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How might it harm a society to destroy some of its money? (For example, by burning a large quantity of cash.)

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    These guys might be experts for this: en.wikipedia.org/wiki/K_Foundation_Burn_a_Million_Quid ;-) Commented Mar 23 at 8:27
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    FWIW not a direct match, but in 2016 India nuked a large part of its bills in circulation, IIRC. reuters.com/business/finance/… Some of those effects, because people didn't turn them in time, possibly mimicked some of this hypothetical cash-burning. And... not to be pedantic, but burning or otherwise destroying worn out banknotes is fairly common practice w central banks/mints. Commented Mar 23 at 16:08
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    @ItalianPhilosophers4Monica The burning by central banks is usually coupled with printing new ones. Usually we talk about replacing in that case.
    – Mast
    Commented Mar 24 at 6:48
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    I'd like to note the ambiguity. Are you asking about literal destruction of literal cash? Or about the reduction of M2 money supply? Commented Mar 25 at 2:33
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    "by burning a large quantity of cash." Whose cash? I don't understand the question. I have my wealth in my bank account or in material things. How is the destruction supposed to happen? Commented Mar 27 at 18:34

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Burning a large quantity of cash in a modern economy will simply impoverish you, and not have any significant effect. The UK’s money supply is about £3 trillion, of which less than £100 billion is notes in circulation. And of course you can’t get your hands on a significant proportion of that £100 billion in order to burn it. You might technically cause a tiny amount of deflation, but it would be swamped by other much larger effects.

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The only harm which is specific to destroying physical tokens of money, would be the cost of reprinting or reminting those tokens, which is typically far less than the face value of the token (intentionally so).

The vast majority of what we think of as "money" does not exist as physical tokens, and in fact a great deal does not even exist in any material form at all, but purely as claims upon the productive economy - the right to make a demand for economic production.

In general, destroying your own claims upon an economy can only impoverish you, since you forfeit the claims whilst others only forfeit the burden you would have represented.

It's possible that if enough claims were somehow destroyed at once, intersecting with a hidebound state policy which did not respond to it by giving away new claims in equal and opposite measure (i.e. applying inflationary pressure), then systemic dysfunction could be caused.

The dysfunction would be a deflation in currency, would be what economists call "a lack of effective demand", and would be widespread bankruptcy of creditors as money claims were pressed against them without them having any commensurate ability to press money claims themselves (due to a lack of sale income caused by the crisis in effective demand, and by upstream bankruptcies).

Typically when attacking a state's economy, you want to assume for yourself the sovereign right to manage the money supply, and create your own claims independently of the will of that state's administration - by forging hard currency, and thus turning on the printing presses when the state in question wants them switched off. You don't typically want to destroy your own genuine claims against the target economy.

Or put in even simpler terms, you want to forge the right to take from your adversary's stores and to put his workforce to your use. You don't want to destroy your already-genuine rights to do so.

One thing to note as well, is that if you do have enough scale to cause systemic dysfunction by destroying claims, you can cause the same dysfunction just by withholding and hoarding the claims. Typically though, the state will respond by driving inflation, and therefore progressively destroying the power of those existing-but-withheld claims against the economy.

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    "Typically when attacking a state's economy, you want to [...] forg[e] hard currency, and thus [turn] on the printing presses when the state in question wants them switched off." It may be worth adding some historical examples of this to the answer: en.wikipedia.org/wiki/Operation_Bernhard In contrast, I doubt there are historical examples of a country trying to destroy their adversary by burning their money. Commented Mar 24 at 12:42
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    The en.wikipedia.org/wiki/Superdollar forgeries caused speculation that Iran was forging them, for a combination of direct profit and anti-US action.
    – pjc50
    Commented Mar 26 at 9:48
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It would be difficult to destroy enough to make a significant difference, however, historically there have been a number of occasions where shortages of particular denominations (particularly coins) have disrupted purchasing and brought alternative tokens into circulation. For example, in Italy in the 1970s there was a short of small denomination coins (see https://numismatics.org/pocketchange/italian-emergency-money-of-the-1970s/).

I think the evidence from this is that while destroying tokens of exchange on a large enough scale might cause disruption and inconvenience, this is the only real impact on the economy.

(Cryptocurrency enthusiasts might ponder that limiting circulation of their coin du jour will not ensure eternally rising value, if some other suitably-backed asset, held in a trusted bank say, is available in sufficient quantities).

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Destroying cash would be a big disruption to be sure, but if credit cards kept working, commerce could continue without any fundamental impediment.

