The article was good, but that part is wrong. The dollar is worth something because you need it to pay taxes. You can squat in a tent in the woods and eat nuts and berries and not buy anything, but if you trade with anyone, they need dollars to pay the taxes on their income, even if it's just barter.
In other words, at some point in time a bunch of elected representatives agreed that the dollar would be worth something and codified that in law.
The basic chartalist money story is:
- Local warlord/chieftan/strongman wants to get government-type things done, e.g. build a road
- Warlord says "I will pay anyone 5 dogecoin per day for working on my road"
- The people say "who cares, we don't want your worthless dogecoin"
- Warlord says "Anyone who does not pay 20 dogecoins in tax by the end of the month will be killed"
Suddenly you have people working on the road. But not everyone wants to work on the road, some people need to do other things like farming food.
So the farmers trade food to the road workers in exchange for dogecoins so that the farmers can pay their tax.
And the farmer trades some extra dogecoins to the blacksmith for a new shovel. Now the blacksmith can pay his tax.
Etc. The imposition of the tax has created a Schelling point where dogecoins now function as a medium of exchange, unit of account (5 dogecoins == 1 day of manual labor), and store of value. i.e. a currency.
Another major (and not mutually exclusive) theory of money is that of credit. Let's say the farmer says "I'll give you a bushel of grain now in exchange for 100 dogecoins by the end of the month". Now the road builder has a debt to the farmer, and the farmer has an asset worth 100 dogecoins modulo the creditworthiness of the road worker. The farmer could trade this IOU to someone else as if it were dogecoins (again, modulo default risk), etc. You can build up the whole financial system from here.
Any explanation of money should be required to refer to this concept
For fiat currencies where new money is mostly created as debt, the common refrain is that its value is based on common trust. I think it’s more than that. Debt is an obligation between two entities regarding future outcomes - namely, the repayment of the loan plus interest. When looked at this way the value of money comes from humanities ability to affect future outcomes. If I take out a mortgage, the bank trusts me to repay based on evidence I’ve demonstrated, and I trust the bank due to the bank’s reputation, the laws that govern banking, etc.
I am not an economist and wouldn’t be surprised if these concepts are already in some theory I’m not aware of. I do think that the sentiment that money created out of nothing is not really correct - rather it’s money created out of expected future value.
It is incorrect to say the dollar is backed by nothing. It is backed by the threat of violence from the US government, and the US government is very good at violence.
Oil being priced in dollar, or the petrodollar standard is due to America providing protection to various OPEC countries who in exchange keep all their reserves in dollars. This is somewhat of a more informal arrangement, but is the reason that countries that stop selling oil in dollars usually get in wars with the U.S (e.g Iraq, Libya, Russia).
Also. capital gains in foreign currency are not normally taxed. That and Argentina and Zimbabwe are horrible at collecting taxes.
However, what money actually represents is debt. This is the same with any asset class, but especially with a country's currency. If I have a goat, and you have a cow, and I want milk but you're not interested in what you have to trade I could issue an IOU, if for instance I have excess feed for my goats that I could trade in the summer. This sort of arrangement could be made in smaller communities, because breaking the social contract could have dire consequences. However, when you scale that up on a societal scale you begin to create a currency. The name of the currency doesn't really matter, honestly, it could be the dollar or bottle caps, as long as it's a currency that represents value to everyone. In a small community a hundred bottle caps could be worth the value of a pound of wheat, or 100 pounds of wheat.
How do you decide? Well it all comes down to the person who is buying the product, but then again, not really... It's also a social contract that people are making. The value is defined by making comparisons both by how useful the asset is, how rare the asset is, the demand for the asset, but how much people agree the asset is worth collectively and in order to make such a decision the people have to decide how much value a currency has when exchanging goods and services.
The same with any fungible asset - all value is created because people collectively decided to assign it this value. You can see this actively playing out in any asset class from housing, stocks, and cars, to things as trivial as magic the gathering cards, to things as important as the value of one's labor. When you're done at the end of a job someone will say to you "how much money do I owe you?" not "how much taxes do I pay you?" because therein lies the real value of a currency. The labor, and the asset that is being provided is the value, not the taxes. Without a common collectively agree upon asset that people can exchange then there is no way to exchange services without a bartering system.
The dollar's power is that universally everyone agrees that it has value. However, the dollar can still have power outside jurisdictions that don't pay taxes to the United States government. How does that square with your argument? Why does it have value? People in France are not paying taxes to the Government but they can freely trade Francs in exchange for Dollars. So it can't be taxes. If there is no currency that everyone agrees has a common value how do you pay taxes? How do you even decide what a fair tax value is? If I say tomorrow that the new currency is bottle caps, what is the fair tax rate? Well, the first question you would ask yourself is what is the value of a bottle cap? And thus you return to the beginning of this post, and society has to begin again to make another unspoken agreement about the value of a new currency. The value of a currency is again will be decided relative to the perceived value of the goods and services provided, and the agreed upon value of said currency.
In my imagination milk is worth 100 bottle caps, but you may disagree. Thus we barter, and therein lies the value of all currency. Bartering isn't gone, it's just invisible, or symbolic nowadays. So when you're in a business meeting trying to sell your next startup imagine how much milk you can buy, or whatever.
https://www.ato.gov.au/Business/GST/In-detail/Rules-for-spec...
Seriously, just try to calculate the idealized value of $1 based on a single tax, perhaps a tax you pay. There's no way to come up with anything. The theory being advanced here does not stand up to even the simplest attempt to apply it!
(There might have been a cruel feudal lord that demanded one gold coin per annum on threat of imprisonment, but I haven't heard of him if there was.)
We seem to be in agreement that a dollar quota would create dollar demand, is that correct?
It seems to me that once the pump starts moving, it doesn't matter whether the government charges a percent or a fixed amount. But I think I agree with you that you can't start the pump by asking for a percent.
Makes me wonder if way down in the kernel code of the monetary system there's some kind of dollar quota, or alternatively if the current system booted off a dollar quota. Makes me think of a stamp tax or something like that.
Since everyone was already exchanging in dollars at that time their value didn't drop to zero, although it has fell a lot since then for obvious reasons.
Since people don't really use dollars as a store of value on a large scale anymore (Bill Gates does not own billions of dollars, he owns billions of dollars worth of stocks land etc.) it's not as bad as it sounds.
Needless to say that relationship is complicated, you can’t work it out on a napkin, but it’s a mistake to think it’s random.
The key point is that the government won't accept berries as payment of your taxes. You have to sell your berries to someone else for dollars, and then pay your taxes in those dollars.
If a berry is worth $1, then a 10% sales tax on 10 berries is $1, which is 1 berry.
If a berry is worth $10, then a 10% sales tax on 10 berries is $10, which is 1 berry.
So what we see here is that the government is taxing 10% berry value at all the different values of a dollar.