortages of “money” create waves in the flow of “money,” circulating it in the market. “Money” circulates in the market through fluctuations and vibrations. For this to happen, a certain amount of “money” must be circulating in the market. And to circulate “money,” it is necessary to swing between economic entities or between production and consumption. Simply flowing “money” does not circulate it in the market. A proper system is required to circulate “money.” This overall system is the market economy. The market economy is driven by “money.” By artificially creating surpluses and shortages of “money” and creating flows that balance these surpluses and shortages, “money” is circulated in the market. “Money” must first be distributed evenly to all citizens. Secondly, “money” must be continuously supplied to each citizen to ensure a minimum standard of living. Thirdly, “money” must be distributed to balance revenue and costs. Fourthly, “money” must be distributed to balance production and consumption. Fifthly, “money” must circulate.

“Money” is not consumed; it is only exchanged. Wealth is completed by consumption. However, “money” is not a consumable good. “Money” does not rot. It can be burned, melted, or decomposed. Although it may deteriorate slightly, “money” is not consumed. “Money” is not consumed but circulates. By circulating, economic entities are maintained. Without the function of circulation, economic entities lose their centripetal force and disintegrate. Economic entities are maintained by the movement of “money.”

The circulation of “money” is driven by the flow of “money.” The source of the force that creates the flow of “money” is the surplus or shortage of funds and time value. The surplus or shortage of funds accumulates in the debt balance of sectors, creating distortions in stock. When the force works to balance these distortions, the market converges. The market exerts its utility by repeating convergence and divergence.

To circulate “money,” the financial system has vertical and horizontal structures. Finance is based on claims and debts, and claims and debts create relationships between assets and liabilities, revenue and costs. This relationship forms the core of the vertical and horizontal structures. In other words, the decomposition of lending and borrowing and revenue creates the vertical direction, and the relationship between revenue and costs, assets, and liabilities creates the horizontal structure. Profit and net assets (capital) link the vertical direction and horizontal structure. Therefore, profit and net assets are differential accounts.

The economy works to maintain four balances: horizontal balance, vertical balance, market balance, and time balance. These four functions move and unify the economy. In other words, the market economy is a four-dimensional space.

The horizontal and vertical functions, and the structure of double-entry bookkeeping, work to maintain balance. Lending and borrowing balance.

The state of the economy appears as balances in interest rates, profits, tax rates, income fluctuations, price fluctuations, and asset value fluctuations. Price fluctuations represent the state of short-term funds, and asset value fluctuations represent the state of long-term funds. These values are like body temperature and blood pressure.

To circulate “money,” there must be two entities: those with a shortage of funds and those with a surplus of funds. These entities must constantly alternate. In other words, the exchange of “money” drives the economic system, and if entities with a shortage or surplus of funds do not alternate, the flow of “money” becomes one-sided, and “money” does not circulate. One-sided flow of “money” hinders normal circulation.

The surplus or shortage of “money” also has a time-based aspect. Time-based surpluses and shortages create time value.

The flow of “money” is caused by opposing functions. Opposing functions create the action-reaction relationship of the economy. The action-reaction of the economy creates economic symmetry and forms the basis of double-entry bookkeeping. Opposing functions include buying and selling, lending and borrowing, debts and claims, income and expenditure, inflows and outflows, revenue and costs, demand and supply.

The flow of “money” is created and controlled by buying and selling and lending and borrowing. The function of buying and selling is the realization of transactions, and the function of lending and borrowing is the transfer of “money.” Buying and selling become flow, and lending and borrowing become stock. Buying and selling exert the power of “money” and complete transactions. Lending and borrowing reserve the function of “money” and prepare for payment. Therefore, buying and selling generate kinetic energy, and lending and borrowing generate potential energy. Buying and selling move goods and realize exchanges. Lending and borrowing move “money.” Buying and selling work on the surface of the market, and lending and borrowing work behind the scenes. The amount of surplus or shortage of funds and the amount of flow created by the surplus or shortage of funds are consistent. In other words, the amount of buying and selling in a unit period and the balance of lending and borrowing are consistent.

Economic entities form non-financial corporate enterprises, financial corporations, general government, households, private non-profit organizations serving households, and foreign sectors according to their functions. The market has functions that balance between sectors, balance flow and stock, balance between economic entities, balance over time, balance demand and supply, and balance production and consumption. These functions circulate “money” in the market. The functions that balance revenue and costs, income and expenditure, move the economy. The force that balances revenue and costs, income and expenditure, converges into profit and prices.

The flow of “money” circulates between sectors, and the surplus or shortage of “money” between economic entities accumulates in each sector, forming stock. Stock prepares for payment. When distortions between sectors expand, the balance between stock and flow cannot be maintained. When the balance between stock and flow cannot be maintained, the circulation of “money” is also hindered. Therefore, balancing stock and flow is the most important issue.

Surplus funds cause stagnation in the flow of “money.” Surplus funds hinder the normal and smooth flow of funds. Surplus funds disrupt the balance between flow and stock and stagnate the flow of “money.” For example, speculative funds during the bubble period caused abnormal rises in land prices, hindering the real demand for housing. Stock affects flow and influences liquidity.

The “money” flowing in the market must be maintained at an appropriate amount. If there is too much or too little, “money” will not flow smoothly. The stagnation of “money” has a significant impact on prices and employment. The biggest challenge of monetary policy is to manage the appropriate amount of “money” flowing in the market.

In the past, the Bank of Japan’s rule was to keep the holding of government bonds within the range of issuing Bank of Japan notes. This rule was temporarily abandoned by the unprecedented monetary easing in 2013.

Bank of Japan: Money Circulation and Stock

Even when the total balance of stock remains constant, there are times when the balance of stock in individual sectors changes. In such cases, it means that the direction of the flow of money between sectors is changing. The changes in the balance of stock in individual sectors suggest changes in the flow (cash flow, changes in cash balance) between sectors.

Before the financial crisis of 1997, households were the main entities with a surplus of funds both in the short and long term, while non-financial corporate enterprises and the overseas sector were entities with a shortage of funds, and the general government and financial institutions had balanced funds. After the financial crisis, non-financial corporate enterprises, along with households, became entities with a surplus of funds in the short term, and the general government became the main entity with a shortage of funds. Additionally, financial institutions, which temporarily faced a shortage of funds during the bubble collapse of 1991, turned into entities with a surplus of funds after the financial crisis. This state has led to deflation.

Bank of Japan: Money Circulation and Flow (Short-term Changes in Stock, Supply and Demand of Funds)

The economic system distributes money through costs by production entities and recovers it through revenue. Costs are converted into income. Consumption entities acquire money through income and return it to production entities through expenditure. In this process, expenditure is converted into revenue. This flow circulates money in the market.

It is necessary to secure a production volume that meets the consumption volume. Income that supports expenditure is required. For funds to circulate smoothly, revenue must exceed costs, and income must be more than costs. If revenue and income cannot maintain a certain level, money will not circulate. The levels of revenue and income are also related to the level of stock. Therefore, the appropriateness of the economy is judged by revenue, prices, costs, income, prices, and expenditure. This harmonizes production, distribution, and consumption.

