Thursday, November 24, 2016

India's currency debacle...

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We would note on this occasion that although what India’s citizens are facing these days may seem a remote danger to most Westerners, it does demonstrate an important point: state-issued paper currency exists only at the sufferance of the State. It can be made worthless by decree.

As we pointed out in “Why Does Fiat Money Seemingly Work?”, the main reason why irredeemable paper money is accepted at all are not only legal tender laws which enforce its use as a means of payment, but primarily the fact that the State insists that its fiat currency be used for the payment of taxes. This is what creates a secondary market demand for fiat money, without which it could probably not exist.

Surprisingly, the concept is not really a modern one – it was tested in Great Britain for a considerable stretch of time with the tally sticks system. Although that particular system ultimately failed (just as every currently extant paper currency eventually will), it did show the way to governments. It was indeed possible to do more than merely usurp the production of gold and silver coins.

So obviously, governments do have considerable influence on what is used as the means of final payment in the economy. What governments have been unable to do though is to effectively “demonetize” the money previously chosen by the market – namely gold. Governments may well be able to make the possession of gold illegal, but they cannot possibly destroy the metal’s monetary qualities by decree. Full story...

Related posts:
  1. Indian economy grinds to a halt after cash-ban: "Faith in system shaken"
  2. The ugly face of India's demonetization: Dozens of deaths...
  3. To understand your future, study Zimbabwe...
  4. Germans losing faith in banks; rush to buy safes...
  5. They are after your cash (and if this happens they will get it)
  6. A golden opportunity for Switzerland...

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