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Wednesday, 2 October 2013

The Illusion of Money

Home-made money may not be accepted as 'legal tender' but anyone is free to buy and sell in any currency they wish. Just the state does not have to accept it as payment of debt and nor does anyone else.  If I buy and sell in JP YEN exclusively I must still pay my tax bill in UK Pounds.

Because of this the illusion is that the only good means of 'tender' is the state issued 'legal tender' and so there appears to be no real market for any alternative currencies, even those that may have clearly very substantial backing.

If there was an alternative currency of substantial backing and the state declared they would accept it by way of payment, recognise it as legal tender, it would potentially become useful and adopted.

But that is not going to occur simply because: if the new currency's backing is more resilient (not a fiat currency and so resistant to inflation) than the state's own tender (which is an inflationary fiat currency) we should all be able to workout what will result.


This is one reason why the state holds the monopoly for the production of their legal tender. The other reason is publishing a fiat currency is, well, like printing your own money.

So why does the banking system not take the advantage and publish their own currencies in competition with the state? (It would be easy to develop insurances for exchanging to state money for paying your tax-bills and the like).

Banks are not going to try to compete because it is the banks that actually produce a large part of the state currency, from nothing, with fractional reserve banking for which they are granted a monopoly by the state. So effectively they are already reaping in the benefit whilst getting the state to act as lender of last resort.

So why does a non banking organisation not issue a new currency? They could but the existing banking system would refuse to deal with it so an entirely independent banking structure would have to be put into place. Bit Coins is an example of this concept.

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