A decrease in total expenditure puts downward pressure on total income. A decrease in total income puts downward pressure on total production.

Extreme income disparity causes bias, hierarchy, and division in the flow of money, hindering normal flow. Additionally, accumulated income disparity leads to asset disparity. Asset disparity relates to the function of long-term funds. The function of correcting income disparity is income redistribution. Income redistribution is a major role of fiscal policy. However, income redistribution is basically the transfer of funds and does not create added value, meaning it is not a productive activity.

Production, Distribution, Consumption, and Money

Claims and debts create horizontal relationships in the economy. At the same time, the process of subdividing claims and debts forms vertical functions. Vertical functions are divided into unit period functions and long-term functions, forming flow and stock. Flow constitutes periodic profit and loss, and stock constitutes lending and borrowing.

The long-term function of money acts to balance time value. The function of money through investment and debt allows for temporal allocation. Investment and debt form investment cash flow and financial cash flow. Investment cash flow constitutes fixed assets, and financial cash flow is established by balancing long-term funds.

When money is lent from financial institutions to economic entities other than financial institutions, claims and debts are created. Money flowing to production entities is distributed into investment and costs. Investment is linked to revenue, and costs are linked to income. Income is spent for consumption, and the remaining funds are invested. Deposits are a type of indirect investment. Funds circulate through the steps of production, distribution, consumption, and investment.

There are two routes for distribution: one through production entities and the other directly distributed by the general government.

Generally, money is lent by the issuing bank, which is the Bank of Japan in Japan, to financial institutions with government bonds and deposits as collateral, and then lent to economic entities excluding financial institutions. Money lent to economic entities excluding financial institutions is invested. Lending money creates claims and debts. Claims initially constitute current assets, which are then converted into fixed assets and costs. Revenue arises from fixed assets and costs. Income arises from costs. Income is spent to form consumption. Income not used for consumption is invested. Investment includes direct and indirect investment, both of which constitute claims and form financial assets.

Investment remains in the market as long-term funds and payment preparation. Since resources invested in production are converted into goods, total production and intermediate investment are two sides of the same coin. Inevitably, the total output is twice the intermediate input. Total production is gross profit. Total output means sales, not production volume. Unsold items become inventory or are discarded. Inventory is an investment. The amount of surplus and shortage and the amount flowed to correct the surplus and shortage are consistent. The amount of surplus and shortage means the supply and demand of funds per unit period. The balance of supply and demand of funds reduces the debt balance of individual sectors, accumulates in stock, and causes distortions in long-term funds. The debt balance of individual sectors forms the function of long-term funds. The amount flowed constitutes flow, which creates added value. Consumption units are provided with income from production entities.

Corporate Enterprise Statistics

Overall, it is notable that interest payments have been significantly compressed, especially since the bubble collapse in 1991. As a result, operating profit has expanded. It seems that interest payments and operating profit share the occupancy rate. Taxes and public charges have remained consistent.

Corporate Enterprise Statistics

The added value of corporate enterprises excluding finance appears to have improved since the Lehman Shock, which is due to the growth in operating profit. The growth in operating profit during this period was due to external factors such as the decline in crude oil prices and the depreciation of the yen. The sense of stagnation in the Japanese economy can be partly attributed to the severe impact of these external factors. The sum of the parts excluding operating profit has remained flat, indicating that the real economy has not changed. Conversely, the increase in operating profit has relatively compressed the distribution rate.

Consumption is carried out by consumption units, which are households. Households are collections of individuals. Basically, living expenses are covered by income, but not all individuals in a household earn income. However, it is a principle that at least one person in a household earns income. There are households where no one earns income or where the income is insufficient for a minimum standard of living. Such households are provided with the necessary money by the government.

Living expenses are covered within the range of earned income. The foundation of the economy is supported by consumption. Therefore, the economy is influenced by consumption. This point needs to be correctly recognized. As the population ages and birth rates decline, housing demand will inevitably decrease. Promoting new housing starts when quantitative housing demand decreases is foolish. Instead, investment should be encouraged to enhance the living environment. Thus, the key to transitioning the economy from a growth phase to a maturity phase is how to shift from a money and goods-centered economy to a people-centered economy. This requires policies based on urban planning concepts. The economy will require more realistic measures rather than ideological ones.

Additionally, consumption is greatly influenced by changes in population composition.

Households

Households are usually based on families. The individuality of the family strongly influences the character of the household. A household is considered to have a single budget. The composition of families is not uniform. Currently, they are generally composed of a single couple as the core. This is the nuclear family. The life plan is centered around the core couple.

A household is composed of individuals. The lives of each family member affect the nature of the household. Typically, from infancy to adulthood, individuals depend economically on their parents as dependents. Once they reach adulthood, get a job, and earn their own income, they are considered to have an independent budget economically. However, they become independent as a household only after marriage. Then, they have children and raise them. The previous idea was that after retirement, elderly parents would be taken care of by their children. However, today, once children have their own independent households, they do not live together again. If income is insufficient, the government is expected to supplement it.

The money involved in a person’s life forms the basis of the household’s long-term funds, debts, and claims. In the past, the state intervened in individual values and controlled people’s ways of life and living. Today, with the establishment of human rights and the diversification of values, it has become difficult to typify and standardize the way families are. Along with this, the way consumption and social welfare are approached has also changed. The economic foundation needs to respond flexibly.

With changes in the social environment, the nature of household debts and claims has also changed. Household debts and claims depend on the approach to consumption investment. In the past, taking care of elderly parents was not only a legal obligation but also a moral duty for children. Today, care facilities and care systems have freed families from moral and economic responsibilities. Individuals are expected to take responsibility for their lives until the end, without relying on anyone else. This individualistic approach has led to issues such as elderly people living alone and dying in isolation. As a result, deposits, insurance, and pensions have become important components of household claims.

Additionally, with the decline in asset values and changes in lifestyle, there is a stronger tendency to view houses as liabilities rather than assets, and the focus of demand has shifted to rentals. This trend calls for a fundamental review of the housing industry. Such changes in the times need to be approached realistically rather than conceptually.

Households are collections of individuals. Therefore, the standard of living largely depends on individual work. Today, as income is attributed to individuals, it has become difficult to view consumption in terms of family units. As individuals’ incomes are guaranteed, children and women, who were previously bound by family, have become more active in society. Consequently, the number of people who never marry or get divorced has increased. The necessity for families to share a household budget has decreased, changing the very nature of families. Viewing families through traditional values will leave one behind in economic changes.

Individuals are generally paid money as compensation for their work. However, some people cannot work. No one can work the same way throughout their life. Aging or illness can prevent people from working, inevitably leading to a loss of income. Consumption is determined by a person’s life. It is not acceptable to neglect those who cannot work. That is the role of the nation-state. People who cannot work either belong to a consumption unit to share compensation or, if still insufficient, receive direct support from the government.

