I have a very strange view of modern fiat currency. I arrived at my understanding after lengthy thought about how money came to be in the first place. I began by contemplating a primitive tribe, and trying to figure out how they might "invent" a paper fiat currency.

Without any understanding of money and banking, the process is mind-numbing. I couldn't find step one, but eventually I figured out how I think they would do it, and I would like to run through the steps here, and discuss the flaws of my ideas in order to better understand them.

To get from barter to fiat is a logical process; each step depends upon a real understanding of the previous steps, but in order to move through the steps we must first agree on definitions of "wealth," "value," and "money." If you are interested in this thought experiment, please post your definitions below.

Is this the economics or philosophy forum?

It's fairly tedious to trod through endless discussions when people don't even agree on the fundamentals. This is an effort to create a foundation for meaningful discussions.

"How is money derived?" is a different question from "What is money?"

And I don't think you are ever, no matter how carefully you argue it, convincing the propertarians that money is anything other than a store of value.

I dunno, most people seem to think it has value as a medium of exchange too.

The filthiest thing a person touches on almost a daily basis.

To get from barter to fiat is a stupid move, and they would only do it if they are dumb enough to be tricked by whoever's running the printing presses.

Evidence suggests that they used notches in sticks to keep track of what was 'owed' in primitive times.

There, now you don't have to wonder.

Are you aware that Carl Menger, the founder of the Austrian School, already did this in 1871 (Principles of Economics), and then Mises improved upon it (Mises' Regression Theorem)?

When my dad (now a retired banker) was a student at Columbia in the fifties, he took a Money and Banking Class. There were some quizzes and homework along the way, but the bulk of the grade was the final exam. He went in expecting a series of long-winded questions, only to find that the entire exam was three words long:

What is money?

He was seriously pissed. Went on tilt. Gave this as his answer and handed the exam in and left the room:

Money is sweat.

He got an F and had to retake the class the next semester, this time giving a long-winded answer that got him an A.

But I think he was right the first time.

"Tally Sticks" issued by King Henry I about 1100 A.D.
They did not represent any commodity, they were simply money issued by the King which declared good for paying taxes.

They were polished sticks of wood & the King had 1/2 of the stick & the other 1/2 was in circulation.

I wonder who matched up the 2 when someone brought them in for payment of their taxes.

Doesn't sound like a viable system, since identification of a stick in circulation as a counterfeit could only be made by the King, since he had the other 1/2.

Indeed, but I don't think they had 'kings' in primitive times, or any other form of government

Haven't read through posts yet but just wanted to add to the thread that Lyric said to me:
A debate on youtube I was just watching came to mind:
http://www.youtube.com/watch?v=cncdQ3qNaHM - 53:45-55:23 mark

"They think they're earning real money, they think we're paying them in gold, we're paying them in little pieces of paper"

According to lyric, they are.

http://www.pbs.org/wnet/ascentofmoney/

can't stand Niall Ferguson but this looks interesting.

Must be nice to be America/The Fed in a world where people such as OP believe the money you type into a computer digitally is real wealth.

+1
Yea this too.

Energy is the ability to do work.

Money is a representation of that energy. And somehow, somewhat indirectly, you can print up more money by pretending there is ever more "technically recoverable" energy in the ground. Unfortunately, when it proves untrue, and those reserve figures are shown to be vastly inflated, over-leveraged investment banks scream for corporate socialism to save them, and that money immediately is revealed as nothing more than numbers on a computer screen ledger.

Ya'll are missing the point -- how would you get from barter to fiat if you wanted to do so?

Want an easier way to exchange goods that didn't involve counting out exactly 6 3/4 chickens for 2 1/8 cows.

For me the term 'money' is simply a means of trade. I don't believe it necessarily has to be a store of value. I also think this means of trade develops naturally in a society as it's kind of hard (and messy )to work out how many chickens to trade for an Ipod.

My thoughts are that a currency would start out by two parties (lets say 2 businesses) agreeing to not have to trade in the physical goods in the present, but use coupons or something with their stamp on them that the other party could collect the goods at a later date. Then more and more people would want in because it would be a much more efficient way to trade.

At some level I think all forms of money are simply backed by the trust that others will accept the paper and trade it for real goods. Like if you are using money that some bank has issued that they said was backed by gold ..... you are still trusting in the bank, and at any time the bank may run off with the gold or whatever. That's why I don't see anything inherently wrong with paper currency not 'backed' by anything, but people should be free to choose their own currency and not have a state monopoly on currency, which is pretty horrible.

Simple: the government would create the fiat currency and say that anybody that wasn't willing to accept the fiat currency would be executed.

Wealth: Assets that are capable of generating income. Those assets can be as simple as the items necessary to fix yourself a healthy breakfast, so that you can put in a day's work in order to generate your weekly paycheck. Or, it could be the robot you have on your assembly line, creating widgets that sell like hotcakes. Or, to a farmer, it could be an irrigation system that allows him/her to generate 2x the quanity of food per acre that could be produced without it.

Value: I assume you are talking about "Store of value": It can be anything that has a predictable value at a later point in time, so long as the item is useful. Antiques for example, that have a history of rising in value, or at least maintaining its value at a predictable rate, can be considered a "store of value," because they can be exchanged for cash that can be used for purchases. Even my household items can be considered a "store of value" even though they are constantly depreciating, so long as they have a resale value and can be expected to have a demand for the items if put up for sale.

All of these different types of "store of value" carry varying degrees of risk when held, because some depreciate in value, while the future value of others are not as predictable as others.

Money: Bank notes, gold & silver act as a store of value because they can be stored & when retrieved have a predicable value/use. They store wealth, and are used to transact wealth, however, it is not in itself, wealth.

Well, that question reminds me of when I was going to college & working for this locksmith. There was a new health club, privately owned, that opened in the area & one of the 2 owners contacted this locksmith to install locks & video surveilance system.

The locksmith proposed that they barter the exchange of service for the locksmith being able to use the club indefinitely, which would in effect, put the locksmith on retainer for future needs, limited to those defined at the time of agreement.

An agreement was reached & the 2 parties were happy......well, happy until the 1 owner of the club told his partner of the deal. That partner wasn't happy at all, because bartering is illegal in America, because it is part of an underground economy and he was concerned about the business running into trouble with government.

The partner who agreed to the arrangement didn't see the big deal in it all, so they went to see their attny., who told him just how much trouble they could get into and so..........they had to cancel the deal with the locksmith.

Problem is: They tried to pay the locksmith the retail rate for the work performed, minus the 2 months he had access to the club. The locksmith, having nothing more than a high school education, was ready to accept the deal, however, he was lucky in the fact that he had me for an employee, who was taking contract law & explained to him that an illegal K is not enforceable in court and so therefore, the owners of the club cannot terminate the bartering agreement and pay him the retail price of the work performed, minus the 2 months membership, that they would have to pay him the full retail price.

So, the locksmith gave it a shot & told the owners of the club that it was full price or court for not paying in full for services rendered and after talking with their attny., coughed up the full price of the work performed by the locksmith.

And that ladies & gentlemen, is how I saw a bartering system convert to a fiat system of exchange.

Bartering is illegal? What?