The technology of money
Money is fascinating. The history of money is even more fascinating. The future of money is perhaps the ultimate fascination! But what is money? The best definition we have heard is “Anything that has a recognized and quantifiable store of value.”
With that in mind, there are essentially three types of money systems that can be operated — and all three can be found in existence right now.
1. FIAT MONEY
This is “legal tender” as issued by governments the world over. Fiat money is money by decree. In other words, you are obliged by law to accept this money as legal payment of debts. Fiat money comes into existence as a debt when someone (or the government) borrows it. This creates a money cycle where issuance as debt starts a cycle that ends in cancellation, or repayment. Fiat money has some disadvantages of course: governments can create more of it to finance their programs — or for political, not economic, purposes. Inflation is one by-product from such practices.
2. BACKED MONEY
This is where the money issued is backed or redeemable for some commodity, goods or service. The obvious example is currency on a gold or other metal standard.
The early history of paper money is the history of gold receipts or certificates. The early goldsmiths soon found that they could simply issue a receipt for gold on deposit, which could then be transferable to other parties as money (having a recognized and quantifiable store of value). The receipts were always redeemable for physical gold, and hence universally acceptable. This practice continues to today with items such as gold deposit receipts and other items such as warehouse receipts.
The practice of fractional reserves started with gold-backed currency, when goldsmiths realized that they could make loans of gold receipts in excess of the actual gold on deposit. This allowed for an expansion of the money supply via credit, and as long as such expansion was kept within certain limits, there was never a rush to redeem all outstanding receipts at one time. There are many examples of issuers getting in trouble when all depositors wanted their gold at the same time: It simply wasn’t there! Fiat money operates on the fractional reserve principle. If everyone who has money on deposit wants it the same day, then the funds are not there.
Gold or silver is not the only commodity that can back a currency. It could also be based on a “basket” of global commodities, or even corporate scrip, or bundles of foreign currency on deposit. One example of such scrip is mileage points as issued by airlines. This is scrip redeemable for flights.
3. MUTUAL CREDIT MONEY (Organized Barter)
This is a situation in which two or more people accept or provide goods or services on credit, and such credit is recorded and repaid at some future date. The system operates best in a small community of like interest. People will become members of the exchange – and offer to provide goods or services in exchange for this local currency.
4. INTERNET CURRENCY — DIGI CASH ETC…
As of now, the Internet-based digital money systems are really only a substitute for hard dollars. Currently you can change your real dollars for these digital dollars and have them held on account. You can then spend them with other account holders. Trouble is, of course, you are limited in your spending choices to those goods and services provided by the other members of the digital money exchange.
It is a worthwhile exercise to look at the possible money options in order to get a clearer understanding of how money works — and how it could work in the future.
This author currently believes that digital money may take one of two forms. It could be a completely private (encrypted) and non-reported mutual credit system. Or, it could be a backed currency of some sort — as issued by some major private player — able to gain the trust of a large number of people a condition that would be necessary to make such a system function. It could grow out of an existing corporate scrip system or be something entirely new. Acceptability is what is important. Once that is achieved, then you have a useful fiat money alternative.