The distribution cycle includes daily, monthly, semi-annual, annual, and irregular periods. Irregular periods refer to discretionary or necessary times and points when harvests or incomes are received.

Forms of salary include daily wages, daily monthly wages, monthly salaries, and annual salaries. The nature of money is also influenced by employment forms. There are clear differences in debt and living conditions between day laborers and irregular employees.

Salaries are generally paid monthly. The monthly cycle helps to level out annual expenditures. Bonuses are often used for long-term debt repayment and temporary expenses. These are based on the rhythm of life and also create that rhythm.

The distribution cycle of money brings regularity to life. The distribution cycle creates cycles and waves of consumption and expenditure.

Seeking balance in one sector alone is not achievable. Individual sectors do not exist independently but in relation to other sectors. Inevitably, the functions of individual sectors quickly spread to other sectors. What is important is not only the changes in individual sectors but also the overall changes and the consistency of individual sectors. The economy emphasizes not only simple quantitative changes but also the distribution to each sector. Therefore, it is crucial to understand the overall direction and the balance of claims and debts between sectors, the increase and decrease per unit period, and the ratios between sectors. The direction, amount, and strength of the flow of money are decisive factors. If there is no change in the total amount, it affects the power relations between sectors. The power relations between sectors influence the direction of the flow of money.

Money flows to create surpluses and shortages of funds caused by lending and borrowing, so the lending and borrowing of funds and cash balances between sectors are consistent. This works to maintain vertical balance between sectors. The total of surpluses and shortages of funds between sectors is zero. This works to maintain horizontal balance. The forces working between sectors aim to correct imbalances, so they flow in the direction of resolving imbalances.

Fixed capital formation does not constitute added value. Fixed capital formation targets means of production, formed through investment. What appears on the surface of profit and loss is only half of the economic value. Fixed capital formed within a unit period is also an economic result. The supply and demand of funds within a unit period appear as increases and decreases in liabilities and fixed assets. Fixed capital is formed through fund transfers.

Production entities procure money through revenue and distribute money through costs. Consumption entities acquire money through income and utilize money through consumption expenditure. Costs are income, and consumption expenditure turns into revenue. The part of income not spent on consumption expenditure is invested, forming fixed capital. This process constitutes the circulation of money. The market economy is maintained by the harmony of production, distribution, and consumption, and balancing this is the role of politics, government, and the central bank. Production, distribution, and consumption are maintained by the circulation of money. Production and consumption are linked and controlled through the distribution system by the circulation of money.

If this circulation is cut off, production, distribution, and consumption disintegrate and lose control. Therefore, production entities and distribution entities are inseparable.

The Role of Interest Rates in Sectors

A car cannot be controlled with just an accelerator; it also needs a transmission, brakes, and steering. Similarly, the economy cannot simply accelerate without control. Interest rates act as both a transmission and brakes. If you only see the clutch and brakes as negative, you cannot control the car. It is simplistic to think that lowering interest rates to zero will improve the economy.

Interest rates are the driving force and motivation for moving money. Because there are interest rates, there is motivation to lend money, and money flows. Without interest rates, those who deposit money cannot be held accountable to those who entrusted them with money. Without interest rates, financial institutions cannot fulfill their responsibilities to depositors, investors, or the country. The most important role of interest rates is to create the flow of money and move money.

The role of interest rates has never been properly evaluated. Many religions have considered charging interest to be immoral. However, interest rates create time value and circulate funds. Zero interest rates are one of the major causes of the current economic stagnation.

The economic system is driven by the flow of money. Distribution is achieved through the circulation of money. So, what creates the flow of money and what drives the circulation of money? That is the question. The force that creates the flow of money and circulates money arises from differences. What creates these differences? It is space and time. Time differences create time value. The main driving force for moving money is time differences, which form the basis of time value. Time value arising from time differences includes profit, interest, unrealized gains and losses, and income. There is motivation to lend because of interest. Without interest, lending and borrowing do not occur because the lender would bear all the risk. In other words, the lender gains nothing, and money does not move.

Interest rates benefit both lenders and borrowers. First, borrowers need funds to start a business. Lenders have funds but no means to generate profit. Both parties benefit by pooling their funds and means. Without interest rates, there is no way to generate mutual profit. Borrowers become cautious and plan carefully because of interest rates. They plan to generate revenue over a certain period. Without interest rates, investment funds become unlimited, and so does the risk, leading to irresponsibility. Today’s zero interest rates make government bonds unlimited and fiscal risk unlimited. This also applies to profit; not making a profit is bad, but making too much profit creates surplus funds and increases uncertainty.

Borrowers must generate profits exceeding the interest. This relationship between interest and profit determines the momentum of investment. Interest rates are not evil; they are the driving force of the economy.

The economic system is driven by the surplus and shortage of funds. The surplus and shortage of funds create the flow of funds. The surplus and shortage of funds are supplemented by lending and borrowing between economic entities and sectors, and the balance accumulates between sectors. The total surplus and shortage between sectors is zero.

Interest rates fundamentally arise from lending, borrowing, and capital transactions, which prepare for payment.

There are short-term and long-term interest rates. Short-term interest rates arise from daily life and business operations, i.e., flow, while long-term interest rates arise from stock. There are also production and consumption interest rates.

Interest rates differ by function, including deposit rates and lending rates. Financial institutions earn revenue from the spread between deposit rates and lending rates.

The role of interest rates varies by sector. For financial institutions, interest rates are the source of revenue, driving the lending of money. Financial institutions create time value through interest rates.

For non-financial corporate enterprises, long-term interest rates arise from investment, and short-term interest rates arise from working capital. Interest rates are costs derived from acquiring means of production. Working capital arises from market transactions, i.e., the time difference between buying, selling, and lending.

Interest rates are the standard for profit. Interest rates are derived from profit and loss, and principal repayment is executed within the range of profit.

Household interest rates are based on consumer finance. Consumer investment, such as mortgages, differs from investment in means of production, as it does not generate revenue and is a one-sided expenditure. Mortgage repayment is based on monthly income. Consumer investment targets consumption means, not production means. Naturally, it is prone to default if income is interrupted or ceases.

For the general government, interest rates on government bonds are settled by taxes and serve as the standard for long-term interest rates. If fiscal balance is not achieved, government bonds expand indefinitely, making payment preparation unlimited.

In the overseas sector, the interest rate differential between domestic and foreign rates is important. Interest rate differentials affect exchange rates and create capital flows in international markets. Many economic fluctuations affecting national survival involve the overseas sector, i.e., they come from abroad. Events like the oil crisis, yen appreciation recession, bubble, and Lehman Shock were caused by external factors and had devastating effects on the domestic economy. Financial engineering has developed to address uncertainties (risks) caused by external factors, such as exchange rate fluctuations, raw material cost fluctuations, and interest rate fluctuations.

Japan was isolated for a long time, cutting off trade with foreign countries and adhering to self-sufficiency. The self-sufficiency system limits the scale of the economy and society to the range that can be self-sufficient. Exceeding this range leads to famine. Japan relies on many resources from abroad to sustain its citizens’ lives. Modern Japan cannot survive without foreign trade, which is the lifeline of the nation. Many wars are caused by the collapse of foreign trade, with the main cause of war being economic.