Taking the US as an example, the majority of "money" exists in digital form:

  • US Currency (cash) = $2.3 Tril
  • US Monetary Base (cash + bank reserves accounts at FED) = $5.8 Tril
  • US M1 money (cash + bank accounts) = $18 Tril

Source: FRED (data service of St Louis FED)- Currency chart , MB chart , M1 chart

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Assuming this is the money the government collected somehow and otherwise would be spending on something, it looks like a trivial deflation. It is not that horrible but may have adverse effects:

  • As some goods fail to find a buyer, the sellers will be forced to reduce the price. The value of the remaining money should increase.
  • The real value of any debts would increase, making it harder for borrowers to pay off.
  • People might delay purchases in anticipation of further price decreases.

A prolonged period of deflation can lead to an economic slowdown or recession. The known historical cases of deflation are the Great Depression (1930) and the Japan's Lost Decade (1990).

Similarly, printing more money (inflation) also have a range of consequences, and while excessive inflation is always bad, a limited and controlled inflation may have complex and at time stimulating effects on economy.

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    Deflation can be harmful and is a real risk, but deflation does not come from destroying physical currency. It comes from a reluctance to borrow and lend money.
    – ohwilleke
    Commented Mar 25 at 18:23
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Coins And Notes

Assuming a 50€ note.

Money have two values:

  1. Material value is low (0.5€cent maybe) due to an industrial process of printing money.
  2. Exchange value (50€), at a commonly determined factor.

Money itself is useless. It tastes cruel, you cant build buildings with it, wont burn good to heaten your flat and money is a bad material for wingsuits.

If a country burn all of its cash (Coins dont burn very well btw.), it will harm a little the environmental nature. There are other exchange mediums that will take place.

But for poor-people the destruction of their money is a big momentenary problem in capitalism.

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The effect of destroying "money" depends on a multitude of different factors.

Like how much are you burning, how is the money distributed within the country and outside of the country, who does the burning, how is the money used in the first place, how accepted is your currency, how does it relate to other currencies, does your country have fixed/semi-fixed prices and so on and on and on.

The thing is, it already makes a difference whether you use idk cigarettes, grain, gold or paper or labor/time vouchers/favors as money and currency. Some of those are consumables, some are naturally depleting in value, others are stable and useless, some possess an intrinsic value, some only posses an exchange value, some are naturally limited, other's are completely fungible commodities and so on.

So likely the first trades happened via a direct exchange of goods and services. So wealth was ownership of intrinsically valuable goods and services. Now destroying those would destroy intrinsic value leaving you worse off than before. Though whether that also effects other people depends on the scope of destruction (environmental damage etc), as well as on the amount of trade happening, so idk if you were the farmer and people relied on the harvest that you'd destroyed you'd disrupt the food supply of a society, while if you weren't part of a society and consumed what you produced all by yourself then your action would have no impact on anybody but yourself.

Next up might be trade via semi-fungible intrinsically valuable goods like idk grain or lifestock. Which allows you to assign a semi-objective value to them and that value is roughly the same for all people with whom you trade. Like they all need to eat, they all eat roughly the same anyway and you've no problem exchanging these goods for other goods and services as their necessity and natural depletion means they are always in high demand. So again if you burn those trade items you're effectively worse of yourself, while the effect on other people relies on how much they relied on your overproduction and the general "wealth" (access to these necessities) of that civilization.

Some problems with grain and lifestock are though that you can only use so much of those, after which their value to yourself will decrease and create work. Like you have to feed and care for your animals you have to protect your corn from the environment, your goods can spoil and die rendering them worthless and if everyone is well nutritioned their value will also decrease. Though given their natural depletion and their necessity they also mean power. Like as you can't opt out of eating, you can leverage supply and demand against other people. So let's say your society has 100 people you have 50 farmers and 50 lumber jacks and the 50 farmers produce 3 times as much as they consume. Now 1/3 is taken for themselves leaving 2 thirds for trade. Now as the lumberjacks also only need 1/3 the last 1/3 is without value. It has cost work to produce it, it would cost work to store it and you're not getting something valuable in return for it. So destroying or never creating it in the first place makes no difference to either the farmer or the group of lumberjacks (at least for now, when the next harvest is less fruitful they might think differently about it).

And I guess from there you already go towards tokens, contracts and "trust" as currency. So take the farmer and their oversupply and suppose they divide that oversupply into meal sized chucks gather as many valuable or worthless tokens as they have chunks and within a trade either allow the person to directly take their grain or accept a token for now and be able to return it for grain later. So that the value of the token is fixed to "set amount of grain". Were depending on the trust in the other person keeping their end of a contract the token is either an intrinsically valuable but easier to transport deposit or is entirely worthless and only covered by the traders reputation to honor their word.

