Thoughts On Currency

[phillip1882]

so lately I've been studying currency and how it works. here's how i think an optimal currency could work.

 

first i think a fiat currency, surprisingly, is best. the government should have sole issuing power of such a currency. basically i imagine government setting up banks across America. they issue loans based on your credit score, and desired amount. the loans are interest free, but when you pay back the loan, the government gets the money to spend into the economy. failure to pay back the loan results in a lowering of your credit score. however, government doesn't have a monopoly on currency, only on the one it issues. if you want to use gold to make a purchase instead this is perfectly legal.

 

the cool part about such a system is you could completely eliminate taxes.

interest free loans would be very attractive to everyone, so most people would borrow with the government, and the more they borrow and pay back, the more the government can spend on societal goods such as police fire department roads etc.

 

what do you think?

[joekgamer]

If the loans are interest free, how would the government make money? And who would set the exchange rates between currencies?

[phillip1882]

basically every time someone asks for a loan, the government prints currency equivalent to the loan amount. when the loan comes back, it becomes used by the government.

 

as for the exchange rate, well who sets them now? not the government that's for sure.

[geko]

The problem is that the more money that's printed the lower its use-value becomes. If a government just printed whatever amount of money was needed whenever it was needed to supply someone with a loan the amount of money in the economy would forever increase. Considering also that the government would print money 'every time someone asks for a loan' the amount would increase drastically, almost certainly leading to runaway prices.

 

Fiat money is generated whenever it's needed at the moment, it's where inflation and several other unnecessary problems come from.

[phillip1882]

in part i agree. there has to be some strict rules on the amount the government can loan out.

for example, there should be a maximum amount, say 10,000 dollars. and as i stated the amount you get also depends on your credit score. if its high, you get get a higher amount in loan, if low then lower amount.

careful records would have to be kept and made open to public scrutiny to keep the government honest.

[CraigD]

The problem is that the more money that's printed the lower its use-value becomes.

Geko has, I think, called out the key, and I think fatal, flaw with the scheme Phillip proposes.

 

I think it's helpful to restate this problem in some actual business transaction scenarios, such as "who will accept the fiat money?", "what size loan do I need?", and "what repayment terms should I get on my zero-interest loan?"

 

Who will accept the fiat money?

As geko notes, the more fiat money that's printed - issued only via loans by a national government, the lower the value of the fiat money. People and corporations accepting this money will either need to spend it quickly, or convert it to a stable-valued species (eg: gold or silver coin or ingot) money.

 

I end the discussion of this question with a question: who will sell species for fiat currency to people and corporations wishing to buy it?

 

What size loan do I need?

Assume that I have good credit, and need a loan for, say, pay tuition and living expenses for my own or a dependent education.

 

I must calculate the decrease in value (inflation) of the fiat money I will have over the period in which it's spent. Prudence dictates that I should consider a worse-than-expected case, so borrow more money than I expect to need. So should everyone else in a similar situation. This will increase the rate of inflation, which in turn requires that I and everyone else get a larger loan.

 

This sounds like trouble to me.

 

What repayment terms should I get on my zero-interest loan?

Assume that I have some amount of species savings and expected future income (but not enough to pay for the education I desire) before getting the above loan. It's to my advantage to repay any amount of the loan as far in the future as possible, as because it is zero-interest, the fiat money repayment amount will not increase, while the amount of species I will need to buy that amount of fiat money will decrease at the fiat money inflation rate.

 

Normally, the disincentive for taking out a loan with a very long repayment period is that its repayment amount increases. However, if the loan is zero-interest, this will not occur.

 

In short, under the nationalized monopoly on fiat money lending proposed, it's to the borrower's advantage to get the largest possible loan and repay it as late as possible. Further, it's to the borrower's advantage to quickly, while his just-borrowed fiat money is at its maximum value, spend all of it on species greater than necessary to repay the loan.

 

This is a "money for nothing" scheme. By virtue of my "good credit score", I can get loan, and immediately convert it into stable-valued species. But none of this created wealth reflects any positive contribution to humankind - I need provide no sought-after good or service with my money. A financial system that doesn't encourage its participants to benefit humankind is, I think, a bad one.

 

The government could impose credit rating and regulation rules to prevent such abuse. However, in this case, it would be equivalent and simpler for the government to impose a pure government-enforced meritocracy where wealth is given to those its rules deem most deserving of it.

 

I don't think either outcome is good, and can't imagine any other to the scenario Phillip proposes.

[phillip1882]

basically i'm basing my system off the tally stick system developed in england many years ago. do a google search for it and read up on it, its a good read.

