Sunday, December 26, 2021

A Mechanical Exercise Tracking the Creation and Lifespan of Fiat Money

Here's a little mechanical exercise that tracks the creation and lifespan of fiat money. We use coins to identify paper or electronic financial instruments and the backs of used envelopes to represent sectors which own financial wealth. This exercise should be comforting for those who believe that money might have a physical reality but may seem unrealistic to those who think of money as being purely virtual.

Our stock of coins should include at least three different denominations. We need four envelopes to represent three financial sectors of an economy and a virtual storehouse.

I used quarters, dimes and pennies. Quarters were used as government bonds, dimes as mortgage-backed securities, and pennies as fiat money.