Emission of fiat money

emission of fiat money
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Paper Money and Inflation in Colonial America Humpage Economist Emeritus Owen F. Humpage's research focusing on the international aspects of central bank policies has appeared in the International Journal of Central Banking, the International Journal of Finance and Economics, and the Journal of Money, Credit, and Banking. PDF Inflation is often thought to be the result of excessive money creation—too many dollars chasing too few goods.

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While in principle this is true, in practice there can be a lot of leeway, so long as trust emission of fiat money the monetary authority's ability to keep things under control remains high.

The American colonists' experience with paper money illustrates how and why this is so and offers lessons for the modern day.

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Money is a societal invention that reduces the costs of engaging in economic exchange. Absent money, we would all have to barter, which is time consuming and wasteful. If money is to do its job well, it must maintain a stable value in terms of the goods and services that it buys.

Traditionally, monies have kept their purchasing power by being made of precious metals—notably gold, silver, and copper—that had value outside of their monetary role. Inflation in the colonies was not solely a problem of too much money chasing too few goods; it had a fiscal component.

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The Usefulness of Money Money reduces the cost of engaging in economic exchange primarily by solving the double-coincidence-of-wants problem. Under barter, if emission of fiat money have an item to trade, you must first find people who want it and then find one among them who has exactly what the best options site desire.

That is difficult enough, but suppose you needed that specific thing today and had nothing to exchange until later.

They dislike this — they want money to work as a safe store of value by fixing its total supply. The Gold Standard is one way of doing this. One often finds especially on the internet! A nation adopts gold as the basis for its currency by fiat — by government decree. The idea of the Gold Standard is to fix the quantity of money by pegging its issue to a scarce resource — gold.

Making things always requires access to the goods necessary for their production before the final good is ready, but pure barter requires that receipts and outlays occur at the same time. Money solves the double-coincidence-of-wants problem by being a general medium of exchange, and it allows one to decouple the timing of receipts and outlays by offering a means of deferred payment. A lack of money plagued colonial America.

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The problem surfaced as soon as settlement reached a stage where agricultural households reaped surpluses, and a fledgling network of commercial activities—trade, processing, small-scale production—emerged.

The mercantile policies of England kept the American colonies perpetually short of specie, the various silver and gold coins that served as money across the globe.

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Whatever specie the colonies acquired through their trade with the Caribbean and southern Europe was lost when they imported finished goods from England. This is not to say that specie did not circulate; it did, but apparently never in sufficient abundance.

Without the convenience of money, colonists resorted to many less-efficient methods of trading. Barter, of course, was common, particularly in rural areas, but individuals often had to accept goods that they did not particularly need or want only because they had no other way to complete a transaction.

They accepted these goods hoping to pass them on in future trades. Some items, most famously tobacco in Virginia and Maryland, worked well in this way and became commodity monies directly or as backing for warehouse receipts. Out of necessity, merchants and wealthy individuals frequently extended credit to others.

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In an economy that depended heavily on barter, however, one could end up holding debts against many individuals and across a broad array of goods. People naturally hoped to net out some of these debts, but this is extremely difficult under barter. Fortunately, colonial creditors could tally debts in British pounds or colonial currencies even if these currencies were not readily available.

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In this way, money acted as a unit of account. By attaching a value to things, money accommodated the netting out of debts.

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Colonial money first arose in the mid-seventeenth century as a unit of account for just such purposes. Moreover, to attract much-needed specie into the colonies, merchants bid the prices of the various silver and gold coins above their official British pound prices, as set by the British mint.

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These colonial premiums could be quite substantial. A silver coin might be worth more Massachusetts pounds than Pennsylvania pounds.

The value of an emissions credit is determined by a national cap in emissions and the degree to which the credit confers a right to pollute. The ultimate value of an emissions credit is realised when it is surrendered to avoid punitive fines for emitting. Emissions reduction currency is also different from a voluntary carbon offset where a payment is made, typically to fund alternative energy or reforestation, the emissions reduction or sequestration resulting from which is used to reduce or cancel the payers responsibility for emissions produced by themselves. The value of an offset is in its being held by the purchaser and applies only for the period and purpose against which the offset applies.

In this way, the different premiums for specie defined distinct colonial money—even though no specific colonial currency actually circulated. Money, acting as a unit of account, ideally describes the value of various goods and services, but money does not determine their values.

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