Now destroying your token again sets you back considerably because you now have no longer the right to ask for grain, but otherwise it has no effect other than the farmer having grain that no one comes to claim and which they might claim for themselves. Now a side effect is that both the grain and the token are fungible so the farmer could give out old grain first and prevent his supply from rotting, while the token owner could also use any such token or could also trade that token for something else which they deem worth as much. Again probably the latter at first also needed to come with contracts or a system of trust in both the trader and the farmer to accept the token without their original owner and so on.

Now after that system a considerable problem arises with the choice of the tokens because either you're talking about personalized tokens which are non-fungible and hard to trade with others (like you'd still need to regularly come to that one farmer to do the actual exchange) or they are too fungible and people could just replicate a token an grab the amount of grain without having exchanged anything useful for it (worthless token for valuable grain).

So the more fake tokens the lesser you have a chance to get any grain if you don't come early so destroying excess supply might even do people a favor as otherwise either the whole trust based system collapses or the value of a token decreases (idk less grain to supply everyone with a token or stuff like that).

Now the more accepted such a token system gets and the higher the trust, the lower the physical value of the token can become and so that it doesn't have to be a deposit anymore to be valuable. So in a sense this can become political, because now the value of that token is no longer in itself, no longer in the thing that it can be exchanged for or the trust in a single entity, but it's a system of trust. It's the executive branch and/or juridical branch of that countries government that upholds rights to tokens, criminalizes theft and forgery and enforces that contracts are honored. So a state apparatus can become the backbone of this system of trade and it can become the self-interest of the upper and middle classes to uphold a system of government because their legal, executive and juridical power can mark the difference between "being rich" and owning a bunch of worthless trash.

And over time the "backup" of that trust based token system has more and more shifted from (the token supplier) owning a large stock of stuff that you can exchange their tokens for, to holding a large pile of gold that serves as security for your money, but which is rarely if ever requested as such, to not having a security for that money at all. So as of right now money is effectively completely worthless and only backed by the fact that other people actually buy into that system and TREAT it as valuable.

On top of that banks have moved from a "positive" stock as the source of their tokens to a "negative" stock. So previously you might have had tons of grain and gave out tokens according to the grain you had in your vault. But nowadays banks don't really have that much currency in their vaults. They have a limited amount to supply everyday people with cash if requested, but not in excessive quantities and far less than those people have in their bank accounts. So if there ever was a bank run where everyone tried to get their money, the banks would be in trouble because they actually give out more money than they actually have.

So if they have 10 tokens worth of grain they might give out 100 tokens worth of grain hoping that only ever 10 people at a time will actually want the grain and not just a token. And as credits, if successfully repaid, bring in more money than they initially requested, banks might actually turn a profit with that, where over time they have the money that they lent to other people despite the fact that they did not having it when they actually lent it to these people. In the process they might end up "creating money", because their credits might supply more money than what is available in cash (and that was already a worthless quantity).

So the either you have to move to a completely digital or book keeping business (old school blockchain) or you have to print new cash to keep up with this kind of inflation of money and currency. So burning cash might not so much be an economical problem but a logistical problem as you'd require access to cashless payment options anywhere otherwise you'd technically have the money but no means to transfer it.

Also hoarded cash, not repaid credits, giving out too many credits, forgery and fraud etc, can all seriously disturb the economy as technically the backup for the money is the market in which it is used, but these things can suddenly increase or decrease the available amount of money and as such mess with supply, demand, prices and the value of the currency.

All while giving out credit and the potential of funding approaches that might produce that surplus that is necessary to repay the credit interest rates is what is keeping the market growing, which repays that credits and bridges the gap between imaginary money and real world goods with intrinsic value and as such serves as backup for the entire currency.

So in a sense money is a stake in the economy of the domain which uses that currency. And as such it is a zero-sum game. If there are hundred goods and 100 shares in owning these goods and you'd burn yours then the remaining 99 shares would still correspond to 100 goods so the value of 1 share increased from 1 to 1 + 1/99. Though what that also means is that it's just a matter of distribution of stuff, you're not actually destroying anything, by adding or subtracting money you just change the wealth of different people.

So again if previously everyone owned 1/100 of the total money supply and I print 100 more bills, then suddenly I have half of the claim to all the stuff (100 out of 200) while anybody else has half of their original claim (from 1 of 100 to 1 of 200). Or if the government took a set amount of money from everyone or proportional to their wealth and then burned that cash, it might have no influence at all, beyond a logistical one because suddenly the value of the money would have increased but the amount would have decrease so the effect would be negligible beyond having to adjust the prices of goods accordingly, but that's really just about changing numbers, the purchasing power hasn't changed.

