The Steady-State Initiative
moving toward sustainability through economic reform
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You might not have thought of it this way, but we print our own paper money every time we write a cheque. Understanding this simple practice will give you some insight into how our economic system works.
Let us suppose that your friend John has a guitar that you would like to buy from him for $100. You say to him, "I don't have the cash on me right now, so will you take a cheque?" John looks at you and trusting that you will not rip him off, replies, "Sure thing, bro." Now, whether you actually have $100 in the bank is of no significance at this point. You have just written an I.O.U. on a piece of paper and John trusts you. He has confidence that you will honour your promise to pay.
Now if John endorses the back of the cheque with his signature, that piece of paper can now be traded to anyone else just as if it were real money. John exchanges the $100 cheque for a drum set. In fact, the same $100 cheque gets traded many times over and each recipient of the cheque accepts it on faith, with confidence that it is worth the $100 written on it. This can go on indefinitely and whether or not there is $100 sitting in the bank is not particularly relevant. The system functions entirely on trust, on consumer confidence.
Then one day, many years later, you sell your old computer for $100 and the buyer offers you a cheque for $100. You look at it in amazement and say, "Hey, this is the same cheque I wrote out to John ages ago. The son-of-a-gun never cashed it. I always wondered what became of him and my cheque. Look, it even has my signature on it." You willingly accept the cheque in exchange for your computer. Then you ponder what you should do with it. After no more than a few seconds you quickly realize that the piece of paper is worth nothing to you. You just rip up the cheque and toss the pieces in the dust bin.
In the same manner, government can pay its bills by printing its own money. When the government receives tax payments with the same money, its original I.O.U. is cancelled or redeemed and the paper money not longer has any value. The government can choose to destroy the paper money or it can reissue it as new I.O.U.