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Imagine a country without fiat money. Everyone has a monthly allowance based on their job and position within their workplace. Imagine that a construction worker receives 100 currency points. With this he can buy, food, pay rent, and live with all of the basic necessities covered, with a few left over points left for entertainment. Imagine an engineer makes twice as much for example. Every month, said currency points would expire, meaning no long term savings are possible.

I am trying to think if it would be feasible for a nation of around 1 million people, that possesses massive oil wealth, and in which the government subsides everything and pays for education and healthcare, to exist. Assume no private business can exist, and everything is owned and operated by the government. Can you provide me with some counter examples that would invalidate the existence of such a nation.

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    $\begingroup$ "Everyone has a monthly allowance based on their job and position within their workplace. Imagine that a construction worker receives 100 currency points." But that is fiat money. $\endgroup$ – RonJohn Dec 4 '18 at 7:56
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    $\begingroup$ Time limited money would lead to a partial barter black economy economy where people bought things they didn't personally need to exchange, because they had to use the money by a particular date. It's very inefficient for an economy to operate to like this. It's actually very like the way government accounting systems worked when I was in the civil service. $\endgroup$ – StephenG Dec 4 '18 at 8:01
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    $\begingroup$ This is called 'Communism' $\endgroup$ – dot_Sp0T Dec 4 '18 at 11:41
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    $\begingroup$ This is how "communist" economies operated, with the extra feature of no savings. The economies worked in the short term, but could not keep up with growing population, part due to lack technological progress (why invent anything if you cannot profit from it?). The expiration of money savings will lead to hoarding of tradeable items: dry & canned foods, alcohol, cigarettes, light bulbs, etc. $\endgroup$ – Bald Bear Dec 4 '18 at 18:03
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    $\begingroup$ Also, as RonJohn points out: "currency points" is indeed fiat money, i.e. something valueless that have been designated as money. What is different is these points are are volatile and disappear at the time checkpoints. A real world example of nearly exactly what you are describing is Truck Wages, of which Tennessee Ernie Ford sings in Sixteen Tons. That in turn lead to Wage Slavery and is outlawed now. $\endgroup$ – MichaelK Dec 5 '18 at 13:12
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I don't think you actually understand what is meant by the term "fiat money". (And no, it's not what you spend on a small Italian car :-)) Your hypothetical monthly allowance is as much fiat money as any other modern currency: https://en.wikipedia.org/wiki/Fiat_money

As to how well the expiration of "money" at the end of a month would work, this is just hyper-inflation taken to an extreme. We've seen how well that works in practice, with examples such as Weimar Germany, Zimbabwe, Venezuela. There would be no individual savings & investment (since the money automatically expires), so people would rush to spend it on whatever physical goods they could acquire. They might then use those goods in an informal barter economy. (I understand this was quite common in Soviet bloc countries.)

As for everything being owned & operated by the government, that's simply Communism. Didn't work all that well the last time it was tried. Remember the Soviet Union?

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  • $\begingroup$ Non-inflationary timed-expiring money is actually a thing. I think they do this fairly regularly in North Korea. Many European countries used to do this as well. In the US, we used to do this with the Military Payment Certificates (as several episodes of MASH attest). Rampant inflation begs for currency expiry, but expiring currency doesn't require inflation. $\endgroup$ – elemtilas Dec 10 '18 at 14:03
  • $\begingroup$ It's not hyper inflation but demurrage $\endgroup$ – Abdussamad Dec 11 '18 at 10:00
  • $\begingroup$ Some nations sort of do this now. In the '70s Bolivia didn't take worn out money out of circulation. It would get shabbier and shabbier until it fell apart. Couple this with inflation.... I used a 10,000 Boliviano note for toilet paper once. Fairly soft from many foldings in many pockets, certainly better than note book paper. At the time it was worth 8 cents. $\endgroup$ – Sherwood Botsford Dec 14 '18 at 22:04
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The issue with this economy is it does not 'self-equalise' unless each part of the economy is carefully monitored and precisely predicted, with its part of the overall placement and quantity constantly adjusted perfectly to actual and future conditions.

Adam Smith's theories largely are based around self-regulating individualism, ie. as goods and services are produced if they are in demand their cost is naturally adjusted to allow the adaptation of the economy to new conditions. Although added to over time, the theory can be argued to largely hold true.

