Paper currencies, plastic tokens.

I pointed out in an earlier post (section 5 of this) that, provided that a government has a balanced budget, it does not need to make salary and welfare payments in any particular currency, it can issue green plastic tokens if it likes, provided it then collects tax in the same tokens.

James Higham said: "The moment we go down the token road, we get into SDRs and thence to oligarchical control. At this time, that's the thing to be avoided at all costs. National currencies need to make a comeback."

To which I asked: "What's the difference between issuing plastic tokens or metal tokens with £1 stamped on them?"

He replied: "It's all in who's backing the tokens and whether you trust them."

Exactly.

So let's take a slightly more practical example to illustrate how government-created currencies work and who or what is backing them. At the moment, the UK uses (say) fifty billion litres of petrol (or diesel) a year, on which it collects about £30 billion in fuel duty. There are (say) fifty million people aged 17 or over (old enough to drive a car and hence 'adult' for the purposes of this example), who receive a lot more than £30 billion a year in various benefits, pensions, tax breaks etc.

The government could scrap fuel duty (currently being collected in £-s-d) and reduce the benefits paid out (currently paid in £-s-d) by £30 billion, and achieve much the same effect by issuing each adult with 1,000 tokens a year (or 20 a week), and levying a tax of one token for each litre of fuel purchased.

The 'average' adult (if there is such a thing) will be indifferent, because the weekly cost of his petrol has gone down by £12 and his other benefits have gone down by £12.

There will of course be some people with surplus tokens (because they don't own a car, or if they do, they don't drive it much) and some people with a deficit of tokens (lorry drivers and other people who have to travel as part of their job), so it's just a question of how these two are matched up, for example:

* Petrol stations could buy the surplus ones and then sell them to people who want to fill up.
* Supermarkets have most of their goods delivered by lorry, so supermarkets will need to buy them as well, so it will set a price per token and will allow customers to pay part of their bills with tokens.
* The bus companies will also allow people to pay in tokens, and will set the price so that they get the right number of tokens to be able to buy the diesel they need etc.

So, these tokens have a value, not because of any intrinsic value, and not even because the issuer is doing anything apart from issue them, but because of the way that they are collected again. People need petrol and are prepared to pay far more for it than it costs to extract and refine, so they will be willing to pay for tokens - that's what gives them their value.

For sure, we do not know what their value will be, I expect that they would start off being traded at around 60p each (which is the currently duty on a litre of petrol), if the price of oil goes up, then the value of the tokens will fall etc.

But we do know that the tokens will have value, and will be a perfectly satisfactory way of making welfare payments and raising the tax to pay them. The fact that the government could completely ignore them in its bookkeeping is a separate matter, the fact that the tax is privately collected (by people with a surplus of tokens) does not stop it being tax.

Of course, there'd be little point in building up a lifetime of savings in these tokens, because the government might announce that the scheme is going to end, in which case the tokens become worthless, but on a week-by-week basis, they would do the job just fine.