Fiat currency is convenient, because when it is issued, it becomes real. An economy based on fiat currency, or debt, can never run out of currency.
Unlike currency backed by commodity, such as gold, silver or even wheat, the amount of that commodity is finite, and if more currency is required to support an economy, the only way to get more currency is to devalue it. A gold note worth one gram of gold, is great. Unless the economy needs more notes and every note in circulation is backed by every gram of gold that exists. There is no more gold, it is all being used to value the notes in existence. The only way to issue more notes is to devalue the note.
There is another problem with commodity backed currency, and that is the value of the commodity is determined by the market, NOT the issuer of the note.
Watch what happens to a fiat currency.
I, (acting as a government), create a currency, called a durango. I issue that currency. I create, 10 million durangos. At this moment, the durango has no value. None, whatsoever. I loan that 10 million durangos to a bank, that I own at zero percent interest. If my bank, immediately repays the loan to me, the durango never has any value. It was an exercise in silliness.
However, if the bank loans that currency to the public, then the market begins to determine the value.
So, some guy needs a job, and offers to mow the lawn of my bank for 10 durangos. There was no loan, there was a trade, and the value of the durango is immediately established, again, by the market. One durango has leaped in value, from zero to one tenth of labor to mow that lawn.
Now, that guy wants to mow more lawns, and he has used all the gas he had, so he goes to the gas station and offers one durango for one gallon of gas, if the gas station accepts that trade, then the market has now determined that a durango is worth one gallon of gas.
The guy goes around offering to mow lawns and expects to be paid in durangos. If anyone wants to have this guy mow his lawn, they have two choices, they can borrow durangos from my bank, OR they can offer goods or services in trade to my bank for durangos. If they borrow, they are now borrowing the notes at the value that the market determined, by the lawn mower, and the gas station. If they trade for durangos, they are participating in the value negotiation of the notes.
Eventually, as the notes are traded and loaned, the market has determined a fairly solid and confident value for the durango, in terms of the goods and services available and desired in the economy.
As business grows, the economy may need more currency to support the growth.
Now, I, as the government, issue another 10 million durangos, and again, loan that to my bank at no interest. Business can now borrow more money, the economy grows, people can buy more and better products, and people are happy.
We are now going to consider those businesses that have succeeded.
A business creates value, by producing a product or service for sale, at a profit. The owner of that business, accumulates that profit as wealth. The business pays for the material, and labor, and the loan of currency that was invested to startup and taxes.
Once those payments are made, whatever is left over is pocketed by the business owner. That business takes steps to maximize profits, it will cut costs and increase price as required to maximize profits.
As the economy grows, the number of successful businesses increases, the number of wealthy people increases.
Note that there are still people who are not wealthy, and some are poor. The business, cuts costs, and labor is certainly a cost, and in the effort to maximize profits, may well reduce the pay of labor, or reduce their labor force.
Recall that a gallon of gas, was originally valued at one durango. As the relative value of commodities go in our current market, a loaf of bread is worth about one half gallon of gas. Or half of a durango.
The baker, as a business owner wants to maximize profits. The cost of materials and labor are fairly static, it would be very difficult to pay less, and the only factor the baker can easily control is the price of his product.
When we look at how business maximizes profit, we often hear about supply and demand. If we assume that is the ONLY factors involved, then the system looks fair and good. There is another factor involved in the profit maximizing equation, and that is the wealth of your customers.
That’s right. A wealthy person might be able to afford paying 50 durangos for a loaf of bread. they might not like it, but they can afford it.
The baker knows this.
What the baker must do, is to determine how high of a price he can set for his bread, without having unsold product. If there are enough wealthy people who can afford to spend 50 durangos per loaf, that all of his bread is sold every day, then THAT will be where he sets his price.
At that price for bread, the people who are not working cannot buy that bread, the people making 10 durangos an hour cannot afford that bread, but why should the baker care? Why should the successful people care, if they can buy their bread, they have no reason to complain, or demand lower prices.
The market has rewarded the fast, smart, and hard working lucky people with profits for success. However the reward for that success comes at the expense of those less fortunate, or greedy. It was the success of business which drove up the prices of base goods and services. It was the success of business that created poverty.
Now, could the success of business cause poverty if a commodity based currency were used instead? ABSOLUTELY!!!
It is NOT the currency that caused poverty, wealth inequity, it was the success and growth of business that causes poverty.
Don’t get angry and think that the success and growth of business is evil. It is NOT evil.
The capital market is good, it works very well for its purpose, which is rewarding hard work, intelligence, and drive. It creates innovation and improvements in our social and technological systems. It is GOOD. For doing its job.
