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jadedragon
Administrator
Canada
3788 Posts |
Posted - 01/21/2010 : 17:37:22
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Commodity "link" not commodity "backed". The Canadian dollar is just as fiat as the US dollar but all currencies are backed by the issuing government's ability to raise/impose taxes. Canada (like Australia) has lots of mines, farms, trees etc - in real terms and on a per capita basis. Therefore the Canadian dollar is commodity linked since the Canadian economy is largely commodity based.
That raises the next question - what drive demand for a currency?
Demand is a Canadian dollars exists because the Canadian Government has the ability to raise taxes and require the payment in Canadian Dollars. That is pretty much the only reason any fiat currency has value. A country which produces and sells a lot of commodities (or anything people want/need) can require taxes be paid which creates demand for that currency amoung people who need to pay the taxes.
Anyone can issue a promise to pay. In the corporate world it is called a bond. On your house it is called a mortgage. The Fed calls it money. All the same thing.
Say we created "goldbucks" and put up gold with some big well respected company or better yet the Swiss Government to serve as collateral. We could use goldbucks all day long to buy other stuff with with Gold backing assured by the Swiss Government.
We could also start printing "paperbucks" and try to use them to buy gold or food or whatever. Suppose that we have crapy income and no real way to redeem the paperbucks. No one is going to want or need paperbucks so it will be really hard to get people to trade hard goods or services for our paperbucks.
However, if we control some territory and decide to impose taxes. If we require everyone to pay taxes in paperbucks, or say go to jail, we create demand for paperbucks. People will now work for paperbucks, see stuff to get them, even steal them. To further prop up paperbucks we make a law that paperbuck must be used to buy government services and be accepted in payment for goods and services. We would also state they must be accepted for paying all debts public and private.
That is how to create a unbacked paper currency and not have it flop.
However, be careful because the whole paper currency becomes worthless if people stop believing in it because we lose our territory in a war (think Japanese occupation money), spend like crazy and lose control of the economy (Zimbabwe etc) or allow too much counterfitting.
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Canadian Dollar is "Commodity linked currency?"
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Posted - 01/21/2010 : 15:57:23