Interest rates abroad play diverse and decisive roles. The bubble is said to have been caused by delayed tightening measures due to being swayed by overseas conditions.

Foreign trade also constrains and determines the value of a country’s currency.

Lending and borrowing between sectors determine the range of interest rates. Rates are calculated based on the relationship between stock and flow. In other words, lending and borrowing relationships between sectors constrain interest rates.

Simply increasing the amount of funds does not necessarily stimulate investment. It may seem strange, but the more surplus funds there are and the lower the interest rates, the less motivation there is to lend or borrow. One reason is the risk of future interest rate increases. Another reason is that financial institutions cannot expect profits from interest rates, reducing their motivation and willingness to lend. Additionally, borrowers may not expect sufficient revenue to recover the invested funds.

To circulate money in the market and distribute wealth, non-financial corporate enterprises, households, finance, and the overseas sector each have roles and functions. If any sector cannot function properly, the balance between sectors is disrupted. Distortions between sectors hinder the circulation of money. Interest rates work through the interaction of non-financial corporate enterprises, households, finance, and the overseas sector. Lowering interest rates on government bonds also lowers lending and deposit rates for non-financial corporate enterprises and households. Additionally, foreign interest rate differentials affect the domestic economy through exchange rates.

The economy is a reality. If people’s lives become unsustainable, the economy collapses.

The Role of the Overseas Sector

Fundamentally, overseas trade arises from the need to procure resources from foreign countries. If self-sufficiency were possible domestically, there would be no need to procure resources from abroad. If everything necessary for survival could be provided domestically, there would be no need to take risks to engage in overseas trade. Overseas trade is necessary because there are resources that must be procured from abroad.

To engage in overseas trade, foreign currency must first be obtained. This is because the necessary goods must be purchased in the market of the partner country. To do this, it is necessary to sell goods to the partner country to obtain their money or to borrow their money. Even to borrow money, collateral is required. Therefore, trade cannot be established without goods that are needed by the partner country and are produced in surplus domestically. Labor can also be considered a good.

This illustrates the function of money. Overseas transactions arise because necessary goods are lacking. To obtain the necessary resources, the money of the trading partner country is required. Money is needed because there are goods that are lacking. If all necessary goods could be procured domestically, there would be no need to exchange money. Obtaining foreign currency implies a shortage of goods, not money. Money is needed because resources must be procured from outside. This reflects the essence of money. Money is needed because there are things that can only be procured with money. In other words, lacking goods can only be obtained with money. Money is created because there are things that can only be obtained with money. This is why money is needed. Money must first be obtained, but it is not the goal. The goal is to obtain what is desired using money.

Goods that are needed and either lacking or unobtainable domestically have monetary value. Even within a household, if labor is lacking, it must be procured from outside, requiring payment. This creates monetary value.

Domestic economic entities face the proposition of procuring necessary resources that are lacking domestically from abroad. To do this, foreign currency must be obtained. Trade with foreign countries cannot occur without the currency of the trading partner country. This is the fundamental premise of the balance of payments.

To buy and sell goods with foreign countries, money must be exchanged, i.e., bought and sold. This creates payment preparation and exchange rates. If payment preparation is exhausted, trade settlements cannot be made.

Necessary resources must be procured from abroad, requiring the creation of money. This is the starting point of overseas trade. To obtain money from abroad, goods that can earn money abroad must be produced. If there are no goods, labor will be exported. In other words, imports and exports are inseparable. The balance of payments is a bidirectional function, not a one-sided function. Revenue and costs are inseparable. Imbalances in imports and exports create surpluses and shortages of money. Surpluses and shortages of money are resolved through fund transfers, i.e., lending and borrowing. Imbalances in imports and exports and surpluses and shortages of money create the relationship between flow and stock. Exchange rates work to resolve these imbalances. Flow and stock relate to the vertical balance of the balance of payments. Simultaneously, imbalances in imports and exports and surpluses and shortages of money work to maintain horizontal balance.

First, the ratio of capital account to current account is examined. Next, the balance of foreign currency reserves and the current account is considered. If the current account falls below the sum of the capital account and foreign currency reserves, it indicates a shortage of funds. A large accumulation of capital account balance affects national sovereignty. This is because the shortage of the capital account is fundamentally considered to be secured by tax rights and national assets.

To sell domestic products abroad, the external price difference is key. The external price difference affects both imports and exports, creating exchange rate issues. Since the external price difference affects trade, it also affects domestic price differences and income levels. The balance of payments is related to the domestic economy through the function of money.

The balance of payments represents a cross-section of the national economy, showing the economic state comprehensively. By examining the balance of payments, the flow, function, and state of money in the economy can be inferred. This is because the balance of payments has checkpoints. Except for illegal items like smuggling, it is possible to record the flow of people, goods, and money passing through checkpoints. Understanding what is revealed by the balance of payments is an important clue to clarifying the economic system.

The balance of payments reveals the vertical structure of a country’s economy. The vertical structure of the economy is divided into the regular flow of goods and money and the state of lending, borrowing, and capital. The economy has the real flow of imports and exports of goods and the flow of money through lending and borrowing. The real flow of imports and exports is aggregated in the current account. To guarantee imports and exports, financial backing is required. Lending and borrowing between countries and payment preparation affect and form the capital account and foreign currency reserves. Real trade clarifies the state of a country’s economy. Therefore, examining the current account reveals the industrial structure and state of a country. It also clearly shows the nature of the economy, whether it relies on processing trade, self-sufficiency of necessary resources, export of raw materials, or tourism. This ties into national strategy. For example, importing oil is crucial for national survival. It is not a matter of trade volume but how much it affects national independence.

The flow of lending and borrowing money clarifies the state of a country’s money claims and debts. Surpluses and shortages of money become clear. Surpluses and shortages of money affect payment preparation, i.e., foreign currency reserves. In simple terms, it reveals whether a country is struggling with money or facing financial difficulties. If a country struggles with money, its independence is also in jeopardy. Surpluses and shortages of money allow for the inference of surpluses and shortages of people, goods, and money. It becomes clear what is sufficient and what is lacking. This clarifies the relationship between flow and stock in a country. Fundamentally, the scale of the balance of payments reflects a country’s production capacity. The ratio of the current account to total production indicates the country’s dependence on foreign countries. Examining the accumulation of lending and borrowing money reveals the balance of external claims and debts. External claims and debts are related to government bonds, clarifying the country’s debt claims. Whether government bonds can be absorbed domestically relates to fiscal independence.

From the balance of payments, national power becomes apparent. National power affects exchange rates. Exchange rates reveal the international evaluation of a country’s currency. Dependence on foreign countries, external price differences, and external income differences indicate the economic power relationships between countries. Interest rates and tariffs influence a country’s economic policy and national strategy.

