Disclaimer – It’s been so long since I wrote this that I have no idea if this is still my position.  I’m just gonna post it as history, *then* read it and make a new post later if I want to change anything.

I originally intended this part of the series to be mostly about fractional-reserve banking, but recently I’ve realised the problem is much more fundamental.  And I don’t really have an answer…In order to examine the problem we need to define when and how money comes into being.  Going back to Flopside, in this barter economy, you have to trade goods directly.  This instantly hits a problem of matching up people who both want what you have and have what you want.  It would be much easier if you could get what you want and let someone else worry about who gets what you have.

One way this could occur would be if person A has 20 strawberries they want to sell and also has a watch in need of repair.  Person B could fix the watch but isn’t interested in strawberries, but rather wants some canvass for his art hobby.  In normal barter A and B could not complete a trade because while B can supply A, A cannot supply B.  A, having a brainwave, decides to offer to B a signed statement saying that the holder of the statement is entitled to 20 strawberries.  B realises he knows someone, C, who quite likes strawberries and also makes canvasses.  So he goes to C and offers this note, in exchange for a canvass.  C accepts and goes to see A to get his strawberries.

What we have here is money in the form of strawberry rights.  The note could in theory go through any number of hands before it returns to A.  Note also that by issuing the note, A now has a liability to the tune of 20 strawberries and the entire chain of trades is made in expectation of A honouring his promise.  Money always denotes a debt if it is to have value.

What’s really interesting is that as long as the issuer of money is considered trustworthy, they can issue as much money as they deem necessary to acquire what they want, and the notes so issued will enable many trades that otherwise would not have happened.

There are risks with this approach, however.  A has the risk that by the time someone decides they actually want strawberries that the original 20 strawberries had perished.  He must somehow find another 20 to give the person, or risk court for breach of contract.  Or maybe A issued notes amounting to more strawberries than he could supply.  If such a case did occur, then the value placed on the notes, which is based not on the value of strawberries but A’s willingness and abilty to supply them, would plummet as no-one would know whether they could get any strawberries using them or not.  You may even have a strawberry ‘run’ where crowds surround A’s house trying to claim what few strawberries are available.

What bearing does any of this have on modern government fiat (your pounds and dollars) which are not backed by any specified commodity or service?  Well, the immediate question arises, what is the government’s liability when it issues currency?  The short answer is nothing.  If you took the promise on a 5 pound note at face value (where it says “I [the cashier of the Bank of England] promise to pay the bearer on demand the sum of Five Pounds”) and hand it into the BoE or the government and say “I’d like my 5 pounds please”, you’d get laughed at.  Or at best, have you fiver handed back to you.

Fiat currency is not redeemable, hence there is no liability accepted when it is issued.  If the valuation of goods was difficult in barter, fiat actually makes it much harder because it adds another ‘good’ of variable quantity and essentially no cost of production.

Why then has fiat worked as well as it does?  If we go back to what money is (namely a token of labour value), then it becomes obvious that a commodity currency really has little relation to an economy.  The amount of work being done can change very quickly and by great amounts, but a commodity, on the whole, does not.  I’m starting to sympathise with the MMT position of just not worrying about money being a store of value, because the only value it can really command (that of other peoples effort) can be there one minute and gone the next.  As long as there is work to be done, printing money to enable the workers to be paid isn’t strictly inflationary in the general sense.  It can certainly increase demand in those goods that those workers then buy, but they are also creating at least some value in the work they do.

In fact, this concept makes a mockery of the dole.  Dole money is a paradox, it is labour value appropriated and given to somebody who is not doing any labour.  I wouldn’t be surprised if most of it is printed, and if you’re gonna do that, you might as well have something to show for it.  This little exercise has made me a believer in make-work programs.  There’s always something that could do with…well…doing! Off the top of my head, there are so many places in our towns that could be better cleaning/groundskeeping.  Might as well use the dole money as wages for people to work for 2 days (or however many hours the dole would get on minimum wage).  Working makes someone more employable (on so many levels) and there’s a public benefit too.  Plus it doesn’t prevent someone from spending the other 3 days looking for a better job, that they now have a better chance of getting.

I’ve come to realise that the dole is the most absurd thing ever in a fiat money system.