Though if I were to own that much money or even "all the money" I'd suddenly be incredibly poor because there's nothing stopping people from just not accepting and using the currency that I own, but instead trade in something else. Like if you owned all the dollars people could trade in cigarettes, bottle caps or Dollar2.0 or whatever weird cryptocoin is currently the hype. Again the value of the currency is derived from the fact that people treat it as having any value at all.

Which opens up another angle for that, which is expansion of the domain of trade. So is it worth for people to join the trading system of a country and accept it's currency, risking that they increase the money supply and thus decrease the value of the currency that you hold or that they decrease the money supply and make you a larger owner of their economy or what if they suddenly change the currency to something else defrauding you entirely?

Also while technically possible, it's an incredibly risky move because after all, the entire system is kinda based on trust and/or power so doing such a move and risking hiccups of the economy can be seen as an assault on another countries economy and their well being, leading to diplomatic, political and even military struggles. Being able to control supply and demand to direct streams of goods and services is power over one or even many societies and as such a vital political issue.

So TL;DR it depends...

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Question:

How might it harm a society to destroy some of its money? (For example, by burning a large quantity of cash.)

Cash supply, how much currency is in the economy has historically been tied to economic growth. This is because historically you couldn't spend cash if you couldn't get access to actual physical money. Thus a shortage of cash, or money supply in the economy could suppress economic activity and growth.

In the United States this has become less true over the last few decades as other forms of purchasing power has become more widely used. ( Checks, Credit etc ). The Federal reserve still tracks money supply and still regularly reviews money supply as an economic indicator; however today it's just one metric in an array of metrics which describes the economy and thus money supply is less important / influential metric than it used to be.

Money Supply:

The money supply is the total amount of money—cash, coins, and balances in bank accounts—in circulation.

The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply.

  • The monetary base: the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
  • M1: the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions).
  • M2: M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares. Data on monetary aggregates are reported in the Federal Reserve's H.3 statistical release ("Aggregate Reserves of Depository Institutions and the Monetary Base") and H.6 statistical release ("Money Stock Measures").
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How might it harm a society to destroy some of its money? (For example, by burning a large quantity of cash.)

Money vs cash
Money and cash are not the same thing. There exist different measures of the amount of money in the economy (monetary aggregates), as, e.g., illustrated in this chart:
enter image description here
(image source)

Cash corresponds to M0, which is just a small part of what economists call money, so destroying lots of cash is unlikely to have serious impact on the economy.

Creating and destroying money
Money is routinely created and destroyed by the banks, and quite deliberately so by the central bank (or whatever is its equivalent in your country.) E.g., a bank taking a deposit of $1000 from one person and then issuing a credit of $900 to another person has just created money - since while the first person still have their $1000 on their account, the second may now use their $500 to pay bills, invest or put onto a deposit in another bank (which may in turn issue a credit.) It works in the same way with various bonds, stocks, etc.

Of course, if the person with $1000 on their deposit decides to withdraw money, while the bank has only $500 remaining in its vault, it will create a problem, know as bank failure - the bank goes bankrupt. This indeed happens quite frequently in unstable economies, where, out of fear of inflation, natural disaster or another catastrophic event, the population en masse decides that having cash is better than keeping money on a deposit.

If banks, out of caution, decide to limit drastically the amount of credit they issue, this also reduces the money supply and negatively affects the economy - as happened during the 2007-2008 financial crisis. This is sometimes referred to as liquidity trap (although the term may be applied also to the situation described in the previous paragraph.)

As the behavior of people and banks described above is not controlled, John Maynard Keynes, the father of the modern macro-economcis, has ascribed it to Animal spirits. Following Keynesian prescriptions, the Central Bank would usually try to compensate for the lack of cash by literally creating money - this is casually called printing money, although in the modern world it usually means issuing the government bonds/debt, and usually in electronic form.

Of course, when the economic recovers, the amount of money would start growing uncontrollably, due to the increasing number of deposits and credits - this would trigger inflation, and the Central bank would have to reduce the amount of money (destroy money) by reducing the amount of new bonds that it issues, while buying back the old ones. The necessity of reducing the money supply and the government discipline required for doing so came to bloom relatively recently, in comparison to the realization usefulness and easiness with which money can be printed. We owe this to the monetarist school, which became influential during the stagflation era in 1970s.

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