When money is made out of stuff, using it to make exchanges is really exchanging goods and services for other goods and services - barter. It all depends on how much seigniorage is in the money that's being used to exchange things with. So if it has a low proportion of seigniorage, that means it's more likely to be a good and not really money yet. If it has a high proportion of seigniorage, that means it's more likely to be used as money and no longer as a good to barter with. Ideally the best form of money is the kind that is totally Seigniorage or has zero cost. Because once something has become money, which can only be used to make exchanges, and cannot be used up, that is, has no utility value, what's the point in it costing anything to produce? Just because something has no utility value by no means makes it less useful as money. It in fact makes it more useful as money. Only goods and services should have a production cost in the ideal world because goods and services are the things we really want, not the money we use to buy those things with. Of course we'll never get to a zero cost of producing money because the money has to be made out of something even if it's infinitesimally cheap like a digital bit. Unless we feel we can all trust people we've never met, and that would be a staggering achievement for civilisation. But more so if money where not needed and was just a promise then all other problems would be moot anyway I expect. Money always has to be hard to come by and today that hardness is the trust that I know it can be exchanged with someone for some good or service. I could print my own money but no one would trust it and this is why its never been illegal to print my own money for any extended period of time. So I know I cannot trust other people yet, and I also know I can trust the money, and that's the primary quality of the money people will choose to use. Keep in mind we're talking about the cost of money to produce not its value in exchange - we're not talking about 'price' here. So the goal in an advanced society should be to make the cost of producing money tend toward zero. And the closer you get to zero cost for the manufacture of the money the better it is as the money. Gold being the classic antithesis obviously which has enormous costs to prospect, mine, refine and deliver. Gold must be a terrible mistake when used as money. It may well have been the best alternative once upon a time but we are civilised today, I think! Now gold is only really hoarded, incentivising deflation obviously if used as a money derivative. Remember, I do not mean money becomes better the closer it's value gets to zero, so pay careful attention please - I mean money becomes better for the nation the closer its cost of production gets to zero. The question remains: where is the breakpoint between a thing that's getting used as a good and the same thing used as money, and does it really matter in then end? I think it does.
So something only becomes money once it's breached that threshold. It's only then more likely to be used as money than used up as a thing or a thing to make other things. Until then it's exchange is still bartering. The breakpoint must be when people on the whole are using that thing being exchanged more than any other thing, in exchanges. e.g. when that thing is THE most exchanged thing. It is then when something becomes de facto money. It has suddenly become more valuable to use that thing now as money, than as a thing. It does not require government fiat to force the people to use that thing as money. That kind of force only makes it de jure money which history tells us is often ignored e.g. via taxation, which though it works, its always evaded if possible by everyone. Making something money, in law, is way too weak a way to make that thing the money. The people as the most powerful constituency, more so than the state or a king, have to act on it as a collective for it to emerge as the money. It doesn't have to be precise either. People will notice the threshold has been breached by intuition, as they make so many exchanges daily, it will become obvious that it's suddenly become the most exchanged thing and can be safely used and trusted as the money. Knowing exactly where the threshold is between being a thing and being the money, which is always a moving target depending on dynamic background conditions is not absolutely necessary for it to function as money either. All that's required is to keep any blocking conditions or interventions well out of the way so that it's passage across the threshold is as easy as possible - anything blocking its way will obviously introduce costly externalities. *Note4. This largely means neither the public state nor the private state must never be allowed to profit from the creation of money. That's a monopoly condition. Any profit from that function must be held in common because it belongs to no one and everyone and any profit must be returned to the commonwealth. Ideally maximising the money's efficacy before allowing a profit to accrue. In the ideal world again which never exists, with a government of purity and thrift and a people trying their best to uphold that, monopoly profits from money creation would never arise already. The objective here is not to dream foolishly about this ideal world. It is to change direction and make it our target maybe for the very first time. *Note2
The terms inflation and deflation are really meaningless terms because it all depends. On if the new money is being spent or hoarded, and if it's being spent at a faster rate than the amount needed to make the totality of exchanges within the closed system its working in - say, the nation. So when people say automatically without paying attention, that if more money is being printed than is needed it will cause inflation, that assumption is untrue. It always depends on at what rate it's being spent or hoarded relatively. And then how much of it is being spent or hoarded compared to what is needed to make all the exchanges in the totality of a closed system in that time and place. If
for example, the government prints too much money and instead of spending it on stuff, the people hoard it instead at a rate that goes faster than is needed to make all exchanges within the system, that will cause deflation not inflation, even if nominally there's still too much money in the system. You have to subtract the amount being hoarded before the analysis as a first step. Unlikely as that is to happen it certainly is a possibility but would be extraordinarily difficult and as such has never been tried in all of history. This next question remains: nobody really knows how much money is the right amount to be available to make the totality of exchanges within that closed system. And given conditions will always be dynamic what tool can be used to measure it in real time anyway. There is no such tool even using AI and gigantic data centres of intelligence and processing power. Therefore you can never really tell how much inflation there actually is in that time and place. You can only hope to hit an imaginary target and hope even more the people will believe it. The people generally accept that government inflation targets and what it reports as actual inflation are bogus. Yet we cannot really know anyway as discussed above so that is moot too. But it would be a better world if a new invention could fix it. And I believe one already exists and is already running at scale.