In your scenario this doesn't happen. Who sets the value of your goods allocation? Who sets the value of your income? These must be planned, sometimes with foreknowledge, especially if there are inherent limitations to income, and how long income is valid.

For instance if there is suddenly a new good that everyone wants, such as a new iPhone, people would find a way to get it. Normally, you could save or invest assets in order to afford these, but if your 'currency' only lasts 1 month you cannot, so people would trade 'IOU's, promises or even swap goods to cater for their desire. Otherwise the government must predict this in advance, and allocate adequate resources to desirable goods, or allocate adequate income to those that need it. A difficult task in the best of times, impossible when reacting to changing circumstances.

In the Soviet Union, there are many prime examples of this type of economy failing. It is mostly in instances where planning is reactionary to altered circumstances. After a deficiency is identified, the value of a good (for instance butter) can be set and it is produced - ok in a world where everything is constant.

However, an enemy nation suddenly invents a new countermeasure, and the Soviets needed to allocate more to defence. This means people making butter are now allocated to making guns, and the populace are left without any butter. As there is no 'currency' it is difficult to determine if the resources allocated to the military are like-for-like, and what ends up happening is a series of '5 year plans' each with a theme, yet never achieving a balanced approach to spending. Eventually each part of the economy is deficient, and not competitive.

In contrast, a self-regulating currency system such as a similar issue in the US, as more resources are spent on the military the price of butter naturally increases, then the demand for butter slowly lowers. You can be assured the resources allocated to the military is what you mean it is, and can achieve balance without prior planning. You can react to natural disasters, or events that alter the market, without having to artificially plan for it. They say that Washington was full of analysts, successful at observing problems, and Moscow was full of planners, failing at solving them. (meaning Washington didn't have to do much and succeed, whereas Moscow was trying to do too much and failing)

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    $\begingroup$ This also leaves room for some creative-inventive to come up with a cheaper but relatively satisfactory alternative to butter. Perhaps as a byproduct of some defense oriented project. Something that the planned economy can't really handle. $\endgroup$ – elemtilas Dec 10 '18 at 14:00
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Everyone wants a little something put by for a rainy day, but you've prevented them from building up any savings. That means it's essential to spend all your points every month on something tangible. It doesn't really matter what as long as it has value and will last past the end of the month.

As a general theme, apart from the fact it's going to be a slightly boring world where children (of any age) can't save their pocket money to buy expensive toys. There no reason why it wouldn't work, apart from the fact that every centrally planned economy has been an unmitigated disaster.

But there's also the question of why bother having a currency at all. Everything is provided by the government according to need and status. Since there's no private business permitted, there's no market for luxury goods. If there are luxury goods available, the government assigns them according to status.

You mention rent, but with the money expiring but either real estate costs no more than 1 month income, or all housing is provided by the government. There would be no point privately letting property as there would be no money to be made from it.

It seems redundant to even go so far as having this pretence at a currency. If you want something, requisition it, if you have the status, you get it.

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  • $\begingroup$ "either real estate costs no more than 1 month income, or all housing is provided by the government" ...or consider repairs and upkeep. It seems likely that very few things done to maintain one's dwelling space (whether apartment or free-standing building) could come out of the few "currency points" left over after essentials are covered. Even if housing is provided for by the government, is the government (as opposed to agents of the government) also doing all the work on it, including building replacement bits for it? $\endgroup$ – a CVn Dec 4 '18 at 13:25
  • $\begingroup$ @aCVn, I'm in the UK so I just assume that the landlord (in this case the government) is responsible for all such upkeep. $\endgroup$ – Separatrix Dec 4 '18 at 13:35
  • $\begingroup$ There's a condition you've skirted around, but not actually included: The value of money in private transactions will change during the month: As you get closer and closer to the expiry date, the currency will be "worth" less. All Rent, etc, would be due within days of everyone getting paid $\endgroup$ – Chronocidal Dec 5 '18 at 12:53
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Counter examples that would invalidate the existence of such a nation:

  • Poland

It's called rationing and it "worked" as you described. The thing was - it didn't work. In any regulated market, apart from obvious black and white market, you will also have grey one (you may heard about this one) and pink. Grey is 50/50 mix of black and white (so acquiring stuff you don't need on white market to trade for something you need/want on black market). While Pink is white market (so government owned companies) acquiring stuff on black market because otherwise they would be unable to work (and if you say that the government provides everything it would mean that there is no need for government because everything is provided).