The principles of balance of payments statistics are: first, transactions within a unit period; second, economic transactions between a specific economic area and the rest of the world; third, based on market prices; fourth, recorded at the time of ownership or claim-debt transfer; and fifth, based on double-entry bookkeeping. Transactions in the balance of payments are categorized as “exchange,” “transfer,” “migration,” and “other attributed transactions” (from “Introduction to Balance of Payments” by the Bank of Japan and the Balance of Payments Statistics Research Group, Toyo Keizai Inc.).

The value of a country’s money and foreign currency reserves represents its ability to procure goods. In other words, it indicates the amount of resources a country can obtain from other countries, reflecting its economic power and national strength. Conversely, if foreign currency is insufficient, the country must borrow from other countries, creating debt. Such debt is secured by tax rights and national assets, inevitably ceding rights to the partner country. This reflects the state of the country. Tax rights and national assets guarantee independence. Borrowing easily from other countries jeopardizes national independence and cedes economic policy leadership.

On September 16, 1992, the UK was forced to withdraw from the European Exchange Rate Mechanism after a massive sell-off of its currency. In 1997, the Thai currency crisis triggered a financial crisis across Asia. Thus, exchange rates are deeply connected to national economies, not just currency transactions.

It is said that currency cannot simultaneously achieve exchange rate stability, independent monetary policy, and free capital movement. This is known as the currency trilemma. Which to prioritize is crucial for national strategy and economic policy, affecting the rise and fall of the nation. All three elements relate to the flow and function of money.

The function of exchange rates summarizes the function of money. The current market economy cannot be sustained by a single country alone. In other words, domestic economies cannot function without trade with other countries. Among the necessities for sustaining a country’s economy are resources that cannot be procured domestically. In other words, resources necessary for a country’s survival must be procured from other countries. This is the fundamental premise of exchange rates. This deepens international division of labor, establishes the world market, and forms the exchange rate system in the process. The exchange rate system was established through the process of trading between countries with different currency systems and units. Currency exchange is required for trade between countries with different currency systems and units.

A country’s economic state is well reflected in the claims and debts in the balance of payments.

The backing of international trade is settlement funds. The power relationship between countries is influenced by how much payment preparation can be made. Closer classifies a country’s economic development stages into six stages: first stage, immature debtor country; second stage, mature debtor country; third stage, debt repayment country; fourth stage, immature creditor country; fifth stage, mature creditor country; and sixth stage, creditor liquidation country. While a country may not necessarily grow through these stages, it indicates a trend. The relationship between claims and debts reflects the state and industrial structure of a country.

International trade is based on mutual relationships between countries, not just the convenience of one party. To procure resources from a partner country, there must be goods to sell to the partner country. Trade can be sustained by balancing buying and selling.

A relationship where claims and debts accumulate unilaterally undermines economic health and jeopardizes national sovereignty and independence. What to export and import relates to national strategy. Economically weak countries may be incorporated under the control of stronger countries depending on the trade materials.

Japan relies on many resources from other countries, especially over 90% of strategic resources like oil. The Japanese economy has been swayed by oil price trends. Depending on strategic resources from abroad, Japan must be sensitive to exchange rate trends. The impact of exchange rate fluctuations varies by industry. Some industries benefit from yen appreciation, while others suffer. It is not a matter of whether yen appreciation is good or bad, but how individual industries are affected. Policies for exchange rate fluctuations must be tailored to each industry.

It is impossible to respond to exchange rate fluctuations with monetary and fiscal policy alone. Since industries are directly affected, exchange rate fluctuations must be addressed as a structural issue.

The Function of Exchange Rates

What connects trade between economic zones is money. Economic zones generally refer to currency zones, based on countries, but there are cases where multiple countries share a single currency or where multiple currencies coexist within a country. However, here we will consider currency zones as the basis. In other words, what connects trade between currency zones is money, but because the currency units are different, the same money cannot be used. Therefore, to trade with other economic zones, it is necessary to exchange currencies used in those economic zones. Currency exchange means exchanging currencies, which implies buying and selling transactions, leading to the creation of exchange rates.

Exchange rates fundamentally arise between currency zones. Trade between currency zones necessitates and creates exchange rates. One reason is the trade itself, and another is the necessity of settling trade transactions, leading to the exchange of not only goods but also money. Goods require the utility of goods, and exchange rates arise for settlement purposes. This also reflects the difference in the nature of the current account and the capital account.

To trade, it is necessary to purchase goods in the partner country’s currency. Therefore, it becomes necessary to exchange one’s own currency for the partner country’s currency. When exchanging currencies between two countries, the question arises as to what basis to use for the exchange. The mechanism and basis for financial settlement are exchange rates.

What complicates exchange rates is the significant disparity in price systems between countries. Even if gold is used as a standard for currency exchange, the price of individual goods relative to gold is not uniform, and there are generally significant differences between countries. Even if gold is used as a standard, gold alone cannot measure its price because the price of gold itself is relative. The economic value of gold is determined by what can be exchanged for a unit of gold. However, what can be exchanged for a unit of gold constantly changes. Even the domestic price of gold is not constant.

The price system that constitutes prices is not universal. The concept of purchasing power parity exists, but prices differ based on national conditions, geographical factors, and cultural factors. For example, the demand and use of oil differ between tropical countries and cold regions, and between oil-producing and non-oil-producing countries. Differences also arise based on the development of transportation systems and road conditions. Transportation costs are not determined solely by comparison with gold. Additionally, the price system for food varies based on staple foods. Countries where rice is the staple food have different economic values compared to countries where bread is the staple food. Exchange rates are not determined unilaterally.

A single currency system forms a single currency zone. This is the principle. Therefore, if two currency systems are adopted within a single administrative zone, it means that two currency zones coexist. If multiple administrative zones share a single currency system, it means that the administrative zones sharing the currency system are integrated into a single currency zone. An example of the latter is the EU.

If two currency units exist within a country, exchange rates arise domestically. In fact, during the Edo period, Japan had a gold and silver standard, necessitating currency exchange between gold and silver coins.

The fact that the economy cannot function without trade is more significant than the volume of trade. Exchange rate fluctuations have a decisive impact on the economy because the economy cannot function without trade.

Understanding how such relationships affect the domestic economy is essential to understanding the meaning of exchange rates. It is not simply about exchanging money. It is about how exchange rate fluctuations affect economic functions. The impact of rising oil prices on exchange rates depends on how oil prices affect the domestic economy. The impact and scope differ depending on whether it is oil, diamonds, or gold. The degree of impact varies between essential goods that must be secured to sustain national life and goods that are preferable but not essential. This is also reflected in exchange rates. The exchange of money necessary for trade is based on the premise of trading an equivalent amount of goods. Otherwise, exchange rates cannot be established. If oil is needed, an equivalent economic value must be exchanged to establish equal trade. Therefore, exchange rates reflect the economic strength of a country. If there is not enough of the partner country’s currency to exchange for oil, the shortfall must be borrowed from somewhere. In such cases, the means of settlement is the key currency, which is currently the US dollar.

