The Fatal Flaw Of Centrally-Issued Money
ByWhy the world’s current money regimes will fail
A Thought Experiment on Money
Let’s imagine a small mountain kingdom with only ten very scarce and thus highly valued seashells in circulation. These few shells are certainly valuable in terms of scarcity, but there aren’t enough of them to act as a means of exchange.
One solution to this innate problem of scarcity—money has to be scarce enough to retain value but not so scarce that there isn’t enough of it in circulation to grease trade—is for the kingdom to issue 100 slips of paper for each shell, each slip of paper representing 1/100th of the shell’s value. Now there is enough money in circulation to facilitate trade and each slip retains a store of value equal to 1/100th of a shell. The slips are paper money, i.e. currency.
This system works well, but the rulers of the kingdom aspire to consume goods and services in excess of what their share of the shell-backed money can buy in the open market. The kingdom’s leaders print another 100 slips of paper without acquiring a shell to back the new slips with intrinsic value. Nobody seems to notice, and so the leaders print another 100 slips. Note that the kingdom didn’t produce more goods and services; its leaders simply produced more money…
The Fatal Flaw Of Centrally-Issued Money
