I want to make the case that thinking of money as a product specifically designed to be used as money and produced by a producer is often a useful perspective, and that this perspective remains useful for government created money. From this perspective, the Federal Reserve (a branch of the Federal government) is the producer of US dollars and the Chinese government is the producer of the yuán. This perspective grew out of my ongoing debate with Silas.

It is not difficult to imagine money which is not produced by anyone. An economy that uses pure gold in no particular shape uses money which is not anyone’s product. There might be gold miners, but they do not produce gold for use as money necessarily, and it could be the case that gold is simply found on the ground occasionally. It is also easy to see the drawbacks of such a money. If gold is in nonstandard lumps it must be weighed and purity tested for each transaction. It also means that people must keep a real resource that might otherwise be used for some productive purpose, so it may mean gold is not used in the optimal manner.

One can ameliorate some of these problems by using a similar but separate product specifically designed to be used as money. A sedan is serviceable for transporting lumber, but a product specifically designed for the task, such as a truck, is much better. Perhaps some bank or government will start minting standard weight and purity gold coins specifically to be used as money for a fee, and people will come to prefer using these coins to gold lumps, perhaps trading at a premium to gold lumps. Now these coins have become different product from gold lumps. The bank takes gold lumps and produces gold coins that have extra properties. These coins can meaningfully said to be the product of that bank or government and not the product of any other bank or government even if competitors produce very similar coins.

If such coins are to succeed it is important for it to bear the bank or government’s name or be otherwise branded. If the coins are not branded or brands are not respected, then it is easy for counterfeiters to ruin the product by producing similar but lower purity coins. However, it is important to distinguish between counterfeiting and merely competing products. A rival bank or government who mints their own coins with a different brand has produced a separate product, much as Gucci bags are not counterfeits of Chanel bags even if they look similar. If a competitor with a different brand produces lower quality coins, they will just ruin their product no one else’s.

This perspective applies very well to government monies. All government monies that I have seen bear a brand of that government (US dollars say “Federal reserve note”), and other people are not allowed to produce money with that brand. Some countries, including the US allow competitors, and some countries do not (link). Most central banks, including the Federal Reserve, turn a profit from their activities.

Most methods of improving a non-product money will involve making money into a product, for the same reason that most methods of improving wild tomatoes as a food source involve making tomatoes into a product. It is almost certainly optimal for most money to be product money.

One implication of this view is that it is meaningful to talk about the optimal level of money production by a bank or government, for the same reasons it is meaningful to talk about the optimal level of bread production by bread producers, there will be some level of production that maximizes welfare (and/or producer profits depending on your optimization criteria).

Another implication of this view is that government produced money is not necessarily special. It is possible that it is special because private producers can’t commit to appropriate production or because money production has some externality that private producers do not take into account, but this is something to be demonstrated rather than true a priori.

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.