My apologies if this is a beginner question, but:
Is fiat currency essentially a form of protectionism? If I have understood this correctly, you can't spend fiat money outside of those areas that accept it? Where as with a commodity backed currency you can exhange the currency for the commodity?
You can exchange currency for commodity, but this only means that the currency was the commodity and stays it. You're not exchanging anything if you're talking about gold coin for gold bar exchange. You're simply exchanging a round bottle of water for a square one.
You can exchange gold coin for wheat, but only where it is accepted. The fact that it is accepted everywhere is irrelevant here.
Fiat currency is accepted everywhere as well, just at different rates, sometimes close to zero. It can also be accepted as commodity, such as in place of firewood or thermal isolation, or even a source of recycled paper.
So, I do not see fiat in itself being protectionist. It does mostly provide for independent enrichment by theft though. This is why you would see this or that locality splitting away from former bigger state and becoming independent, often through war. The people do fight for perceived or true benefits of independence, but the leaders in all cases except American independence, participate solely and exclusively for the opportunity to print paper money, I.E., to become their own sovereign kings among others already existing sovereigns.
Thorgold:You can exchange currency for commodity, but this only means that the currency was the commodity and stays it. You're not exchanging anything if you're talking about gold coin for gold bar exchange. You're simply exchanging a round bottle of water for a square one.
What I mean is that if you have Country X fiat currency, that is only accepted in Country X. And if Country X has essentially no competitive products, with other countries offering better products for less, are you not forced to purchase inferior products? And if that currency is not backed by any commodities and is not redeemable, then you have to use it to purchase products from Country X.
Where as with a commodity backed currency (that you can exchange for that commodity) you can simply take the commodity and buy products from another country.
Libertas est Veritas: Where as with a commodity backed currency (that you can exchange for that commodity) you can simply take the commodity and buy products from another country.
Libertas est Veritas:What I mean is that if you have Country X fiat currency, that is only accepted in Country X. And if Country X has essentially no competitive products, with other countries offering better products for less, are you not forced to purchase inferior products? And if that currency is not backed by any commodities and is not redeemable, then you have to use it to purchase products from Country X.
Well, this is sometimes true and sometimes not. At present, the USD is accepted in many countries. Granted, the reason for that has a lot to do with fear - the US promises to kill anyone trying to exchange oil for Euros, which makes the USD valuable. And other fiat currencies are accepted world-wide too, there's a business known as money changers, who precisely operate by accepting any currency, and paying in the currency of the country where they are located. So, if I come to America with francs, I can sell those francs to a money changer for USD and buy American products. I believe major banks, through their credit cards, will clear international transactions as well, meaning that I can go on the internet and buy olive oil from Greece (although not cigars from Cuba), and the bank will charge my card in USD but pay the merchant in Greek currency. I could be wrong, but I think that's how it works.
Yes, naturally the money changer takes a cut, but that doesn't seem to defeat the point. It's conceivable that a commodity based currency would not be accepted universally due to subjective preferences, and then you'd have to make an exchange and pay a fee - say, go from gold to silver. So I'm not seeing the argument here. Now, if you want to argue that the existence of a fiat currency causes a country to tend towards protectionism, that certainly seems to make sense - after all, look again at my first statement above about the USD. I think that would be a more successful argument.
Torsten:What hinders you to take the fiat currency and purchase commodities or other currencies with it..?
The that will profit the market that accepts it, which is why I am wondering if it is protectionism.
JAlanKatz:And other fiat currencies are accepted world-wide too, there's a business known as money changers, who precisely operate by accepting any currency, and paying in the currency of the country where they are located.
Yes, but money changers operate for profit, so exchanging the money will mean a net loss. Also, the money changers will be in the same position as the person they changed the currency for; to use the currency they have to spend it in a market that accepts it.
JAlanKatz:I believe major banks, through their credit cards, will clear international transactions as well, meaning that I can go on the internet and buy olive oil from Greece (although not cigars from Cuba), and the bank will charge my card in USD but pay the merchant in Greek currency.
I'm not quite sure how digital money conversions are handled. I'm approaching this from the 'real' money perspective.