The key currency is the settlement currency. To trade between countries, settlement funds must be prepared. The currency for settlement is the US dollar. Countries other than the US must keep a certain amount of US dollars as payment preparation. This is foreign currency reserves. If the balance of payment preparation funds is exhausted, trade with other countries becomes impossible, leading to a currency crisis. If foreign currency reserves are exhausted, borrowing from institutions like the World Bank becomes necessary, and that money is in US dollars, essentially borrowing from the US. Conversely, the US does not need to prepare payment funds because the dollar is the settlement currency. The dollar is accepted in any country. Before the Nixon Shock, the dollar was convertible, requiring gold exchange upon request, but Nixon ended the gold convertibility, removing the gold constraint. Since the US dollar is the settlement currency, the world market is influenced by the dollar exchange rate and the economic policies of the US, the issuing country of the dollar. This forces compliance with unilateral US demands like the Plaza Accord. The US dollar is the key currency in the international market. However, the US struggles with controlling the massive outflow of dollars abroad.

The nature of exchange rates demands vertical balance, meaning the balance of the current account and the capital account. As the key currency country, the US must continuously supply a large amount of dollars to the international market, leading to a chronic shortage of US dollars in the world market. The US is required to maintain a surplus in the capital account, leading to a chronic deficit in the current account for the key currency country.

One way to resolve this contradiction is to establish a settlement currency other than the key currency, which has been attempted repeatedly but has not yet been realized. This is due to the fundamental nature of money, which is established by universal recognition as money. A currency solely for settlement between currencies has not been widely accepted.

To understand how exchange rate fluctuations affect the domestic economy, it is more important to consider the impact of exchange rate fluctuations on prices, income, and revenue than the volume of trade.

The impact of exchange rate fluctuations on domestic markets is more significant for the overall economy than the impact on trade.

This is because internal and external price differences and income differences disrupt the premises of the domestic economy. Exchange rate fluctuations change the levels of internal and external price differences and income differences, altering the flow of goods and money.

It is important to note that some goods are affected by exchange rate fluctuations while others are not. The impact of exchange rate-affected goods on unaffected goods is also a concern. For example, domestic employee income is not affected by exchange rate fluctuations, but relatively lower foreign prices may stimulate overseas travel.

Fundamentally, the premise conditions of each country’s economy differ. Each country has different economic systems, structures, and approaches to the economy. Ignoring these differences and attempting to achieve free trade solely through exchange rates and tariffs is reckless. The world includes socialist countries, dictatorships, and Islamic fundamentalist countries. Economic development stages, currency systems, and financial systems differ. Fundamental views on interest rates differ. Labor conditions and resources vary. Countries with and without resources start from different positions. Safety and specification regulations differ, as seen in emission regulations and food and drug safety regulations. Customs and habits differ. Some countries restrict food for religious reasons. Countries differ in size and population. Strategic locations differ, such as being an island or landlocked country. Environmental conditions and needs differ between cold and tropical regions. Military power and civic standards vary. Market history and structure differ. Social capital differences are significant. Trade conditions must be set according to each country’s circumstances. It is not just a matter of tariffs. Imposing one’s own convenience on the partner country can lead to conflict.

Exchange rates do not directly affect income but influence the flow of people and goods through internal and external price and income differences. Concluding that yen depreciation benefits export industries is simplistic. The most important aspect of exchange rate fluctuations is their overall economic impact.

To mitigate the adverse effects of exchange rate fluctuations, interventions in exchange rates are sometimes attempted. In such cases, policies related to government bonds should also be noted, as funds for exchange rate intervention are procured through government bonds.

When significant exchange rate fluctuations are expected, policies tailored to the impact on different industries should be implemented in advance. Uniform policies cannot be applied. The impact of exchange rate fluctuations may also have time lags.

In the international market, it is said that exchange rate stability, free capital movement, and independent monetary policy cannot be achieved simultaneously. This is because, with fixed exchange rates and free capital movement, interest rate differences between countries lead to one-sided capital flows, borrowing in low-interest countries and investing in high-interest countries.

Countries with floating exchange rates need an economic structure that mitigates the impact of exchange rate fluctuations, like a ship floating on the sea, to avoid capsizing in large waves.

Definition of Requirements for “Money”

“Money” is a means of distribution.

The monetary system is based on the mechanism of distributing wealth through the circulation of money. The essence of the monetary system is how to distribute money to every corner of the market and keep it circulating.

The economic system is driven by the flow of money. The flow of money is triggered by the inflow and outflow of money to and from economic entities.

A single monetary system forms a currency zone. A country’s monetary system is singular. The boundaries of the currency zone and administrative authority coincide. The monetary system is guaranteed by state power. When state power weakens, the effectiveness of money also diminishes. Money and power are inseparable. Money is power. Conversely, the currency zone defines administrative authority. The range where money is accepted is the range where administrative power extends. The effective range of a single monetary system essentially defines administrative authority. If there is an area where money is not accepted, that area is in a state of extraterritoriality.

There was a time when multiple financial institutions freely issued money. However, this led to the inability to maintain price control by the administration. As a result, the principle now is that a country’s monetary system is unified. Currently, the currency zone and administrative authority are fundamentally aligned. There are cases where multiple governments share a single monetary system. In such cases, the boundaries of the administrative zones of countries adopting the same currency are unified. The integration of the currency zone and administrative authority maintains the consistency of politics and economics.

Even if virtual currencies become widespread, they are backed and guaranteed by the existing monetary system. Misunderstanding this point leads to a lack of understanding of the function of virtual currencies. Virtual currencies are also built on the existing monetary system.

Money unifies value.

Money creates monetary value. Monetary value refers to the exchange value at any given time, meaning the product of quantity and price. Quantity is finite, and price is infinite. Sales quantity is the product of per-unit consumption and the consuming population, which is finite. Therefore, economic fluctuations are monetary phenomena. It is important to note that the economic realities of people and goods are limited. Goods and fixed assets constitute the market. What fluctuates is the price, and to control the economy, prices must be restrained. While goods and people constrain price formation, the direct factor causing price fluctuations is exchange value. Price fluctuations are fundamentally monetary phenomena. Monetary value forms nominal value.

The utility of money is in the exchange for goods. The purpose of money is to achieve distribution through the exchange for goods. This is because monetary value represents the utility of money. The utility of money is exerted through market transactions. Money exerts its effectiveness through the inflow and outflow to and from economic entities. Effectiveness is measured by the amount of inflow and outflow.

The function of money is driven by differences. Differences include time differences, spatial differences, material differences, individual differences, and qualitative differences.

Goods are intended to be consumed. However, money is not consumed; it is only exchanged. Because it is not consumed, it preserves nominal value and circulates.

The economic system operates by economic entities receiving some utility from the outside by spending money. When economic entities use money, i.e., spend it, their cash balance decreases. If the balance is depleted, economic entities cannot continue economic activities. Therefore, money must be continuously replenished. Money circulates through the means of acquiring money and the function of the goods acquired with money. Acquiring money creates surplus funds, and spending money creates a shortage of funds. This surplus and shortage of funds create the flow of money.

