The nature of money and the need for self-commitment

The essence of money is not based on the physical material, but on the mutual trust of people. It doesn’t matter if this confidence is captured in silver, clay, paper or on a screen. In today’s digital communication, even the pure can only act as a medium of exchange. This realization raises fundamental questions about stability andthe origin of currencies. Historical change shows that the form of money always corresponds to the technological possibilities of the respective epoch.

The need for self-commitment in money creation

When a ruler has control over the money supply, he quickly gets into a cycle of expectations. People expect a constant expansion of the currency, which steadily reduces the value of the money. In order to break this vicious circle, the issuer of the currency must find a mechanism to bind itself. Only through a credible self-restraint can apermanent and stable monetary infrastructure. Without such fixed rules, the population’s trust in the means of payment would quickly be lost.

3 Essential methods to limit the money supply

There are essentially 3 different ways to prevent unbridled currency multiplication. The first approach is based on the creation of incentive structures that make excessive expansion unattractive. This is the basic idea behind the outsourcing of money control to an independent institution. The second way is to tie money to a scarceraw material like gold. The third approach uses an algorithmic limitation, which has only become possible through digital currencies.

The basic difference between metal money and paper money

Many thinkers overlook a significant quality in their view, which distinguishes metal money from money without intrinsic value. One is much more difficult to multiply than the other. If there is no protective mechanism through incentive structures against excessive money multiplication, metal money contains an effective protective function. The pure paper money or book moneydoes not have this inherent limitation. The physical raw material forces the issuer to be modest, while the paper money knows no such natural hurdles.

The physical benefits and the procurement of precious metals

If one considers the method of self-binding prevailing in the ruling money, the use of metal as a basis is striking. Precious metal generally has the advantage of having numerous desirable properties of physical money. It is durable, difficult to foresee and easy to mark with coat of arms or denominations. At the same time, it is only possible to procure in a limited amount, whatadditionally supports the value. If a ruler wants to build a metal-based monetary infrastructure, he must first obtain the metal to mint the coins.

The logistic effort and the limit of the money supply

The procurement of the metal is on the one hand associated with considerable logistics effort. On the other hand, there must be real values that the ruler can dispose of in order to exchange them for the metal or to use it for his abrasion. The amount of money produced is of course limited in this way. This is the actual effect of an expensive metal or analogous to itof digital currency. It does not contain any material properties that make it valuable, nor does it have coagulated labor force.

The protective mechanism against moral risk

The expensive metal is not coupled to any other real values, but serves as an effective protective mechanism against unbridled money multiplication. It protects the population from the moral risk of the money emitter, which would otherwise easily succumb to the temptation of inflationary policy. However, it must be noted that we are still here in the world of ruling moneylocated. These considerations apply to monetary systems in which the money supply is specified from outside, regardless of economic actions. The money supply is rigid in this system and does not adapt flexibly to the needs of the market.

The functioning of the state paper money

With a money without cover, money is created by doing business from within, and other laws apply to this. In such a system, the ruler would be forbidden to emit his own money without control. He would be forced to get extra money from other people who have a self-interest to get their money back. That way it wouldGradually more and more expensive for him to get funds that go beyond his tax revenue. The value is created here by carefully constructed incentive structures of the parties involved and not by exogenous limitations.

The material properties and the required scarcity

If one sticks to the consideration of the ruling money and the non-cash money, the question arises as to the exact properties of the materials. There are specific characteristics that make up the shortness of scarcity money required. The natural limitation of resources ensures that the issuer cannot arbitrarily increase the amount. These physical limits create thatNecessary trust in the consistency of the currency. Ultimately, it is the combination of physical existence and natural rarity that saves money from decay. Consideration of the different monetary systems shows that confidence in the currency must always be based on fixed rules and natural limitations. Without such mechanisms, the temptation for exploitation wouldendanger economic stability of money creation. The development from physical metal to digital and algorithmic solutions reflects technical progress, but does not change the basic economic necessities. Every form of money requires structures that effectively control the power of the issuers and protect the trust of users. merelyWith such credible restrictions, money can permanently fulfill its function as a stable medium of exchange and value storage.