[miscellaneous] Understanding Fiat Currency

October 2016

I’ve been thinking about the nature of money for a few weeks now and while reading Sweezy’s essay on capitalism, it occurred to me suddenly that money is really only a collective agreement, a mind boggling, incredibly complex, formal system of keeping track of “favors”/”IOU’s”. Trust and deference to the established “value” of a monetary note is critical. Niall Ferguson’s definition of money as a “crystallized relationship between debtor and creditor” is spot on. I always thought it was lacking and unclear, but it really is that straightforward and tenuous.

The immediate skeptical response might be to ask, “What keeps the debtor from simply defaulting on his debt?” 

I think its hard to grasp how necessary hegemony is to the functioning of the monetary system. Society’s members must have an unwavering acceptance of the currency, treating it as if it were sacred and “common sense.”

It really is that simple. I think I was struck because it all seemed to fragile and simple. But when one accounts for hegemony, this fundamental fragility can be worked around.