Re: The Economy Of Plenty

Hal (
Thu, 18 Sep 1997 09:09:45 -0700 (PDT)

Damien R. Sullivan writes:
> US dollars overseas are not backed by gold, or US gov't services, and
> foreigners have no need to pay taxes or debts to the US gov't. But
> everyone believes that everyone else will sell things for US dollars,
> which makes everyone themselves willing to sell things for US dollars.
> In a sense, modern currency is backed by valuable goods: it is backed by
> all the valuable goods in existence.

It's more than just a "belief". People are obligated by law to accept
U.S. dollars for goods, in at least a couple of ways. First, the legal
tender laws state that dollars can be used to pay off debts. I've read
differing interpretations of exactly how this works, but at a minimum,
if you offer someone dollars to discharge a debt, and he refuses to take
them, he cannot proceed with any sort of collection procedures as long
as your offer is in force. (Some people say that the debt is completely
discharged by this procedure.)

Secondly, there are contracts which explicitly state a value in dollars.
One example is mortgages. With a mortgage, the lender retains title to
the property. The mortgage contract states that upon presentation of
a certain number of dollars, title is transferred. The total value of
mortgages is approximately equal to the total money supply (unsurprisingly,
if you understand where money comes from). This then gives backing in
terms of real property.

> } You need backing with a useful, valuable commodity (or service) in order
> } for something to be accepted as money (or else the money itself needs to
> } be useful and valuable, like gold has been historically).
> Gold was hardly useful or practically valuable itself. Jewelry only
> goes so far, and chip wires are new and also probably don't go that
> far. (You can't eat gold.) But everyone believed that everyone else
> would sell food or iron or blacksmithing for gold, so everyone sold
> things for gold. Again, the real backing is mutual agreement, or rather
> faith and habit which may get rationalized as mutual agreement. (Or
> they may not.)

The big problem with getting something new accepted as money is
bootstrapping it. It has to be valuable enough that people will accept
it even before everyone else will. Gold and other early forms of money
(beads, etc.) had that property. Fiat notes issued by me, scrawled on
a scrap of paper, do not.

> I can't see that there's any serious problem with fiat currency except
> the ability to "print" a lot of it, which seems to be generally accepted
> as a bad idea these days.

Yes, historically the number of examples of fiat currency inflation has
almost been too many to count.

The bigger problem IMO is that usually any form of competition is
disallowed. If the fiat currency had to compete with privately issued
banknotes that would provide needed discipline.

At one time, casino chips began to be accepted in a small form in Las
Vegas for purchases. (I think this was largely a promotional effort by
the casinos, something to be fun for the customers.) This was stopped
because it violated the currency laws. Similar attempts to set up local
scrips have also had problems. They may be tolerated on a small scale,
but if they show signs of spreading they will be halted.