 

I end the discussion of this question with a question: who will sell species for fiat currency to people and corporations wishing to buy it?

 

well optimally private organizations. that's perfectly leagal. i feel it's important to note here, a dollar printed only stays in circulation a finite amount of time (ussually about 10 years) before it becomes too worn to be usable. so you HAVE to print some money to keep currency in circulation. and as i noted earlier, there is maximum loan amount people can take out. the keeps the supply of money in proportion to the population.

 

Assume that I have some amount of species savings and expected future income (but not enough to pay for the education I desire) before getting the above loan. It's to my advantage to repay any amount of the loan as far in the future as possible, as because it is zero-interest, the fiat money repayment amount will not increase, while the amount of species I will need to buy that amount of fiat money will decrease at the fiat money inflation rate.

 

the fiat supply of money will only increase if the population increases and most poeple have a good credit score.

i agree, it's to your advantage to have the maximum amount of time for the loan, but it's to the governments advantage to have the minimum. obviously the more your given in loan the more time you'll have to repay it, but so what? you'll still need to convert back to the fait currency to repay the loan, and as stated, the fait currency only increases if the population increases and most people have good credit.

 

 

This is a "money for nothing" scheme. By virtue of my "good credit score", I can get loan, and immediately convert it into stable-valued species. But none of this created wealth reflects any positive contribution to humankind - I need provide no sought-after good or service with my money. A financial system that doesn't encourage its participants to benefit humankind is, I think, a bad one.

well why don't you do that now? are you accepting dollars as payment of debt? why?

 

there is nothing neccisarily unstable about a fiat currency, so long as you don't inflate without limit. but here there is a specific limit. the credit score, and the maximum loan amount, the maximum loan amount assures that the currnecy doesnt expand beyond it's poprotion to population, the credit score keeps people honest. arguably the government could raise the rate, and i agree if the government started this bad practice, it would quickly become unstable.

 

but in any case, i disagree, buying species such as gold or silver is a benfit to mankind, just as much as buying anything else would be.

[geko]

Money supply is not maintained because once money is printed and given it's spent. This money will have forever more changed the price-index because the increased demand would have raised prices. You cannot take money out of the economy; if it exists it's in a holding.

 

By the way, removing interest on loans doesn't remove the burden, it just shifts it. In this case from the debtor to the creditor. Since the creditor is government/the national bank it's directly increased the money supply further and also the national debt.

 

As an aside, there's an inherent difference between this idea and the tally stick idea in that the tally stick was credit money backed on a standard, this is fiat money backed on nothing.

[phillip1882]

Money supply is not maintained because once money is printed and given it's spent. This money will have forever more changed the price-index because the increased demand would have raised prices. You cannot take money out of the economy; if it exists it's in a holding.

err; no. even with a non fiat currency this is not true. prices are always fluctuating, and will always do so. if you destroyed 90% of the gold for example, the remaining 10% will dramatically increase in price. this would be equally true with a fiat currency, precisely because if you make it attractive to everyone, decreasing the supply increases the desire for it.

 

By the way, removing interest on loans doesn't remove the burden, it just shifts it. In this case from the debtor to the creditor. Since the creditor is government/the national bank it's directly increased the money supply further and also the national debt.

what? half this statement make no sense.

firstly no interest is what makes the currency attractive. second the government isn't really producing wealth, its simply facilitating trade and benefiting in the process. and the only way this would increase the debt is if the government spends more than it gets paid back in loans.

 

As an aside, there's an inherent difference between this idea and the tally stick idea in that the tally stick was credit money backed on a standard, this is fiat money backed on nothing.

from my understanding the tally sticks weren't backed by anything. they where simply issued by the government and collected as taxes. i could be wrong however, i only read 1 article on it.

[phillip1882]

let's do a simple example to better demonstrate.

in tiny ville they have about 800 people each producing various goods and services.

