Thursday, March 29, 2007
A thought experiment concerning money
Although money cannot be identified with any of its physical tokens, the curiosity is that money can be created and destroyed via the creation and destruction of its physical tokens. For example, a central bank can print more money to increase the money supply. And consider the following thought experiment: suppose that everyone in the world withdraws all the money they hold in bank accounts and investment accounts, and everyone with shares, or futures, or other financial options, also cashes them in. (Let us suppose, for the sake of argument, that there are sufficient bank notes to allow this). Then suppose that everyone builds a huge bonfire, and burns all their money. There would then be no money left in the world, and our economies would be crippled. The knowledge, skills and experience possessed by people would not have changed, and the value of the goods and services produced by people would not have changed, but every economy in the world would collapse.