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Money Vapour

Money Vapour

This essay is about how money systems collapse and what holds them together.

The Confidence Game

Before money there was barter. Then came exchanging units of gold. Goldsmiths would store gold for their clients and issue them receipts. It then became convenient to exchange the receipts and leave the valuable gold locked up safely. The value of the receipt depended on the reputation of the goldsmith. It depended on confidence that the individual goldsmith would and could produce the gold on demand.

Then the great fraud began. The keepers of the gold started lending it, or receipts, out to others and charging interest. Even though they did not own it, they lent it out counting on the fact it was unlikely everyone would at once demand to redeem their certificates. Then the crown and the banks got in on the bonanza. This process has got so out of hand that today Canadian banks happily lend money with no reserves at all to back them up. The government no longer backs its currency with gold. However, because this all happened gradually, the house of cards did not collapse. People continued to believe in it because it worked on a day to day basis.

The magic of currency systems is that they work at all. If anyone looks closely at them, they see there is nothing holding them up. They work because people have faith in them and because people in general have no interest in the big picture. They don’t have inherent stability other than this faith. When the faith is shaken, they can quickly collapse.


Monetary systems do collapse when people lose confidence in them. Here are some examples:

Bank runs

People lose confidence in a bank and withdraw their money all at once. Since the bank has the money out on loans, it can’t honour those withdrawals. Panic ensues and the bank has to close, possibly rescued by some central insurance bank that absorbs the run and restores confidence.


In Germany somebody thought a great way to finance public debt would be to print money. There was no need to raise taxes. Of course, this lead to an inflation spiral. Eventually people lost confidence in the monetary system and used currency as wallpaper. The people reverted to using barter, cigarettes and nylons became the units of currency.


When you play the board game Monopoly, people fight desperately with each other over the play money. When one player wins all the money, the game ends and the money again is treated just as coloured paper of no particular value. Similarly in Argentina when the banks won all the money, the people abandoned the official currency and started using their own local currencies.


In a major natural disaster, what you need is food, water and shelter. Your credit card is utterly useless. Cash is only good for starting fires.


International currencies are bought and sold each day. The daily price (exchange rate) is determined, as in all other commodities, by supply and demand. Any of the following can depress the value of a currency:
  • Trade deficit.
  • High national debt.
  • Lack of confidence is a government to survive.
  • Lack of confidence in a government to pay its debt.
  • Corruption.
  • Runaway spending.
  • A fear that others will lose confidence in a currency, leading to panic selling if a currency starts to slip.
  • Low productivity.
  • Any sort of uncertainty, e.g. war, terrorism, natural disasters.
  • Machinations by currency speculators who may be motivated for profit or for backstabbing.
The USA has another currency value factor that does not apply to other currencies. The US dollar is used as the global petrodollar. People need US dollars to buy and sell oil, even when the USA is not involved as either producer or consumer. This helps give the currency extra stability and value. The catch is, if other countries start using some other currency, such as the Euro, or some basket of currencies as the petrodollar, then there will be trillions of unneeded US dollars suddenly dumped on the market, which could tank the entire US economy. One reason for the Gulf War was that Saddam was threatening to sell oil for Euros. He could have started a financial avalanche that could have buried the USA.

The End of Oil

Consider this scenario. As the oil runs out, countries that have oil or that steal oil, will get very wealthy. The ledgers of the world will show them with an embarrassment of riches. Then the oil runs out. The lights go out except for those who have been prudent and have planned ahead. The US military will become all but useless without oil to run it. Countries like the USA may then try to buy the alternative energy technology they need. Those that have it could well say What need have I of your paper money or ledger entries? I want something of real value or backed by real value, e.g. wheat. You are paupers in terms of real wealth. Begone you bums.

This is roughly the problem an individual faces whose savings are in the currency of some poor country in tough times. He can’t spend them. He needs a hard currency that others value.

book cover recommend book⇒The Rigged Game: Corporate America and A People Betrayedto book home
by John Hively 978-1-55164-280-2 paperback
publisher Black Rose 978-1-55164-281-9 hardcover
published 2006-07-15
This is a book about how a tiny wealthy elite, through corporations, have absconded with a larger and larger share of the wealth from the working people. It also analyses the consequence of doing this to excess, such as happened in the Great Depression. To boost dividends, corporations lay off employees, outsource or reduce wages. The wealthy who now have the lion’s share of the money don’t buy more food, stereos etc. They invest their wealth. So over all, when many corporations do this at once, demand for goods collapses and the economy goes into recession. Similarly, to boost dividends, co-operating so-called competitors simultaneously raise their prices. This is the opposite of what you normally do in times of slowing sales. The strategy lowers demand even further, in a vicious downward spiral.
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kilowatt cards: a proposal that currency should be backed by a promise to deliver electric power

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