You are thinking of a situation when a local currency is used. One can only use this money locally:
Depreciating community-owned currencies There was a time when people were so convinced that the earth was flat, that the idea that it was round was inconceivable. Likewise today, the idea of a community or region issuing and using its own currency and running its own bank may seem just inconceivable. But it has happened. The Worgl Schillings In the early 1930s the small town of Worgl in the Austrian Tyrol, suffering like every other town in Europe and America from the Great Depression, took the unlikely step of issuing its own currency. Its burgomaster, Michael Unterguggenberger, faced an empty treasury, because the unemployed citizens could not pay their taxes; roads and bridges needed repair and parks needed maintenance, for which the town could not pay; and idle men and women earned no wages. He recognised that all three problems could be solved if he could find the connecting link. That link was money. The three problems coexisted because no one had any of it, and his simple solution was to create money locally. He issued numbered 'labour certificates' to the value of 32,000 schillings, in denominations of 1, 5 and 10 schillings, respectively. These became valid only after being stamped at the town hall, and depreciated monthly by 1 per cent of their nominal value. It was possible for the holders to 'revalue' them by the purchase, before the end of each month, of stamps from the town hall, in the process creating a relief fund. 'The small town of Worgl in the Austrian Tyrol, suffering like every other town in Europe and America from the Great Depression, took the unlikely step of issuing its own currency' The depreciation not only encouraged rapid circulation, but also the payment of taxes, past, current and upcoming. These taxes were used to provide social and public services. At the end of each year, it was required that the notes be turned in for new ones. No charge was made for the transaction if the required stamps had been affixed. Subject to a 2 per cent deduction, the town also undertook to convert the labour notes into Austrian schillings. To facilitate this conversion at any time - and thereby provide a cover for the relief certificates - the trustees deposited at the local Raiffeisen Bank (credit union) an amount in Austrian currency equivalent to the issued local currency. The money was loaned out to trustworthy wholesalers at 6 per cent interest. Interest thereby flowed back into the town treasury, yet further facilitating transactions with the 'outside' world. Wages paid in the new money The burgomaster put this money into circulation by paying 50 per cent - later raised to 75 per cent - of the wages of the town's clerical and manual workers in the new money. The workers found that all businesses in Worgl accepted the currency in payment and at face value, and the notes returned to the parish treasury as dues and taxes. Economically, there was no inflation, and politically, the money was unanimously acceptable to all the municipal parties. 'Because it was a depreciating currency, it circulated with rapidity, boosting the local economy. Further, many paid their taxes in advance because it was financially advantageous' Because it was a depreciating currency, it circulated with rapidity, boosting the local economy. Also, not only did people merely pay their current taxes in the currency, but also discharged their tax arrears. Further, many paid their taxes in advance because it was financially advantageous. Apart from the obvious employment benefits, physical assets were created. These included improvements in the main street and its drainage system, street lighting, new road construction, manufacturing of kerb stones and drainage pipes, construction of a ski-jumping platform, and fencing and construction of a new water reservoir. Although the Worgl money was unanimously accepted at the local level, there was great opposition from two centralist forces - the Tyrol Labour Party and the Austrian State Bank. In both cases, there seemed to be the fear of the experiment spreading, for the idea was copied by the neighbouring town of Kirchbichel. The town monies were valid in both places. Other towns in the Tyrol also decided on issuing depreciating money, but did not proceed because of threats from the State Bank. The experiment curtailed Ultimately, the State Bank threatened legal proceedings and on September 1st 1933, the experiment was terminated. In an analysis, Unterguggenberger concluded that depreciating currency fulfils the functions of money much better than unvarying nationalised currency. He noted that no difficulties or complaints had arisen in making payments in the new currency or in affixing stamps, and that the local currency was accepted by all businesses very shortly after starting the project. He also suggested that, not only did it work at the town level, but it could also be applied in larger entities including regions, provinces and the state. Although the experiment was terminated in Austria, it was noted and tried elsewhere. In Canada, for instance, the government of the Province of Alberta set up a provincial depreciating currency in the mid-1930s in the form of Prosperity Certificates. The 'danger' of its success prompted the central government to ban it. What lessons? What lessons can be learnt? First and foremost, that there is nothing sacred about the 'national' money with which we grew up. Money - as information technology, metal chips, paper slips and electronic blips - is what people will accept in payment for goods and services and taxes. 