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.


Neil Forsyth said...

Wouldn't make much difference to me, as I'm permanently skint. The odd thing is, apart from my smoking habit, I don't think I spend that much more money than my wife (who earns roughly the same as me), yet she always has an extremely healthy bank balance. Sorry, just an idle thought on the mystery of my financial woes (I really need to get out a pencil and paper). Anyway, back to your thought experiment. Well, if all the lolly went up in smoke and everyone was back to square one, there would be absolute mayhem for a time, I'd imagine. However, a money-less situation like that couldn't last very long. New currencies would emerge pretty quickly. Not necessarily paper money, with its abstract value, but concrete goods and services. For example, I'd be buying up cigarette stocks left, right and centre. Look, there would be widespread misery, death and destruction leading to a complete change in the world order. And I've a strong feeling it wouldn't pan out great for guys like me or you. Suffice to say, when the dust had settled, it would be the same kind of ruthless bastard who had more money beforehand who would end up with more of what replaced it.

Gordon McCabe said...

Maybe your wife, Neil, has shares in Imperial Tobacco. As you spend more money on cigarettes, her wealth goes up.

And, yes, in the event of law and order collapsing, I don't think I'd last long. Although, maybe I could find a place to hole-up for a while, before emerging into a John Wyndham, post-apocalyptic new world.