








Common errors

One common trap people fall into is assuming that  government paper money is fundamentally different from other kinds of money, say gold coin money, without stopping to examine the issues closely. If this is a strongly held belief for them, it can make reasoning about how government paper money is and is not different from other money difficult for them.

One common claim is that government paper money  is fundamentally different from other kinds of money because it is “inherently valueless”  or “not backed”. It’s possible for something like this to be true, but it’s also not necessarily so. It’s important not to try to reason too much from these ideas until we have a solid theoretical understanding of monetary economics and what it means to be “unbacked”. For example, it’s definitely not the case that government paper money is always worthless in the conventional economic sense, people often hold such money and use it how they would use any other kind of money, so people must value it.

It’s OK to have an intuitive distrust of government paper money, but it should remain merely intuition until concrete objections can be explained. It is important to start from the basics and not make distinctions, especially distinctions which have connotations, before you understand why there is a distinction to be made.

Readers with this kind of intuition may find it useful to think of a private producer of money that operates very similarly to how the US Federal Reserve system operates (the US Federal Reserve is profitable and contributes its profits to the general fund) instead of a government run supplier. This will help see the similarities and difference between different kinds of money and to stop seeing government money as inherently special.