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  • Fred Piechoczek

What's the value of paper?

Updated: Jan 17, 2023

This article was written by Fred Piechoczek. All views and opinions expressed are strictly his own.

I have often wondered what money is and if anyone really knows. It seems to capture the imagination everywhere from a very young age, even where maths is poor and literacy low. Like grammar, money seems to be hardwired in the human brain. Linguistics has so far failed to build a system of grammar that a machine can use to create language that is not nonsense. Likewise, money in its various physical and virtual forms, with their velocities, strengths, weaknesses, inflations, deflations and links to economic activity, cycles and growth seems to defy exact description. Here are two scenarios.

Scenario One

If you are American, have lots of soldiers, tanks, aircraft and bombs, you can invade another country – say, Iraq. After bombing out its infrastructure and certainly its currency, the local economy is left with barter to effect trade. In the rebuilding phase, your soldiers and civilian advisers and contractors need money, as do the locals to replace primitive bartering of goods. What you do is to take three tonnes of paper and some ink and print a billion dollars that are exactly the same as those you use at home in the USA, except for the serial numbers. You airfreight the tonnage to Iraq, where it is used to purchase a billion dollar’s worth of local goods and services. The locals probably continue to use the dollar bills to effect exchange of goods and services between themselves but that does not impact your home US dollar currency. After you have effected this shipment of paper to Iraq a few times, the question of a new local currency arises. Different paper and pictures are used this time and the new currency is put into circulation in exchange for the US dollar notes circulating in Iraq that are withdrawn and burnt.

In summary, you have shipped over to Iraq three tonnes of paper per billion dollars, obtained the equivalent value of goods and services and then burned the paper … “That’s the way you do it. Money for nothin’ and your chicks for free”.

Of course, in the case of Iraq, there is the corollary that some billions went missing ‘in transit’, so they probably did return to the USA indirectly to stoke inflation.

Scenario Two

The Russian ruble = GBP0.011. You may not think GBP is a good store of value, but it and the US dollar may look good to a Russian with a bit of spare cash after paying for borscht and vodka.

I am not sure how many US dollar bills there are in Russia today, I doubt anyone knows, but it runs into many, many, many billions and grows, padding out mattresses, sitting in safes and occasionally making it to Cypriot bank accounts.

To get to Russia, these dollar bills are at some point exchanged for goods and services, and having arrived in Russia on a permanent visa, they are effectively withdrawn from circulation in the USA, such that the US has exported a few tons of paper for billions of dollars of goods and services. Any claim against the USA, which issued the paper currency, is lost if the paper remains overseas, simply as paper, and is never presented as a claim in the USA or used there as legal tender.

In this scenario, the USA has exported paper with pretty designs printed on it, in exchange for goods and services that are clearly many times the value. Good work if you can get it.

This technique can be compared to tribute that used to be paid by the defeated in battle to the victorious in peace.

You may criticise the oversimplification of the above two scenarios, or even suggest bits are missing and incomplete, but I counter that this is the sort of analysis that economists spend their time doing, and they get paid to do it.

Now if you really want to create money for nothing, let’s move on to the stock markets.

Just as a footnote to Fred’s article, there are of course times when the vast printing of money doesn’t work, and the problems come home to roost. I’m thinking particularly of 1920s Portugal. I’ve written about this before, so I’m not going to rehash all the detail, but in the early 1920s, a man called Alves Reis managed to have printed many, many millions of Escudo notes, which were – through the various criminal processes he was able to use – to all intents and purposes legitimate currency; in other words, not forgeries as we conventionally understand the meaning of the term. (For those with a predilection for law reports, the Banco do Portugal versus Waterlow case is where you can find a lot of the detail.) The result of this was that the money supply in the country expanded massively (unexpectedly, as well) creating rampant inflation and in the end a governmental crisis and collapse. What happened then was the arrival in power of the economist Antonio Salazar, who ruled the country with a corporatist state rod of iron until 1968.

In Fred’s two examples, the USA has effectively succeeded in securing assets in return for its “valueless” paper; and while poor old Alves Reis did live high on the hog for a year or so around 1924/25, ultimately he was sentenced to 20 years in gaol, of which he served about 15.

The moral of this? When the state does it, it’s OK; when the private individual tries effectively the same game, he ends up in gaol……  





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