On Understanding Money
Published: March 2001
Fiat money is a creation of both the state and society. Its value is supported by expectations which are conditioned by the dynamics of trust in government, the socio-economic structure and by outside events such as wars, plagues or political unrest.
The micro-management of a dynamic economy is not far removed in difficulty
from the micro-management of the weather. However, money and the financial
institutions and instruments of a modern economy provide the means to
influence expectations and bound behaviour. The control of the fiat money
supply, together with rules on the granting of credit and the bankruptcy, default and reorganisation rules are public services. They provide lower and upper bounds for the price level in the economy. They also determine the innovation rate of the economy. An innovation may be regarded as an economic mutation; the less costly failure is, the more likely an innovation will be risked.