What is NOT the job, or purpose of the capital market is providing support for people who are not hard working, intelligent or driven. NOR is it reasonable to expect the market to provide that support by imposing taxes on business. Those people who are successful should be allowed to keep their entire reward for their efforts. Not punished for the failures of others to succeed in the market.
You may be confused. I have asserted that fiat currency allows uncontrolled wealth accumulation, and that wealth accumulation, by the equation that is used for profit maximizing, causes poverty, which is bad. Yet I maintain that the market is good. What the hell am I talking about???
I am talking about the reality of the capital market. Without judgement, it works well for it’s purpose, and I am also talking about the reality that the market cannot, reasonably, be expected to even consider, much less support the poverty it creates. However that may seem harsh, it is simply true.
I have also asserted that it is NOT the fiat currency which causes poverty. The same business growth and wealth inequity occurs when a commodity based currency is used. Historical evidence supports this, poverty and wealth inequity has existed throughout human history, regardless of currency used.
Is there a solution? Yes. Let me be clear, gold is NOT the answer!
I would like to revisit the moment when the person offered to mow the bank lawn for 10 durangos. What the trade involved was a currency, for labor.
Then some time later, the value of human labor was traded for a commodity using the durango note as an instrument of negotiation.
It was the value of human labor that provided the original value of the currency, and if that value had been set, and defined as the value of currency, then the market could not have reset or negotiated that value. THAT, right there is the KEY to the solution.
The key is to value currency, by human labor, and then to define that value as being able to purchase some base commodities.
It may seem that I have just suggested to back currency by commodity, but I have not. I have said that we can value the currency as human labor.
Let us just for a moment, assume that a durango is worth one hour of labor. Don’t get all butt hurt and start arguing. follow along and watch the solution work.
Now, if we define the value of a durango also, as being able to purchase all of the goods and services to support a human with one dependent for four hours.
What I have just done, is defined the MINIMUM value of human labor, to be the traded, using this currency, for the goods and services to support a human for eight hours. That does not mean free TV and internet. That does not mean Armani suits and caviar on the veranda of a Georgia mansion.
That means food, water and power, clothing and health care, education, transportation and a job.
What job? The jobs available to provide those goods and services needed by the workers doing those jobs. That is it. No luxury goods and services. People need food, so there are jobs to grow and serve food. People need power, so there are jobs to provide power.
What this system is is a SOCIAL economy, not a capital economy. It provides ONLY the goods and services that people need to live. NOTHING else.
If a person wants to drive a Cadillac, or Maserati, they need to find a job in the capital economy.
The only wage paid in this social economy is one durango per hour. No exceptions, no one makes more, no one makes less. Every person that participates in the social economy is assured a job, and a wage above poverty. There are jobs that need to be done, and people who are willing to work. No one requires any profit. No profit is generated and the value of the currency, the durango is absolutely stable and solid. It cannot be devalued, it cannot be deflated.
Now, the people who participate in the social economy are doing so by voluntary decision. The capital market still exists, and is available to anyone who wants to participate in THAT economy. A welder in the social economy, might decide to hire out a few hours a week to a business doing machine work. That welder is now straddling both economies, and may decide at some time, to leave the social economy entirely, and make a profit in the capital market. Do not complain that the welder can only earn one durango per hour, because that is not true. The social economy pays one durango per hour, but the market pays whatever the market pays. that welder might negotiate a wage with that business for 25 durangos per hour.
Straddling and migrating to the capital market should be encouraged.
Wait. Where does the capital market get its currency? How does the capital economy get durangos?
The same way it gets currency NOW, it borrows currency, from the social economy. The “bank”.
The market can borrow as much as they want to risk. The market can now grow, using the same financial rules they use now, and the success of the market, providing LUXURY goods and services cannot in any way affect the value of the currency.
The key is to use currency based on, backed by human labor. The lock is to value human labor at a MINIMUM that assures a worker will not live in poverty.
Now the market can grow and succeed, and NOT be limited by being required, by taxation to support the people that fail to succeed in the market.
The people who are not, for whatever reason able to succeed in the market are fully supported by the social economy and are not a burden on the market.
Living in the social economy is not a miserable existence. Most of the work, is mundane and not very challenging or difficult. The life is not extravagant, or plush, but is well above poverty. Straddling can be used to improve life, without risking total failure in the market, allowing people who wish to, an opportunity to gain some luxury goods and services, and to move entirely to the capital market.
Those who do participate fully and entirely in the market have a social net available. No matter how bad the failure in the market might be, the social economy never allows a person willing to perform some labor to fail utterly.
A social economy is NOT evil either. Think about it.