(Untitled)

[malathion]

A man stays in a hotel for a night and when the time comes to pay his bill he doesn't have any cash or cards. Instead he writes the hotel manager a check for $100. Said man has beautiful handwriting and the hotel manager can't bring himself to cash the check. He decides to keep it instead. A little time later he goes to buy groceries but realizes

Comments

[jordan179]

Everyone who used the check, other than the first man. To find the exact price everyone paid, divide $100 by the number of transactions; each person paid the first man that much per transaction. Which is another way of saying that issuing new money in excess of the rate in which it wears out is a hidden tax.

[jordan179]

So it's really no different than if the guest paid cash. This is just an exercise in proving that value is subjective.

The problem is that, unless the check is redeemed at some point, $100 of fiat money have been inserted into the economy, causing inflation. And note the fiction of assuming that everybody is willing to accept this check as money simply because they think it's pretty.

Paper money issued by a government is backed by bullion and/or reputation. It's not "fiat money" in the same sense.

[malathion]

Can you explain what it means for money to be backed by "reputation"?

[jordan179]

Those who decide to accept it as payment for debts believe that (1) the issuing agency won't issue too much money and devalue the currency, and (2) those already part of the "money club" actually have the assets to back up their wealth in paper.

[ytterbius]

"It isn't money at all, it's a good."

It's a good (as a piece of paper and ink), but it represents money, which really gives it it's value. Both of the people that took the check, took it because it was money, not because it, of itself, had any intangible value to them. They then changed their mind, but they did return to it's value as money later on when they passed it on. No matter the subjective value of the check, in the background is the understanding that it actually can be redeemed for $100. Maybe a thousand years later the beautiful check could be sold or traded for real money of the time as some kind of collector's item and without any expectation that the face value could possibly be redeemed in some way, but that's not the scenario of the story.

[ytterbius]

Yeah, I wasn't arguing the original point, I was just being picky on one statement. :)

[absolutcalm]

Paper money issue by a government is backed by... reputation.

How is that not fiat money?

[jordan179]

Reputation is an important intangible commodity; it is not lightly breached. Ask a banker. Especially right now.