Reasons such markets arise are, general generalization:

  • People who are "awarded" for the plan fulfilment will either lie about it (they report 100% while they made 80%) or they will meddle with numbers. In Poland we had such joke -

State farm had 5 pigs that weight 150kg each. Supervisor said "oh, that's bad, let's write that we have 10 pigs 75kg each". And then the government said "oh, we have 10 pigs, let's trade 5 of them for steel".

  • You may not amass "currency point" but you may amass commodity that, surprisingly, don't keep the white market value but change it to black market one. Because government don't have, and cannot have, value converter the value of pack of smoke is arbitrary to the owner. You don't smoke so it's worthless. But for someone who does it may be worth 5 packs of sweets. So you trade.
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    $\begingroup$ I d have called the "pink market" a system where women barter "services" in exchange of goods. $\endgroup$ – Fred Dec 12 '18 at 23:17
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Lots of good answers so far! I'll concur on the notion that your point system is in fact a currency system, but I disagree that it is a fiat system.

The US dollar, the UK pound, the euro as presently understood as either a piece of rag paper, a little copper and brass disc or an electronic blip in an account, is indeed fiat currency. It is worth one dollar or pound or euro because the government concurs with the Central Bank who says those things are worth money.

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Your system is actually quite different. You country's currency points (CPTS) are much more like Ithaca Hours which is a money system based upon a person's labour. If you work an hour, you get an Hour. In your system, if you work an hour you get 0.625 CPTS for four 40 hour weeks. (100 per month, as a generic construction worker.)

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Where your system I think can be made to work is with the two factors that don't seem to have been addressed. One is the oil rich nature of your economy. Second is the very small size of your population. A million citizens sitting on top of decades or centuries worth of oil reserves means there's a lot of money to be made.

Just not by your citizens.

For this to work, two things need to happen. One, you need to control how many people can play in the sandbox at once. You can't have foreigners coming in and claiming, even after a couple generations, to be citizens. To keep your benefitted citizen rolls manageable, you need to define a citizen in terms of clan or family residency within the kingdom before the time of oil discovery. This means all the FDWs (and their inevitably domestically created children) are excluded; foreign oil execs & foreign service providers are excluded. Keeping the numbers manageable means your government should be able to provide all the basics free of charge in perpetuity.

Second, your Government Oil Corporation needs to be able to operate internally and externally with some kind of internationally accepted currency. US dollar, sterling, euros, gold sovereigns, ameros, Maria Theresa thalers, whatever. This is what they will get in exchange for the oil. This is what they will pay the foreign workers with. This is what they will use to import goods and build up infrastructure.

enter image description hereenter image description here

So long as conditions are reasonably stable and oil remains a valuable commodity, your system should function, simply because GOCorp has enough income to make the system work.

For a while. And for some people only.

The limiting factor will be in your citizens. Any citizen who is willing to abide by the limitations of the system ought to be happy. He gets a nice apartment all furnished and with a decent modern appliance plan, utilities paid, public transport paid, a good job, school for the kids, low cost public amusements and educational facilities at his disposal.

But what if his neighbour wants to visit Paris or tour London? What about the CPTS engineer who gets 200 a month who's friends with a foreign services engineer whose wage packet is full of exotic and valuable euros and silver thalers and US dollars? While the citizen has to use up his CPTS locally within the month, his friend can literally sit on a hoard of valuable money that doesn't expire!

Sooner or later, dissension will arise. GOCorp will have to manage the crisis somehow, which I leave to you!

Answer:

YES your system can work; but only with limitations on who can benefit from the system and only so long as the citizens perceive the system to be of benefit to them. You'll need more social engineering than economic policy to keep the system working.

A possible outlet for your citizens who are not earning money, is to install a vending machine like this one:

enter image description here

This way, citizens can actually accrue some savings. Just press a button to determine how many CPTS you want to convert and the machine spits out gold or silver coins of equivalent value (less conversion fee).

