I’m not quite understanding you. Fiat money existed long, long, before Keynes. Same with governments and banks creating money out of thin air, even when the country had a metallic standard.
The problem with money is that it is very difficult to understand without digging deep into the question, “What is money.” At the same time using money is so simple and easy that most people have no interest or need to find out what it is and how it works. To use cars as an example, most drivers don’t have a clue about the Otto Cycle because they can drive just fine without that knowledge.
An Otto cycle is an idealized thermodynamic cycle that describes the functioning of a typical spark ignition piston engine. It is the thermodynamic cycle most commonly found in automobile engines.[1]
https://en.wikipedia.org/wiki/Otto_cycle
What money is not
Currency is not money just as casino chips are not money. We call dollar bills money and we could just as easily call casino chips money but they are not money. What then are dollar bills and casino chips? They are part of an accounting system!
How about gold currency? Gold coins were an attempt to attach value (money) to the accounting chips which was useful before we had instant world wide communications. The gold standard becomes a myth with fractional reserve banking. Say banks have a 10% reserve requirement. You deposit $100 dollars worth of gold and the bank can make loans up to $1,000. But those dollars are not backed by gold, the bank does not have $1,000 worth of gold, only $100. Nixon found that out in 1971. The other problem with gold is that it works like a fisherman’s measuring tape, it grows and shrinks based on supply and demand making it a lousy numbering system to use in accounting.
What is money
Money is an accounting system that keeps track of the wealth you have created and not yet spent. In ancient Babylon they recorded transactions on clay tablets, “John gave Jack ten cows.” That was proof that John was worth ten cows. This kind of accounting gets messy quickly. Somehow, I don’t know how, humanity invented tokens to keep track of wealth. These tokens we call currency which represent the value the owner has accumulated. Money is the value the accounting system tracks, it is immaterial, a meme if you wish.
I promised earlier that money is difficult to understand. I think I just proved it. I have spent over 20 years trying to find out what money really is. Niall Fergusson and John Kenneth Galbraith wrote books about money but never did explain the real meaning of money so I kept digging and the above is the best I can do to explain it.
Currency becomes money when we all agree it is money but it is not money, it is just tokens that represent the value traded by the players.
Have you ever seen the money in your broker’s account? They don’t have the official tokens. And banks can create money just like the Fed can by making loans without printing tokens. It’s as real money as the bills the Fed gives you. Because money has no physical existence we invented terms like the “velocity” of money which all it means is that trades are happening faster or slower. The number of tokens has not changed, they just changed hands faster or slower. When a stock drops in price the number of tokens has not changed, we just all agreed that the stock is now worth this new number.
What printing money means is that the government can make fake accounting entries without creating the value they are supposed to represent. The government prints fresh new tokens and people think they got the Real McCoy but they got forgeries with no value backing them. Taxation then takes these forgeries out of circulation which would complete the Keynes cycle.
If the above sounds strange, the Spanish did it with the silver from Potosi. They flooded Spain with silver creating inflation because no additional goods and services came into existence – no value creation to back the newly mined metal. This shows that the metal in the currency is not the value of the wealth the currency is supposed to account for.
The Captain