Eureka! Figuring Out How Government, ‘Money’, Debt, etc. Works

I am currently working my way through the book The Creature from Jekyll Island – an explanation of our monetary system and related economic system. 

Needless to say, reading this book is an enormous undertaking – but an enriching experience, at least intellectually. 

Over the years, I have often wondered what made money valuable and acceptable in exchange for stuff and labor – especially fiat money as a modern-day invention This book attempts to answer that question.

I’ve often tried to visualize what would happen if we didn’t have fiat money. I’d envisioned a corn farmer with a barn full of corn. To buy milk, he’d probably give a dairy farmer an IOU for 10 bushels of corn payable to the holder in exchange for a year’s supply of milk. The dairy farmer would probably want 10 single bushel IOUs. He could then use five at the meat market and five at the clothing store. The meat market guy could use the five to pay the cattle rancher and the other five for his kids tuition. The school in turn would use the five to pay teachers who would spend them for their needs.  The clothing store would use them to pay his invoices.

Now, if the community didn’t trust the corn producer and his IOUs, the corn producer might swap his IOUs with IOUs from the most honest, richest, most trustworthy man in the community (a banker?). The rich guy might exchange nine of his IOUs for 10 of the corn farmers.  Thus the rich guy would get richer – and the corn farmer would have a more viable currency with which to buy stuff.

I’m ruminating here because I can understand how debt creates money. Understanding the government’s right to create the money is another challenge.  I guess the government is the rich guy in the above example. Not exactly a one-to-one comparison – but it sort of gets me there.

Needless to say, my examples would make more sense if, instead of a corn farmer we were dealing with a gold miner.

As Clash readers know, we need to measure things. The government has set standards for length, area, distance, weight, etc. So I can sort of understand how they have the legal right to establish an instrument of measurement (i.e., the dollar) for quantifying the value of things and labor and the time-value of capital. 

It’s really amazing how we know how to use fiat currency without fully understanding the process of its creation.  It’s like a gigantic puzzle. Personally, I enjoy thinking about this kind of stuff. I suppose it’s the engineer in me.

Readers, let me know what you think.

Image: Courtesy of: http://englishvocabulary2012.wikispaces.com/Figure+out

About the author: William Pauwels

William A. Pauwels, Sr. was born in Jackson Michigan to a Belgian, immigrant, entrepreneurial family. Bill is a graduate of the University of Notre Dame and served in executive and/or leadership positions at Thomson Industries, Inc., Dow Corning, Loctite and Sherwin-Williams. He is currently CIO of Pauwels Private Investment Practice. He's been commenting on matters political/economic/philosophical since 1980.

View all articles by William Pauwels

Like Clash? Like Clash.

Leave a comment

Please disable your Ad Blocker to leave a comment.

Trending Now on Clash Daily