If there's too much money in circulation, how do you get it back out? You have to ask how it came into circulation in the first place. And 95% of all money comes into circulation via the mortgage to purchase real estate. You cannot say that when people pay back their mortgage that takes money out of circulation because the money still remains in circulation when it's paid back to the bank. Again when you tot all this up the question is how do you measure all this easily to make sure you're constantly on the right track, if administering an entire nation - a closed macro system?
The advent of digital currency might deliver a remedy for both these questions through the work of Dr. Craig Wright. With his invention it may well be possible to scan for the breakpoint dynamically at any time as it moves around, just in case digital currency goes mainstream as the nations money. That is to be able to scan for when it crosses the threshold from crypto, to real money. Through both tokenised deposits and a CBDC. *Note3. While also keeping a scientific real time check on the quantity of money in circulation. Certainly the tooling is there in his protocol. We shall see as we enter the next great recession toward the end of next year, where central bank and private bank money will be in serious jeopardy once again.
*Notes:
- "Is digital currency a commodity or a security" is a common question in the crypto world, with a fair deal or quasi-religious support on both sides, largely because the law settling on one or the other means huge unearned gains will be made by the winner. But its a moot question anyway. Because ALL money across ALL of history has ALWAYS been a commodity as can be deducted from the above dialogue, whatever the law declares as ink on a piece of paper, it cannot change that one iota, it can only create a monopoly power with its inevitable winners and losers. Not to mention the evidence before our own faces on display at the Ashmolean's money gallery in the ancient City of Oxford, UK(which is excellent BTW and apols' for the CAPS)
- Just because the current state is in power, does not mean it has a right to the profits of monopoly. It only means it has the power to keep those ill gotten gains. Likewise, just because a private interest has a similar hold over monopoly profits does not mean it has a right to them. It just means that the public state is allowing it to proceed regardless. I'm not trying to be an anarchist here. I am pointing out that its irrelevant who is keeping the freebies, because whomever on all sides is doing it, that will harm the nation equally.
- Do not be quick to let socially engineered fear grab hold of you on these digital currencies. The state already has you by the balls on how you spend your money through taxation of earned incomes, credit card limits, subsidies, welfare, overdrafts and so on and so on. There is nothing new here with CBDC's. Even the fact that being digital will make it easier to control people's activity is counter balanced with the other fact that with a digital currency, that injustice will be clearly recorded in perpetuity, thus discouraging such state activity. Not to mention that privacy will be increased on the whole.
- The US administration has recently done this with Bitcoin Core, a fork of the original protocol which removed every feature which made that particular blockchain capable of any of the useful things we're talking about here. So we do not need to worry about that particular blockchain any more.
- I'm well aware that Bitcoin has a fixed supply of coins. But the Bitcoin blockchain is being used in this context as external tooling for the administration of digital currencies. So is not limited by the blockchain itself. The blockchain may well also be used as a ledger, but only enough of it to run the system through tokenisation. I hear you, at ultra high scale the number of transactions versus the frequency might develop into a problem if the admin is not paying attention or misunderstands its principles. Which is all the more reason to discourage hoarding and inflation in its use.
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