Typology

Ori (@orishim on X) writes:

"Money is commonly understood through two competing models: state-issued fiat and scarce commodities. But beyond these lies a rich history of alternative monetary systems, each attempting to capture some fundamental truth about value.

Through these approaches, we can better understand what money is and what it ought to be.

1. Authority (Fiat)

Money is whatever the State accepts for tax payment.

Authority-backed currencies maintain value through a dual mechanism. The sovereign creates baseline demand by requiring tax payments in its currency, while adjusting money supply and interest rates to manage purchasing power.

This understanding emerged from Chartalism, which argues that money derives its value from the State's power to impose tax obligations in its chosen monetary unit. Modern Monetary Theory (MMT) extends this insight to contemporary fiat systems, emphasizing that sovereign governments can always create money to meet obligations, with the real constraint being inflation rather than tax revenues.

Both frameworks explain how fiat currencies maintain value without commodity backing. The State's role as currency issuer and tax collector creates perpetual demand for the currency, while legal tender laws reinforce its use. This enables flexible monetary policy that can respond to economic conditions but requires trustworthy institutions.

2. Commodities

Money is a tangible and scarce thing.

Commodity money maintains value by anchoring its supply to something that cannot be easily created or destroyed. Carl Menger formalized this view in his theory of monetary evolution, demonstrating how the most marketable commodities naturally emerge as money through market processes rather than state decree. According to this view, gold became the dominant monetary commodity because it has optimal physical properties: durability, divisibility, high value-to-weight ratio, natural scarcity.

The classical gold standard, articulated by David Ricardo and others, attempted to institutionalize these properties into a self-regulating monetary system. By fixing currency values to gold, it promised automatic price stability and natural balance-of-payments adjustments between nations. While challenging to maintain, the gold standard demonstrated how commodity backing could constrain monetary policy and prevent currency debasement.

The search for incorruptible money has found new expression in cryptocurrency. Bitcoin's design enhances gold's key characteristics through cryptographic rather than physical constraints. This fixed-supply model has inspired variations, notably memecoins that demonstrate the role of social narrative and speculation in attaching value to scarcity.

3. Private Debt

Money is created when banks make loans.

Debt-backed money maintains value through the cycle of credit creation and debt repayment. When banks make loans, they create new money as deposits, which is destroyed when loans are repaid. This process, known as endogenous money creation, means the money supply naturally expands and contracts with economic activity.

This understanding emerged from the credit theory of money, developed by Henry Dunning Macleod in the 19th century. Macleod argued that bank credit, rather than state authority or commodity reserves, is the primary source of money in modern economies. Joseph Schumpeter later expanded this theory, showing how credit creation enables economic innovation and growth. In 2014, the Bank of England acknowledged that commercial banks create most of the money in circulation through lending. When a bank makes a loan, it creates both an asset (the loan) and a liability (the deposit), expanding the money supply without requiring pre-existing deposits or reserves.

This system enables dynamic money creation tied to economic opportunities, but it also creates inherent instability. Minsky's Financial Instability Hypothesis explains how economic stability encourages risky lending, leading to cycles of credit expansion and contraction. As banks and borrowers become more confident, they take on greater leverage, eventually leading to financial crisis. DeFi protocols like Maker, Aave, and Ethena demonstrate how debt-based money creation can operate without traditional banks, using smart contracts to issue loans against user collateral. Newer protocols that use reputation scores for undercollateralized lending may expand the scope of debt-based money even further.

4. Mutual Credit

Money is a ledger of who owes what.

Mutual credit extends the insight that money emerges from credit obligations but reimagines them in a peer-to-peer network rather than a banking hierarchy. Money is created when participants extend credit to each other and destroyed when debts are repaid, ensuring the total supply always sums to zero. In his 1849 proposal for a "People's Bank," Pierre-Joseph Proudhon argued that money could emerge from interest-free lines of credit between producers and consumers.

E.C. Riegel developed this view in the 1940s with his "Valun" system, a mutual credit arrangement between private enterprises. Riegel argued that money's essence lay not in its backing but in the trust relationships between traders, making state or commodity backing unnecessary.

The Swiss WIR Bank, founded in 1934, provides the longest-running example of mutual credit at scale. Operating alongside the national currency, WIR credits are created when businesses extend credit to each other. The system has shown resilience during economic downturns.

Modern Local Exchange Trading Systems (LETS) apply these principles at a community scale. In LETS networks, members' credits and debits must sum to zero, creating a self-balancing monetary system. This ensures stability but also reveals mutual credit's key limitation: the difficulty of extending trust relationships beyond high-trust communities. Crypto-based experiments like @CirclesUBI, @grassEcon, and Credit Commons attempt to address this scaling challenge through algorithmic mechanisms.