The distribution of production goods is achieved in two stages: money is pre-distributed to all consumption units, and consumption units purchase goods from the market as needed. For economic entities, the first stage appears as income, and the second stage appears as expenditure. Therefore, for consumption units, income is expenditure, and expenditure is the household budget. In other words, the basis of distribution is the income standard, which varies with the price level. The purpose of distribution is how to evenly distribute income at a certain standard.

Moreover, consumption cannot be sustained without price stability. The economic system requires price stability.

In contrast, production aims to achieve maximum utility with minimal investment. Production and distribution operate on different logics. Therefore, maintaining the balance between production and consumption is difficult.

The role of financial institutions is to correct imbalances in production, and the role of the general government is to correct imbalances in income.

The general government collects part of the income through taxes and recirculates it into the market through administrative expenses and public works, thereby circulating money. This process also involves income redistribution.

The activities of economic entities alone create imbalances in the flow of money. The inflow and outflow of money by economic entities are uncertain and create spatial and temporal imbalances. The role of finance is to correct these imbalances. Corporate enterprises streamline the flow of money through economic activities. The role of finance is to correct temporal imbalances in funds and stabilize profit and loss. It is important to maintain the balance of lending and borrowing through revenue. In other words, if loan repayment cannot be covered by revenue, the balance of lending and borrowing cannot be maintained.

To ensure the proper functioning of economic entities, it is necessary to understand the functions of assets, liabilities, capital, revenue, costs, and profit and regulate the market to achieve appropriate prices. Unprincipled deregulation is the most dangerous policy for the economic system. Deregulation is implemented to achieve appropriate prices and stimulate economic activity, not as an absolute principle. It should be done as needed.

Production entities have the role of stabilizing uncertain and unstable income through lending and borrowing and establishing stable income for employees by standardizing wages. Production entities also act as rectifiers of income and expenditure.

The purpose of the economy is to procure, produce, and fairly distribute the resources necessary for life, enriching people’s lives. However, production areas and harvests vary and are not constant. Since the foundation is unstable and biased, income and production must be stabilized through some function to avoid instability in life. If left unchecked, disparities in living standards will widen. Correcting economic biases and disparities is one of the important roles of the economic system.

All activities of economic entities begin with fund procurement. The means of fund procurement for production entities are capital means, lending and borrowing means, and profit and loss means. The means of fund procurement for consumption entities are earning, borrowing, and receiving. In any case, economic entities start with fund procurement. This is the same for the general government.

The economic system is not about making profits or money. It is about procuring, producing, and fairly distributing necessary goods to enrich people’s lives.

The economic system circulates money. It supplies money evenly to all consumption entities. It is required to have three functions: continuously supplying fresh money to all consumption entities.

The Algorithm of Money

The difference between the algorithm of money and the algorithm of goods is that while the algorithm of goods is for producing actual goods and services for use, the algorithm of money is for producing value.

The production of goods for actual use and the production of value differ in that goods have practicality and substance, whereas value is a product of perception and lacks substance. The production of goods, whether tangible or intangible, has some form of substance and practicality. However, money is based on concepts like trust and confidence and lacks substance and practicality. Money has no use other than its function of exchange. It is essentially an exchange for the sake of exchange. Moreover, modern primary currencies are fiat money, which do not even have a tangible backing. In other words, there is nothing to back them up, no collateral.

Since money is a means of distribution, it needs to have an upper limit. This is because money is a shadow and must project a finite substance. People and goods are finite. If the measure projecting this finite substance is unlimited, it becomes impossible to compare the whole with its parts. Therefore, the monetary unit must be constrained in some form to function as a measure. The upper limit of the monetary unit is set by procedures and contracts.

Therefore, the value of money is based on procedures and contracts. Procedures and contracts must be guaranteed by law. This is a necessary requirement. The algorithm of money begins with the procedures for setting the upper limit of monetary value.

The upper limit of monetary value is set by mutual checks between the government and the central bank. The government issues government bonds and uses them as collateral for the central bank to issue paper money. The balance of government bond issuance constrains the upper limit of the central bank’s issuance of paper money. In other words, the current currency management system manages the circulation of currency by having the central bank and the government issue and exchange claims and debts.

The algorithm of money is somewhat complex. First, financial institutions need to produce money. They supply the produced money by lending it to economic entities. Economic entities that obtain money acquire the necessary resources for living through market transactions.

Paper money is produced through lending and borrowing between the government and financial institutions. The central bank, generally the issuing institution, is at the center of financial institutions. Other financial institutions borrow money from the central bank using their assets as collateral and lend it to private companies and households. Companies and households that borrow money from financial institutions circulate money in the market through buying and selling transactions.

The economy is a historical product. Money is also a historical product, inheriting past legacies. Therefore, even if it is said to start from zero, it is not entirely zero. In the process of establishing a modern financial system, past debts, such as domain notes, old currencies, and gold bond certificates based on stipends, were collected and used as collateral.

The Flow of Money

Money also has a flow of production, distribution, circulation (use), savings, and reuse. The decisive difference between goods and money is that goods are consumed to completion, whereas money circulates without being consumed.

Paper money can be integrated into the market through five stages: the generation of paper money, the establishment of trust in paper money, the circulation of paper money, the continuous circulation of paper money, and the restriction of the upper limit of paper money circulation.

To establish the economic system, it is necessary to first create money, gain social approval, supply it to the market, and circulate it. The value of money is its exchange value. Today’s money has no substance; its value lies in the function of exchange. The function of money is neither production nor consumption; it is exchange.

Money is issued and produced by the government and the central bank holding claims and debts against each other. The produced money is initially deposited with financial institutions and the government, and then financial institutions lend it to non-financial corporate enterprises, supplying it to the market. Non-financial corporate enterprises circulate money in the market through market transactions and supply money to households as income. Households use the supplied money (final private consumption expenditure) to purchase the resources necessary for living from the market. Surplus money is deposited with financial institutions and lent to non-financial corporate enterprises and households, circulating in the market. Once money is produced, the market economy begins with each economic entity procuring money.

Production entities invest in means of production through loans and investments from financial institutions, households, and other corporate enterprises. They pay costs from the revenue earned within a unit period, supply money to households, and repay debts and taxes.

The flow of money is formed by the combination of income and expenditure. The essence of revenue is social utility, inevitably accompanied by social responsibility.

Generally, money is lent by the issuing bank, which is the Bank of Japan in Japan, to financial institutions with government bonds and deposits as collateral, and then lent to economic entities excluding financial institutions. Money lent to economic entities excluding financial institutions is invested. Loans create claims and debts. Claims initially constitute current assets, which are then converted into fixed assets and costs. Revenue arises from fixed assets and costs. Income arises from costs. Consumption investment and consumption expenditure are formed from income. Income is spent to form consumption. Income not used for consumption is invested. Investment includes direct and indirect investment, both of which constitute claims and form financial assets. Deposits mean indirect investment. Income imbalances are corrected through taxation and redistribution during the process. The important role of fiscal policy is to correct disparities through income redistribution because income disparity creates biases and distortions in the distribution of wealth, hindering the circulation of money.