'It was the fact that the community or regional money could be used to pay taxes, and also exchanged for familiar national currency, that made it acceptable and successful' If they will accept community or regional money, then it is as good as Ls or $s or Dms. It was the fact that the community or regional money could be used to pay taxes, and also exchanged for familiar national currency, that made it acceptable and successful. 'A depressed community in an apparently hopeless situation found a way of ending the seemingly insoluble problems of unemployment' The most important lesson, however, is that a depressed community in an apparently hopeless situation found a way of ending the seemingly insoluble problems of unemployment, local decline and lack of a reliable tax base, symbiotically through the use of community-owned currency. The prime candidate for the cause of community and regional decline is the centralised banking and money system. By definition, 'national' money is political. The banks are also political in as much as they make policies to siphon off local wealth and value into their central financial vortex. 'The centralised banks collect money from the regions in a nation and invest in a booming area' This vortex is well described by Myrdal's 'cumulative causation effect.' The centralised banks collect money from the regions in a nation and invest in a booming area, creating a further boom, which demands more national money from the regions, which creates... Conversely and concurrently, the communities and regions are deprived of their wealth - via the national money - to feed the voracious appetite of the centre. Even if some of that money is re-imported into the community or region, it is as externally controlled capital. In the process the communities or regions lose control of their economy, and also their political systems, becoming dispensable 'Regions of Sacrifice'. Scotland is a prime example. A duplication of the process is now evolving in the push for a European central bank and a single European currency. From observation and experience, there is no doubt that the European Monetary System will be used to enhance a corridor of centralised financial power running from London to Zurich and connected to the other major financial centres of Europe, including possibly Moscow. The centralisation of power has always created problems, and its abuse comes as no surprise. The appropriate decentralisation of power, known as the Principle of Subsidiarity, can and should take place. This principle states that the priority for decision-making and action-taking should be at the most decentralised level possible. Only when those decisions and actions impinge upon the well-being of the next larger communities or regions, should those too have an influence. 'It will require authorisation to be given to local and regional governments to create their own currency in the form of non-interest bearing local bonds to be used as money' In practical terms, it will require authorisation to be given to local and regional governments to create their own currency in the form of non-interest-bearing local bonds to be used as money. Community Barter In discussing these ideas, it is also important to understand the difference between community currency and community barter systems. A community barter system - like the LETSystem, which is not community currency - is usually based on voluntary organisational sharing of information about goods and services available from individuals in an area. The accounting is usually based either on time or the nationalised currency (pounds, dollars, etc). Such a system has three basic weaknesses: - It tends to be limited in scope to a handful of dedicated practitioners, usually in largely rural or semi-rural areas. - It does not cater for transactions outside the community. - It encourages hoarding, rather than the circulation of wealth and energy, and can only expand by recruiting new producers - there are no 'built-in' inducements to encourage the circulation of goods and services. A community currency, on the other hand, can be used by anyone in the community as a 'means of payment' for any commodity or service. The only limit to the expansion of its circulation is its acceptability, so it encourages all forms of economic activity. If suitable provision is made for 'convertibility', it can facilitate transactions with people and organisations outside the community, and indeed encourage community 'import replacement'. Also, of course, communities may agree - as they did in the Tyrol - to accept each other's currency at par. Workable now? The example of Worgl suggests several prerequisites for success: - The currency be accepted by local government and other 'official' organisations in payment for taxes, rents, licences, etc, and be used by them for their own local payments. - It must be exchangable into national currency, though some deterrents to conversion - a discount on face value, perhaps - may be needed to prevent the whole issue from disappearing from circulation. - It is essential to encourage the circulation of community money and to discourage 'hoarding', through automatic depreciation. The demise of the Worgl experiment has its lessons, too. It will be necessary to amend the present situation under which only the state - English or European - can issue money - pounds or ECUs - as legal tender. Otherwise the issuers of community currency, and perhaps even its users, will face state sanctions. It will also be necessary to persuade workers that they are not being cheated if part or all of their pay is in community currency. The experiment is surely worth trying, and the growing strength of the regional movement in Britain and Europe suggests that there would be political support in many places for such initiatives.
Likewise today, the idea of a community or region issuing and using its own currency and running its own bank may seem just inconceivable.
