Thanks for answering, Jason! My respect for you has gone UP. Without mentioning names, some in this (or a nearby) thread offer nothing but snark and pointless quibbles; my respect for them has gone DOWN.
In the OP of "History of Money" I distinguished
bank-created money from
fiat money; I did so for a reason.
Whatever faults they may have, or scope for fraud,
private banks revolutionized commerce. Certain inventions -- the printing press, steam engines, the light-bulb -- are given special credit for changing primitive society into the modern industrial world. I wonder if
bank-created money -- sometimes (confusingly?) referred to as "fractional-reserve banking" -- should be added to the list of such key inventions!
With fiat money, a ruler may print notes not backed by anything, and pass them out willy-nilly to friends, vendors, and voters. But bank-created money has a different character. Banks do not GIVE money away, as the dictator with a printing press might; they only LEND money and expect it to be paid back. The bank-created money, unlike fiat money, is BACKED by something, even if the only backing is the debt instrument signed by the borrower.
Of course it's possible for banks to operate illegally, print money willy-nilly and pass it out to their friends -- cf. the S&L crisis during the Reagan Administration -- so PROPER banking requires personal integrity and/or government regulation. HOW has this propriety largely been maintained over the centuries? Can we expect this to continue? These are important questions we may want to take up.
Properly-run banks operate with a BALANCE SHEET:
Assets (minus Loan Loss Allowances) = Liabilities + Capital
Banks do NOT create money willy-nilly; the created money appears as a LIABILITY on their balance sheet. Unlike many corporations, the "market cap" of a bank is usually close in value to the "Capital" on their balance sheet.
The earliest central banks were themselves private banks, distinguished mainly by sheer size, which maintained balance sheets exactly like private banks. Money created by central banks appears as liability on their balance sheets, and is backed by assets. The similarities and differences between random private banks and central banks with official status are much discussed (e.g. in
Central banking and finance: the Bank of England and the Bank Act of 1844) BUT when contemplating
money creation it is best to remember that central banks function mechanically like ordinary private banks. The FedRes Banks are still nominally owned by member private banks; the Bank of England was not nationalized until 1946.
The real culprit is Legal Tender laws. In the United States, the dollar is legal tender, which means you must accept it as payment of a debt....
If Legal Tender laws are removed, and here is your answer, then what would function as money is whatever people want to function as money. That's the whole reason I mentioned Snickers and cigarettes, to illustrate the variability available.
"I've got banknotes issued by the State of California. Can I pay a week's rent with them?"
-- You in Arkansas boy. We take Califunkey notes at 60 cents on the dollar!
"In California, it's the Arkansas notes that are worth 60 cents on the dollar."
-- Ya ain't in Califunkey now boy. Y'all got bullets? What caliber? Mamie's Inn up the road uses bullets for money ...
It was 5000 years ago that a single commodity became standardized as the single measure of money. With the rise of commerce, this standardization became more and more useful. I do not see utter chaos as a good alternative.
And the idea of taking the power of regulating short-term interest rates and monitoring banks' financial prudence away from the FedRes and giving it to Treasury confuses me. Presumably Jason does NOT mean keeping a central bank like the one we have but just giving it a different name. Instead he must mean a government authority which operates on different principles.
The FedRes operates as a proper central bank; it is mandated to bolster the economy in specific ways;
- Stabilizing the value of the currency. (In Jason's model different types of money would fluctuate in value relative to each other, interfering with commerce.)
- Stabilizing short-term interest rates.
- Functioning as a Lender of Last Resort. Without such a last-resort lender, how could a severe liquidity crisis be resolved? Issuing fiat money is a recipe for hyper-inflation.
I'm afraid that some will argue that
we already have inflation in the present system so we may as well use fiat money ("printing-press money") anyway. This is WRONG. I will probably go into more detail about this in a future post.
Up until the Federal Reserve, the United States used Treasury Notes backed by silver. Banks also issued their own currency, which did lead to the issue of Wildcat Banks. The key point about those Wildcat Banks is that you weren't required to accept their currency. If someone offers you currency from Mutual of Bob you are free to tell them to pound sand and pay you in real money.
"I don't have no bullets. This is so frustrating I want to go back to Califunkey, as you call it, but need money for gasoline. What do iPhones trade at here?"
-- Thirty dollars. Jesse down at the ammo store might give you a few boxes of bullets for it.
"It's worth a lot more than that. And what am I going to do with bullets?"
-- We're down-to-earth folk here in Arkansas. You best drive to N'Orleans or some other big city you wanna try to sell an iPhone.
-- If ya got BitCoins or MagaCoins, Jesse will sell ya bullets. MagaCoins also accepted at the saloon if ya wanna party.
Here is one of the most important points of this answer: the lack of a central plan is a feature, not a bug, of not having a central plan. I trust people to work things out on their own, and wonder why few others do.
So millions of Americans will "vote" with their pocketbooks and decide whether iPhones, metal coins, beanie babies, Bitcoins, Califunkey bank-notes or MAGA hats are the best unit of money with which to calibrate commerce!? You're right: You do "trust people" more than many of us do.
