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Scrip Currency Can’t Save the Economy

January 22nd, 2009

Matt C. sent me an e-mail a few days ago, referencing a George Monbiot’s recent article in The Guardian, If the state can’t save us, we need a licence to print our own money.

Matt said:

I wanted to pass on an interesting article to you, not sure if
you caught it, from the Guardian in the UK:

VERY interesting to see an argument like this hit a more mainstream
level, though I’m not skilled enough at economics to probe for
weaknesses in his argument — thought I’d get your input.

I did not read the article until Matt asked about it, although I noticed a similar article from The Economist was getting some heavy action on Reddit|Economics.

My first thought is, if the state can’t save us, we shouldn’t need a license! Why should we have to obtain permission to save ourselves?

In the article, Monbiot makes an argument in favor of local scrip currencies. I’ve previously written that scrip currency is a recipe for disaster. I make this claim on several grounds: scrip denies an individual his right to make time preferential decisions regarding consumption, investment, and intertemporal resource allocations, it violates otherwise sound economic theory with regards to the origin of money, it seeks to dilute or destroy the fundamental properties of money and furthermore, arises generally only due to government failures.

On this last note, Monbiot cites favorably a few historic examples of where they worked, notably in places already ravaged by hyperinflation. Hyperinflation is an economic condition that pretty much turns everything upside down. It is the manifestation of a complete collapse of a fraudulent economic status quo: “money” loses its value to inflation so rapidly that no amount of propaganda to the contrary can hide the fact that it no longer functions as a store of value—one of the fundamental properties of money proper. Germans during the interwar period, for example, were known to use Marks as fuel for their fires, since it was less valuable than cords of firewood.

Monbiot also mentions Bernard Lietaer’s book, The Future of Money and suggests that “Money consists only of an agreement within a community to use something as a medium of exchange.” In fairness, Monbiot notes (in as many words) that he really has no idea what he’s talking about, which is nice, since he doesn’t have any idea what he’s talking about. Although money is in fact a medium of exchange, but an item can only become money if it is an economic good. There are a number of other qualities which make some items more or less suited to perform the monetary function (i.e., homogeneity, divisibility, etc.), but it need also be scarce (e.g., finite in supply) and it must be desired.

True money represents accumulated wealth. It is a physical representation of the value one has created. The “agreement” to use something or other as money need not be explicit. One works, produces goods or provides a service to others in exchange for either something he desires (barter or direct exchange), or in exchange for something he believes that others desire (indirect exchange). There is always a certain amount of speculative risk in indirect exchange, but generally the benefits outweigh the risks.

The problem with fiat money is that it all eventually collapses and those left holding the “money” are left with worthless pieces of ornate paper, while all the physical wealth they had previously created has been confiscated. Attempting to remedy this problem with another pseudo-money like local scrip is at best a temporary stop-gap.

For further reading on the origins of money, I suggest Mises’ Regression Theorem.

Comments

3 Comments

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  • Matt C. says on: January 26, 2009 at 3:26 pm

     

    Thanks for reviewing the article, much appreciated! Part of why I sent it to you is that, on the surface, some of what he was saying rang true to me: i.e. the idea of circumventing the central bank system and working at a community level. However, as I mentioned, I have no skill at economics to find the holes in the idea, so I appreciate your break down of it!

    Question in follow up: would you say that a system based not on some State imposed valuation of scrip, but on a local agreed upon valuation, would work better? (I’m grasping for the correct terms here but…) in other words, would a system where local communities agreed on their medium of exchange within that community (say setting their own ‘gold standard’ so to speak), thus getting around the central bank system, suffer the same issues?

    Again, I apologize to anyone that views this as an “Econ 101” type of question.

    Thanks!

    Matt C.

  • David Z says on: January 26, 2009 at 4:05 pm

     

    No problem at all, Matt. I’m glad I could help.

    I’ll post a follow-up to your new question sometime soon (my definition of “soon”, not the real definition). Stay tuned!

no third solution

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