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  • $\begingroup$ I'm not sure how this is different to someone working for £10 an hour - they have entered an agreement with their employer to say an hour of their time is worth an £10. This doesn't stop the pound from being fiat money. $\endgroup$ – Lio Elbammalf Dec 12 '18 at 20:37
  • $\begingroup$ Well, what stops Hours from being fiat money is that it is not a government saying what an Hour is worth. There is an agreement between worker and management. If you're an unskilled day labourer and management says your Hour is worth ten quid you won't really have much say. If I come along and say I know how to properly work and maintain a range of power equipment and air tools, and by the way, I'm offering that skillset for twenty quid an Hour. If I accept 15 our unskilled day labourer hours are worth different amounts. (cont) $\endgroup$ – elemtilas Dec 12 '18 at 20:58
  • $\begingroup$ The labour is also not worth ten pounds, because there are no domestic pounds for an hour to be worth ten of. That's basic to the scenario. And yes, the pounds that this government corporation will inevitably have to deal with are, in fact, fiat currency. $\endgroup$ – elemtilas Dec 12 '18 at 20:59
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What you are describing is FIAT money, since the credit is backed by the state.

It only being valid for a month doesn't change anything. States rotate their bills and coins from time to time, usually with a period of overlap where you can switch to the new variant. The case descried here has a short lifespan, and no option to get the new version.

Non-Fiat money would be ex. gold coins that by the gold content is inherently of value

Ignoring the fact that gold is fairly useless for the average person compared to food and water. The seeming argument for non-fiat is that the government can't make your money worthless on a whim. Since any coin you possess is valuable by itself.

I'd argue your system won't actually change much, just make it harder/illegal to do

There will still be private companies, just might not be legal. According to David Graeber’s book Debt - Updated and Expanded: The First 5,000 Years, smaller communities will anyway just deal with credit to trade among themselves. It won't default to a barter system of economy, as there's arguably no example of that having existed anywhere.

Additionally, a bank could still manage your tokens. If you had extra tokens to spare, put them in the bank. The bank redistribute it to someone as a loan, assuming there's enough time.

Of course, it become tricky due to time limit, but the bank can also issue it's own currency based on credit and the government token. As others mentioned, commodities don't expire overnight either.

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Just a thought about what might happen in this system.

We've all been in the situation where we have too much month at the end of our money. And there are some with bit left over at the end. So what's to stop people in the second group from offering to loan a bit of their surplus (say 5 points) to those in need based on a promise that after the first of the next month they pay it back, most likely with interest (say 6 points). Thus a minority start accumulating a black/grey market capital.

I'm not the brightest person on this board, so if I could think of that trick, not only would the people in this country think of it, they could come up with some even more interesting ways to accumulate wealth despite the limitations imposed.

In short, your model is not sustainable. Sorry.

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This is an interesting idea. Kind of like a modified version of socialism (not communism). You should look into the economic model that Qatar enjoys. It's not an identical system to what you're talking about, but there are enough similarities that you should check it out anyway. You might get some interesting insights. Also, you should try to think about every way this system could be subverted and abused. No economic system is without corruption. People are wily that way.

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  • $\begingroup$ Hi Brian, welcome to WB.SE! Please take a moment to review the help center and tour so you can get a good idea how the place works and what is expected in a good answer. You have the makings of a good answer, but it is little more than a vague suggestion. A good SE response will flesh an idea out and more fully explain than what you have done. As it stands, you've got little more than a comment, and may well be deleted. Please think on it; then edit and improve! $\endgroup$ – elemtilas Dec 13 '18 at 23:39
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as pointed out by many of other answer, what you are proposing right now is, well, a currency.if you wan't it to work without currency you might take a different aproach. each mounth every citizen will have the right to go on a website and they will subscribe to a full package. every of them as the same value, but not in the same way.

let say there is two package, for the simplicity of example.

"food quality" you get few theatre ticket, basic compute, but you will be issued food from more local producer

"entertainement" where, you get a lot of theater place, but, lower quality food

but what you realy get from it will also depend of your job. an engineer who take food quality might for example get, some fancier food and a bit more place to the theater than a worker.

it would prevent the wast that your current system would create, who right know encourage to spend everything on useless thing, because otherwise the would waste their money

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