Derek Thompson did a good write-up on private currencies for The Atlantic, and even included a sidebar on the Fureai Kippu currency of Japan! I am quoted as saying, in regard to the question of where money gets it’s value:

“Imagine that we are on a gold standard and a severe drought hits,” economist Nick Blanchard explained to me in a useful example. “Suddenly water is in extremely high demand relative to gold, and everyone would be happy to rid themselves of bullion for water. Would you say that the dollar derives its value from gold, or the fact that people will accept it to buy water? The gold price of water is a floating exchange rate as much as is the dollar price of yen.”

“The real value of any currency comes from the reasonable assumption that when you demand goods and services, the paper/metal/lint/whatever in your pocket will be accepted in exchange for that thing,” he continued. “Currency loses all its value when people no longer want it in exchange for what you want.”

Indeed, I focus very heavily on money as a medium of exchange. It’s pretty common that people get the price of money and the value of money confused, and switch between thinking of (and talking about) money as a medium of exchange and unit of account willy-nilly. I almost never think of money as a store of value. The fact that we store value in dollars is an artifact of our currency featuring positive interest rates.

A little more on Fureai Kippu: It is an all-electronic currency, and has two central clearing houses, one in northern and southern Japan. FK credits are easily transferable, and many younger people transfer their credits to older relatives so that they can pay for care. The biggest thing (other than health care) to spend FK credits on is education. Private teachers are very popular in Japan, and many of them accept the credits as partial payment of tuition. And finally, a survey of elderly in Japan found that they preferred workers who were paid in Fureai Kippu to those paid in Yen, because the care was better (or more “authentic”). The absence of interest rates is what creates this effect — different currencies foster different relationships between people. Bernard Lietaer is fond of referring to this as “Yang money”, and “Yin money”.

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