But it has happened.
The Worgl Schillings
In the early 1930s the small town of Worgl in the Austrian Tyrol, suffering like every other town in Europe and America from the Great Depression, took the unlikely step of issuing its own currency.
Its burgomaster, Michael Unterguggenberger, faced an empty treasury, because the unemployed citizens could not pay their taxes; roads and bridges needed repair and parks needed maintenance, for which the town could not pay; and idle men and women earned no wages.
He recognised that all three problems could be solved if he could find the connecting link.
That link was money. The three problems coexisted because no one had any of it, and his simple solution was to create money locally.
He issued numbered 'labour certificates' to the value of 32,000 schillings, in denominations of 1, 5 and 10 schillings, respectively. These became valid only after being stamped at the town hall, and depreciated monthly by 1 per cent of their nominal value.
It was possible for the holders to 'revalue' them by the purchase, before the end of each month, of stamps from the town hall, in the process creating a relief fund.
'The small town of Worgl in the Austrian Tyrol, suffering like every other town in Europe and America from the Great Depression, took the unlikely step of issuing its own currency'
The depreciation not only encouraged rapid circulation, but also the payment of taxes, past, current and upcoming. These taxes were used to provide social and public services.
At the end of each year, it was required that the notes be turned in for new ones. No charge was made for the transaction if the required stamps had been affixed. Subject to a 2 per cent deduction, the town also undertook to convert the labour notes into Austrian schillings.
To facilitate this conversion at any time - and thereby provide a cover for the relief certificates - the trustees deposited at the local Raiffeisen Bank (credit union) an amount in Austrian currency equivalent to the issued local currency.
The money was loaned out to trustworthy wholesalers at 6 per cent interest. Interest thereby flowed back into the town treasury, yet further facilitating transactions with the 'outside' world.
Wages paid in the new money
The burgomaster put this money into circulation by paying 50 per cent - later raised to 75 per cent - of the wages of the town's clerical and manual workers in the new money.
The workers found that all businesses in Worgl accepted the currency in payment and at face value, and the notes returned to the parish treasury as dues and taxes. Economically, there was no inflation, and politically, the money was unanimously acceptable to all the municipal parties.
'Because it was a depreciating currency, it circulated with rapidity, boosting the local economy. Further, many paid their taxes in advance because it was financially advantageous'
Because it was a depreciating currency, it circulated with rapidity, boosting the local economy. Also, not only did people merely pay their current taxes in the currency, but also discharged their tax arrears. Further, many paid their taxes in advance because it was financially advantageous.
Apart from the obvious employment benefits, physical assets were created. These included improvements in the main street and its drainage system, street lighting, new road construction, manufacturing of kerb stones and drainage pipes, construction of a ski-jumping platform, and fencing and construction of a new water reservoir.
Although the Worgl money was unanimously accepted at the local level, there was great opposition from two centralist forces - the Tyrol Labour Party and the Austrian State Bank.
In both cases, there seemed to be the fear of the experiment spreading, for the idea was copied by the neighbouring town of Kirchbichel. The town monies were valid in both places. Other towns in the Tyrol also decided on issuing depreciating money, but did not proceed because of threats from the State Bank.
The experiment curtailed
Ultimately, the State Bank threatened legal proceedings and on September 1st 1933, the experiment was terminated.
In an analysis, Unterguggenberger concluded that depreciating currency fulfils the functions of money much better than unvarying nationalised currency. He noted that no difficulties or complaints had arisen in making payments in the new currency or in affixing stamps, and that the local currency was accepted by all businesses very shortly after starting the project.
He also suggested that, not only did it work at the town level, but it could also be applied in larger entities including regions, provinces and the state.
Although the experiment was terminated in Austria, it was noted and tried elsewhere. In Canada, for instance, the government of the Province of Alberta set up a provincial depreciating currency in the mid-1930s in the form of Prosperity Certificates.
The 'danger' of its success prompted the central government to ban it.
What lessons?
What lessons can be learnt? First and foremost, that there is nothing sacred about the 'national' money with which we grew up.
Money - as information technology, metal chips, paper slips and electronic blips - is what people will accept in payment for goods and services and taxes.
