How would an economy and country operate without fiat money?

Question

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 subsidizes 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?

Answer 1

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?

Answer 2

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)

Answer 3

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.

Answer 4

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.

Answer 5

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.

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.

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:

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).

Answer 6

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.

Answer 7

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.

Answer 8

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.

Answer 9

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