Despite believing I had a good understanding of money this exercise took far longer than I expected largely because I tried to think it through with a simpler case “Lordy World” but as I explored the implications of the features of money it just kept messing with my mind. “How can this really work?” There appeared to be flaws all over the place. With this in mind I hope Lordy World will really make you think. The fundamental features are correct but you will see that the implications are mind boggling.
[ASIDE: I spent a lot of time thinking about what was a good currency for this, looking for something everyone could get and could split in to small parts whilst being limited in availability. You may think an idea is original but it rarely is. Also, today at the cinema I saw a trailer for “In Time” which looks to be based on this kind of idea]
Imagine a small area of land surrounding a market town such that everyone can get to the town and back to exchange goods. There is no contact with other communities everything consumed and produced is done so within this land and done sustainably. The land has rich soils and extensive forests. People meet everyday to exchange goods by barter. Some people produce goods others work for people in exchange for goods. The main form of energy is human work and sunlight.
It is noted that the barter system makes getting what you need in exchange for what you have oftentimes hard, convoluted and sometimes impossible. A bright spark in the community comes up with this idea of a medium of exchange. He decides, for good reasons, to have the medium of exchange related to human work so he thus introduces the “Person Hour Lordy” – each note represents an hour of human labour. If needs be smaller coins will be produced representing a man minute. Though not strictly fungible (ie an hour of person As labour is not the same as an hour of person Bs) they more or less are and if there is a problem they can work on standardisation (eg we have a standard person hour and each person will have an equivalent – eg for person A 45 minutes is equivalent to a Person Hour Lordy, person B is 1h15. Periodically these factors could be reviewed) [for my illustration this fact is not that important] He decides to call this idea “money”
How does money get in to circulation ? They set up a central body which he calls the Bank. From here you can deposit your time and get fungible Person Hour Lordys (quickly abbreviated to PHLs). Rules are in place so you couldn’t deposit more hours than could be redeemed in a certain time frame (eg a 35 hour work week). The Bank would keep accounts so they knew who had deposited hours of labour and handled any redemption of hours. The guy running the bank is paid in PHLs by the producers since his services are helping facilitate the trade in their products.
If you have PHLs there are three things you can do
- Hang on to them to buy products later
- Redeem them at the bank. This means you get hours of someones labour it could be your own if you deposited hours or someone elses
It’s important to note some features of this system:
- money is linked to something of intrinsic value and of limited supply.
- the money in circulation is limited by the population and the maximum number of hours you can deposit.
- the banker cannot arbitrarily increase the money in circulation. He could increase the limit on time deposits which increases the maximum but it would still require people depositing time to increase the money supply.
- given the closed system we have and the limit on money supply general inflation cannot occur. If some products went up in price others would be cheaper or unsold since there’s only so much money. So much like a barter system prices will fluctuate based on relative availability but there can’t be a general rise in prices. (NB – for years and years nations for all intents and purposes were not in a closed system with the mass of the world to expand in to and lots of room for population growth. However, the World is a closed system and with globalisation and population growth we are now starting to hit the limits of this closed system)