It's all fine and dandy until this bit:
But the government soon moved stealthily to a fiat system, maintaining the principle but abandoning the practice of redeeming jiaozi for metal. Bring an old jiaozi in to the government treasury to be redeemed, and you would receive a crisp new jiaozi.
That was a very modern step. The money we use today all over the world is created by central banks and it's backed by nothing in particular except the promises to replace old notes with fresh ones.
Nope.
Rather counter-intuitively, government issued 'money' does not require any asset-backing whatsoever, all the government needs is a system of whereby people HAVE TO hand those notes back to the government which effectively 'unprints' them again. The mistake that the Weimar Republic et al made was not taxing enough.
This is most easily explained with rationing vouchers. The vouchers had virtually zero cost of production to the government, were handed out as a kind of universal welfare entitlement and people HAD TO hand them over when they bought food or petrol. The government played little or no part in supplying food or petrol so they were not 'asset backed'.
Some people did not use all their vouchers and other people wanted to buy more food or petrol than their official ration, so would pay for them. That's where the value comes from.
On the day rationing was abolished, all the spare vouchers people had accumulated became worthless. Similarly, if the government had printed far more vouchers than there was food or petrol available, the vouchers would have significantly fallen in value.
It's the same with governments printing money (or its electronic equivalent). For every 'real £' of value you create, collect or spend, the government demands that you also pay X% of that value in 'government £' to the government.
Everybody needs to earn (by producing or collecting rent) and to consume goods and services. So you HAVE TO somehow obtain the permission slips to do in 'government £' from the government (or from beneficiaries of government spending). That's what gives them their value.
So the real economy works backwards from the answer and for convenience, denominates its transactions in whatever the national currency is. It wouldn't matter what 'currency' is used in the real economy (like BitCoin), the government simply converts your BitCoin earnings/spending to its 'government £' equivalent and charges you tax accordingly.
The thought experiment works just as well with any tax, including Land Value Tax. It's basic Modern Monetary Theory.
Debate Magazine
