Community-based Banking (6) Created by the Community

Money is not created by the government. Money is created by the trust of the people in the community in which it is issued and accepted. The value of a currency only extends as far as the authority and reliability of the group that accepts it is trusted.

Trust fosters trade. If trust in is limited to immediate neighbours and friends trade will be almost impossible. If trust extends to larger communities, trade and specialisation will increase. If trust spreads across many communities, trade will expand.

State money only has value within the boundary of the state. Most coins have a picture of the king on them. People assume that the king’s coins have value anywhere that the king has control. This is an illusion. A coin is only of value as far as the king is trusted and most kings are not trusted, because they have frequently debased their coins.

A king cannot make money valuable. A king cannot force a people to trust his money. All he can do is demand that people pay taxes using their coins. This creates some demand for the king’s coins, but it does not establish trust in the king’s money. A king’s money will only be used throughout a nation if the people know that other people within the community will accept in exchange for goods and services. If that trust disappears then the money will stop being used as people find safer ways to trade. A king cannot stop this from happening.

The fiat money that we currently use is backed by the government. Most people assume that it can be trusted because the laws require everyone to accept it for the settlement of debt and for the payment of taxes. Trust in fiat money is really trust in the government. Unfortunately, governments cannot be trusted. Throughout history, they have debased their currencies and their people have suffered terribly.

The truth is that money only has value, if people of the community accept it as having value. It will only be trusted, if the people of the community trust it. They will only trust it, if the key traders in their accept it. If people stop honouring the obligation it represents, its value disappears, regardless of whose picture is on it or the laws behind it. If traders stop accepting money, then its value will disappear, regardless of who has issued the money?

When I have a hundred dollar note in my pocket, I feel confident, but what am I trusting? I am not assuming that the paper has value. I am not trusting the bureaucrat who signature is on it. I am trusting the people in my community. I am relying on some in the community to exchange the note for something that I need.