'It was the fact that the community or regional money could be used to pay taxes, and also exchanged for familiar national currency, that made it acceptable and successful'
If they will accept community or regional money, then it is as good as Ls or $s or Dms. It was the fact that the community or regional money could be used to pay taxes, and also exchanged for familiar national currency, that made it acceptable and successful.
'A depressed community in an apparently hopeless situation found a way of ending the seemingly insoluble problems of unemployment'
The most important lesson, however, is that a depressed community in an apparently hopeless situation found a way of ending the seemingly insoluble problems of unemployment, local decline and lack of a reliable tax base, symbiotically through the use of community-owned currency.
The prime candidate for the cause of community and regional decline is the centralised banking and money system. By definition, 'national' money is political.
The banks are also political in as much as they make policies to siphon off local wealth and value into their central financial vortex.
'The centralised banks collect money from the regions in a nation and invest in a booming area'
This vortex is well described by Myrdal's 'cumulative causation effect.' The centralised banks collect money from the regions in a nation and invest in a booming area, creating a further boom, which demands more national money from the regions, which creates...
Conversely and concurrently, the communities and regions are deprived of their wealth - via the national money - to feed the voracious appetite of the centre. Even if some of that money is re-imported into the community or region, it is as externally controlled capital.
In the process the communities or regions lose control of their economy, and also their political systems, becoming dispensable 'Regions of Sacrifice'. Scotland is a prime example.
A duplication of the process is now evolving in the push for a European central bank and a single European currency.
From observation and experience, there is no doubt that the European Monetary System will be used to enhance a corridor of centralised financial power running from London to Zurich and connected to the other major financial centres of Europe, including possibly Moscow. The centralisation of power has always created problems, and its abuse comes as no surprise.
The appropriate decentralisation of power, known as the Principle of Subsidiarity, can and should take place. This principle states that the priority for decision-making and action-taking should be at the most decentralised level possible. Only when those decisions and actions impinge upon the well-being of the next larger communities or regions, should those too have an influence.
'It will require authorisation to be given to local and regional governments to create their own currency in the form of non-interest bearing local bonds to be used as money'
In practical terms, it will require authorisation to be given to local and regional governments to create their own currency in the form of non-interest-bearing local bonds to be used as money.
Community Barter
In discussing these ideas, it is also important to understand the difference between community currency and community barter systems.
A community barter system - like the LETSystem, which is not community currency - is usually based on voluntary organisational sharing of information about goods and services available from individuals in an area. The accounting is usually based either on time or the nationalised currency (pounds, dollars, etc).
Such a system has three basic weaknesses:
- It tends to be limited in scope to a handful of dedicated practitioners, usually in largely rural or semi-rural areas.
- It does not cater for transactions outside the community.
- It encourages hoarding, rather than the circulation of wealth and energy, and can only expand by recruiting new producers - there are no 'built-in' inducements to encourage the circulation of goods and services.
A community currency, on the other hand, can be used by anyone in the community as a 'means of payment' for any commodity or service.
The only limit to the expansion of its circulation is its acceptability, so it encourages all forms of economic activity. If suitable provision is made for 'convertibility', it can facilitate transactions with people and organisations outside the community, and indeed encourage community 'import replacement'.
Also, of course, communities may agree - as they did in the Tyrol - to accept each other's currency at par.
Workable now?
The example of Worgl suggests several prerequisites for success:
- The currency be accepted by local government and other 'official' organisations in payment for taxes, rents, licences, etc, and be used by them for their own local payments.
- It must be exchangable into national currency, though some deterrents to conversion - a discount on face value, perhaps - may be needed to prevent the whole issue from disappearing from circulation.
- It is essential to encourage the circulation of community money and to discourage 'hoarding', through automatic depreciation.
The demise of the Worgl experiment has its lessons, too. It will be necessary to amend the present situation under which only the state - English or European - can issue money - pounds or ECUs - as legal tender. Otherwise the issuers of community currency, and perhaps even its users, will face state sanctions.
It will also be necessary to persuade workers that they are not being cheated if part or all of their pay is in community currency.
The experiment is surely worth trying, and the growing strength of the regional movement in Britain and Europe suggests that there would be political support in many places for such initiatives.
Source: http://www.globalideasbank.org/site/bank/idea.php?ideaId=904