5. Labor

Money represents human work.

Labor-backed currencies maintain value by creating new money only when work is performed. Each currency unit represents a standardized unit of human effort, like one hour of labor.

This approach emerged from critiques of industrial capitalism, particularly through Robert Owen's response to 19th century labor conditions. Owen proposed a system where currency directly represented hours of human effort, building on classical political economy's labor theory of value.

Josiah Warren, inspired by Owen but critical of his communal approaches, developed a more individualistic system. He implemented the first practical labor currency at his Cincinnati Time Store (1827-1830), where goods were priced in hours of work. Warren's experiment demonstrated the feasibility of labor backing and its challenges—accounting for skill differences, work conditions, and varying productivity.

In the 1980s, Edgar Cahn developed Time Banking, which focuses on community service and mutual aid rather than commercial exchange. It values everyone's time equally, regardless of the service provided. Participants earn "time credits" by offering skills or assistance to others in the network and spend these credits to receive help or services in return.

6. Energy

Money should be tied to the laws of thermodynamics.

Energy-backed currencies maintain value by tying the money supply to measurable energy production or availability. Each currency unit corresponds to a standardized amount of energy (typically kilowatt-hours).

Proposals for energy-backed currency emerged from ecological economics' critique of conventional money's disconnection from physical reality. Howard Odum's 1970s work on energy accounting provided the theoretical foundation, demonstrating how all economic activity could be measured in energy terms.

Richard Douthwaite developed a practical monetary proposal in "The Ecology of Money" (1999). He argued that linking currency to energy production would connect money supply and real economic capacity. Unlike gold or fiat, energy-backed money would expand with genuine growth, measured by energy throughput.

In the 1920s, early experiments with energy-backed currencies occurred in Germany during hyperinflation, where some municipalities issued scrip backed by electrical power. In the 2000s, there have been various currency proposals related to renewable energy, such as Solar Dollars, Edogawatt, and Kiwah. SolarCoin is a blockchain-based approach, where each coin represents 1 MWh of verified electricity production.

7. Indexes

Money should reflect real-world economic conditions.

Indexed currencies are linked to economic indicators or baskets of goods to maintain stable purchasing power. Unlike commodity-backed systems, they don't require holding reserves. When the currency's market value drifts above or below its target index, different mechanisms can restore the peg, such as adjusting interest rates, issuance rates, or conducting open market operations.

The concept emerged in the 1910s with Irving Fisher's proposals for a "compensated dollar" that would maintain constant purchasing power with respect to a basket of commodities. This influenced John Maynard Keynes's "Bancor" proposal during the 1944 Bretton Woods Conference, a supranational currency unit based on a trade-weighted basket of 30 representative commodities. A variation of this idea was implemented in 1969 with the International Monetary Fund's Special Drawing Rights (SDR), which derives value from a weighted basket of 5 major currencies. The SDR serves as a supplementary international reserve asset that helps to stabilize the international monetary system.

In 1976, Friedrich Hayek proposed the "ducat," a private currency that would maintain stable purchasing power through a commodity basket index. Unlike previous proposals, Hayek envisioned private banks competing to issue ducats.

The rise of computational power has enabled more ambitious proposals. Robert Shiller suggested "trills"—tokens representing one-trillionth of a nation's GDP—to link currency value to economic output. Bernard Lietaer's Terra currency concept proposed backing by a basket of commodities with demurrage fees. Lok Sang Ho developed the World Currency Unit, which combines GDP-weighted major currencies that are each indexed against their countries' inflation rates. Facebook's Libra (later Diem) planned to derive value from a basket of stable financial assets."

(https://x.com/orishim/status/1863940546315886872)

Discussion

Ori:

"The search for monetary truth reveals not a single answer, but a series of incomplete truths. Each foundation reflects certain values while obscuring others, shaped by the observer's vantage point. Perhaps money's deepest truth lies not in a single system, but in the interplay of complementary solutions.

Bernard Lietaer's four-layer monetary framework is one version of how this might work:

Index-backed world currency for store of value
National fiat currencies for economic sovereignty
Purpose-specific currencies for social goals
Regional and community currencies for local resilience

Richard Douthwaite's multiple currency proposal offers another vision, combining:

Energy-backed world currency to serve as global reserve
National currencies, linked to the global reserve, for everyday commerce
User-created currencies, both geographic and purpose-specific, to mobilize underutilized resources
Commodity currencies for savings

Crypto makes monetary diversity feasible, enabling currency programmability and interoperability. The real question is no longer whether multiple currencies will coexist, but who will design them."