Ultimately, money is provided to consumption units as income from production entities. According to the classification of income tax in Japan, income is classified into ten types: interest income, dividend income, real estate income, business income, salary income, retirement income, forest income, capital gains, occasional income, and miscellaneous income.

Production entities recover revenue from consumption entities, convert it into costs, and provide it to consumption entities. Consumption entities receive income from production entities, buy goods, and return money to production entities. The surplus and shortage of money arising in this process are offset by lending and borrowing. This repetition creates the circulation of money in the market. Money swings between economic entities. In other words, the relationship between revenue and costs, income and expenditure drives the economic system.

Prices are determined by the total amount of currency circulating in the market and the goods supplied to the market, as well as the goods needed by households. The primary job of the government and the central bank is to control prices by adjusting the circulation of currency.

Some people say that fiscal policy will not default or that hyperinflation will not occur. Many of these people are the type who see the trees but not the forest. Economic issues are not limited to fiscal defaults or hyperinflation. There are also financial crises and recessions. More serious is the widening disparity. The most concerning issue now is the financial crisis. It is not a simplistic issue of avoiding hyperinflation or defaults. The problem is when the economic system fails to function normally.

If the state issues money without limit, it will eventually lose control over the function of money because mutual checks will no longer work. Therefore, once money circulates to some extent in the market, it is necessary to restrict the upper limit of money circulation. This is because money is a means of distribution, and monetary value is a relative value.

The problem is the recovery of money. Once issued, paper money is difficult to recover because money is like a debt that cannot be repaid. Additionally, since paper money is issued with the country’s debt as collateral, it cannot be ultimately recovered until the country’s debt is settled.

Factors Leading to the Breakdown of the Algorithm of Money

Modern people seem to believe that economic value can endlessly spring forth, but this is merely an illusion. Economic value is created by people’s desires and production volume. Both human desires and production volume have limits. The only thing without limits is money, which can be created in any amount if desired. Human desires form demand, and production volume is based on supply capacity. The foundation of the economy is not money but demand and supply. Misunderstanding this point causes the algorithm of money to go awry because it deviates from the original role and function of money.

The greatest utility of money lies in directly linking labor and income. By directly linking labor and income, production, distribution, and consumption are interconnected, allowing money to circulate. If labor and income are separated, the connection between production, distribution, and consumption is severed, and money stops circulating.

The utility of money is exerted by its flow and circulation in the market, ensuring that money reaches everyone. In other words, the algorithm of money breaks down when money stops flowing, stops circulating, or fails to reach everyone.

To identify the causes of the breakdown of the algorithm of money, it is necessary to clarify what worsens the flow of money, what prevents its circulation, and what prevents it from reaching everyone.

The flow of money is worsened by obstacles, blockages, and clogs. The circulation of money is hindered by stagnation, sedimentation, bottlenecks, and dead ends. Disparities and extreme biases prevent money from reaching everyone. The function of money is similar to blood. Therefore, the causes of blood diseases also apply to money. Money can suffer from conditions similar to blockages, blood clots, paralysis, arteriosclerosis, aneurysms, arterial dissection, rupture, hypertension, heart failure, bleeding, and arrhythmias. Particularly, diseases like cerebral infarction, cerebral thrombosis, and heart attacks can be fatal. Ignoring symptoms like blockages and blood clots leads to the breakdown of the algorithm of money. If even a part of a blood vessel is blocked and blood cannot flow beyond that point, the area deprived of blood flow becomes necrotic.

It is important to pay attention to the flow of money that does not appear on the surface, i.e., in profit and loss. Even if the flow is not visible on the surface, if it stagnates, economic entities will collapse, and the economy will cease to function. This is because liquidity is lost.

To understand the utility of profit, it is essential to consider debt repayment. The repayment of the principal of a debt does not appear in profit and loss but is paid from profit. If profit cannot be secured, debt repayment is hindered, necessitating refinancing. The problem is that the flow of money allocated for debt repayment is invisible, unlike costs. Although it does not directly reduce profit like costs, it can be fatal for economic entities, leading to their collapse. Moreover, because it is invisible, the amount of expenditure cannot be measured. Even if it appears that profit is being made on the surface, there is a risk of accumulating and self-propagating debt, leading to sudden liquidity crises. Increasing loans as an economic measure is fine, but it can sometimes invisibly pressure profit. Profit cannot remain the same as before the loans. However, the reasons for increasing the profit margin are not visible from the outside.

The True Nature of Money

Seeking substance in money is futile and pointless. Money has no substance; it only has a function. The saying “casting pearls before swine” implies that cats do not kill or deceive each other for gold coins, and pigs do not harbor resentment, envy, or jealousy over pearls. Cats know that gold coins neither fill their stomachs nor protect them from the cold or heat. So, who truly understands value better, humans or cats and pigs?

Money has no use value. In essence, money alone is useless. Money only has meaning when used, which means buying, selling, lending, or borrowing goods. However, if the other party does not recognize money as money, it cannot be used. For example, presenting US dollars at a local bar might work if it’s a place frequented by foreigners, but usually, it won’t be accepted. If this is true for US dollars, it is even more so for unfamiliar countries.

The value of money exists if both parties recognize it, but if one party does not, it does not exist. Trying to buy goods in an unfamiliar country with Japanese yen is impossible without exchanging it first. Recently, the effectiveness of cash has diminished, and more stores only accept cards. This is the true nature of money; it has value if recognized, and none if not. Money is like a chimera, an elusive entity. People live their lives being swayed by this unknown entity called money. Some even kill, deceive, fight, and hate each other for money. The end of money often means the end of relationships. Yet, people arrogantly believe they understand value better than pigs or cats, who do not hate or kill each other for money.

The value of money lies in people’s perceptions. It exists in their minds and only holds meaning there. Despite this, people have become controlled by money and even attempt to measure human worth with it. Borders and money are human creations, yet when conflicts arise, people invoke God and curse Him. However, since borders and money are human creations, humans must resolve any issues that arise. Complaining to cats or pigs is pointless because it is a human responsibility, not theirs.

It is crucial to understand the true nature of money. When used correctly, money is useful, but when used incorrectly, it leads to ruin. Blaming others or cursing God is pointless. Money is a shadow; seeking substance in it is futile. The truth lies elsewhere. The true nature of money is within oneself. Events related to money are merely reflections of one’s own heart. Fearing one’s shadow and not facing one’s true self leads to being controlled by it. Desires are not one’s true self. Using money solely to satisfy one’s desires leads to losing oneself.

Indulgence, arrogance, pride, jealousy, envy, vanity, and conceit—mistaking one’s greed and pride for one’s true self leads to ruin. Using money according to one’s desires results in self-destruction, making one inferior to cats and pigs. When used wisely, money benefits oneself. The true nature of money lies in its function. Using money with moderation, thrift, and self-control for the benefit of others enriches oneself. When used correctly, money enriches both oneself and others.