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The notion of money is very complex and there are multiple schools of thought but here's one way to look at it: Say you give me a donkey and I give you an "IOU

by deeg 4y ago

The notion of money is very complex and there are multiple schools of thought but here's one way to look at it: Say you give me a donkey and I give you an "IOU - one donkey or equivalent". That IOU represents my debt to you. If my reputation is good, you could trade that IOU to someone else for say, 10 chickens, you pass my debt to them. If my reputation is really good, your town could pass my IOU around for different goods and then my IOU acts just like money. Cash (and money) works the same way as an IOU. It's just that the owner of the debt is abstract and far removed from the holder of the cash.

denton-scratch 4y ago
I get that cash is basically an IOU. I also get that an IOU doesn't really require any token; a shake of hands is enough to establish a debt, which is the same as money. So it seems that in an economy without money, money will arise automatically, in the form of debts that are to a greater or lesser extent formalised. So why do economies need central banks? What's wrong with that kind of "informal money"? I have a strong suspicion that we don't; that it's governments that need central banks.
- ArnoVW 4y ago
  We created central banks after the organically grown system crashed spectacularly a couple of times. This is generally the way we react to that sort of things. And even if things still sometimes break (in slightly different ways than before) these systems have allowed us enormous amounts of economic growth.
- imtringued 4y ago
  We don't need central banks as they are today. We need something like a demurrage currency, once you have that you can control the velocity of money, once the velocity of money is known, you can do price level targeting via monetarism aka no inflation or deflation. The central bank won't have to set the interest rates anymore if the reserve requirement is something sane like 20% or 30% as banks are limited in their bank reserves and thus incentivized to choose the right interest rate for themselves. This also eliminates the need for QE. You still need the central bank as an inter banking network by the way.

by deeg 4y ago

denton-scratch 4y ago

I get that cash is basically an IOU. I also get that an IOU doesn't really require any token; a shake of hands is enough to establish a debt, which is the same as money. So it seems that in an economy without money, money will arise automatically, in the form of debts that are to a greater or lesser extent formalised. So why do economies need central banks? What's wrong with that kind of "informal money"? I have a strong suspicion that we don't; that it's governments that need central banks.

ArnoVW 4y ago
We created central banks after the organically grown system crashed spectacularly a couple of times. This is generally the way we react to that sort of things. And even if things still sometimes break (in slightly different ways than before) these systems have allowed us enormous amounts of economic growth.
imtringued 4y ago
We don't need central banks as they are today. We need something like a demurrage currency, once you have that you can control the velocity of money, once the velocity of money is known, you can do price level targeting via monetarism aka no inflation or deflation. The central bank won't have to set the interest rates anymore if the reserve requirement is something sane like 20% or 30% as banks are limited in their bank reserves and thus incentivized to choose the right interest rate for themselves. This also eliminates the need for QE. You still need the central bank as an inter banking network by the way.