however, there are some trades people cannot commit. for example, Bob who makes telescopes, can't trade directly with Bill who raises pigs. so they elect Phillip, deemed to be an honest man, to run a bank and issue the currency described above. Phillip begins by issuing everyone a starting value for trade, 20 dollars. he sets the maximum loan amount from his bank to be 1000. Bob comes in needing 50 dollars. Phillip agrees on the condition that Bob pay it back within 90 days, and prints currency equal to that amount. the previous total currency was 16000. the additional 50 dollars makes this total increase to 16050. this is a roughly .003 percent increase in supply, and by the time Bob pays back prices will have risen by this slight amount to reflect that. when Bob pays back, Phillip is now able to spend the 50 dollars. admittedly this gives Phillip and advantage over everyone else, as since he didn't really work for the money, merely printed it. however, had Bob not paid back, Phillip would be out of luck, and would have had to punish Bob for his dishonesty. (lowering his credit score.) in truth, Phillip most likely will only get about half his loans paid back in full, as the various demands come in. years pass. some people, the people most successful at producing and convincing others of the value of their goods, have a high credit score, others have a low one. Phillip himself is fairly rich, as the whole town depends on him, but surprisingly not the the richest, roughly 5% is richer than him, as he spent money for goods and services from the repaid loans. dollars begin being taken out of circulation, as they get worn from use, so the value of each one goes up, meaning the money people have saved is now getting more valuable.

 

hope this makes sense.

[geko]

There's numerous problems with this. For example, how does destroying notes that were printed, loaned, spent and paid back and are now 'worn' destroy the debt, the capital, the savings, the interest and the commodities that were generated and accumulated from them in the past? Destroying a note doesn't somehow remove it's past and present influence of it from the economy. Whoever destroys this note loses, the exchange value and the interest bearing on it, which increases debt again and accumulates yet more interest. Monetary value is also not assigned by an arbiter.

 

Stating there is no burden to printed money because we've declared an interest rate of zero doesn't make it so. Ask yourself why for example the US national debt increases by 10's of thousands of dollars a second. Hell, ask why they don't just chop it in half since about 50% of it is owed to itself anyway.

 

Interest is not something that's just randomly and arbitrarily arrived at and set in the private sector to 'make money'. It's determined and adjusted to the ratio between the valuation of present goods against future goods. You'd have to remove people's value expectations to remove this interest which can't be done. Both public and private sectors have to deal with it. Even a pure socialist economy couldn't remove it.

 

To sum up, government is accountable for this fiat money and it's also footing the interest bill for it's generation, it's not going to destroy it when it's to its detriment. Therefore the money supply will increase at an alarming rate leading eventually to runaway prices and debasement of the currency.

[phillip1882]

There's numerous problems with this. For example, how does destroying notes that were printed, loaned, spent and paid back and are now 'worn' destroy the debt, the capital, the savings, the interest and the commodities that were generated and accumulated from them in the past?

well of course none of these things are destroyed, that's the point. money is precisely made to facilitate trade, no more. why would you want to destroy any of these things?

 

Destroying a note doesn't somehow remove it's past and present influence of it from the economy. Whoever destroys this note loses, the exchange value and the interest bearing on it, which increases debt again and accumulates yet more interest. Monetary value is also not assigned by an arbiter.

what exactly do you mean by interest here? as discussed already these are interest free loans.

 

Stating there is no burden to printed money because we've declared an interest rate of zero doesn't make it so. Ask yourself why for example the US national debt increases by 10's of thousands of dollars a second. Hell, ask why they don't just chop it in half since about 50% of it is owed to itself anyway.

well of course there is a burden to it, but there would be a burden to any currency we used. under a non fiat currency you would have to charge interest to make a profit, as well as hold collateral while the loan is in issuance.

 

Interest is not something that's just randomly and arbitrarily arrived at and set in the private sector to 'make money'. It's determined and adjusted to the ratio between the valuation of present goods against future goods. You'd have to remove people's value expectations to remove this interest which can't be done. Both public and private sectors have to deal with it. Even a pure socialist economy couldn't remove it.

I'm not quite sure what you mean here. I don't see anything wrong with charging zero interest on a loan, on money your simply printing. of course private interests could charge interest, nothing wrong with that, and i fully expect that to develop with enough time. but the person who prints the currency not only should not charge interest but in my opinion by charging interest he would be deprecating the total value of the dollar even more.

To sum up, government is accountable for this fiat money and it's also footing the interest bill for it's generation, it's not going to destroy it when it's to its detriment. Therefore the money supply will increase at an alarming rate leading eventually to runaway prices and debasement of the currency.

it would be just as much to the government benefit to destroy some currency as it would be to everyone else.

true they can no longer spend it, but any money they have saved increases in value.

 

as i said earlier the government could adopt a practice of runaway spending, simply by issuing any loan request that comes in, but this would be as much the the government's detriment as it would be to everyone elses. the more the government prints, the less valuable the individual dollars are, and the government isn't the first spender, the loan holder is.

[jhnmichle]

Taxes are main source of income for the govt. you can't eliminate this concept.

[phillip1882]

Taxes are main source of income for the govt. you can eliminate this concept.

i think you ment you can't eliminate taxes rather than you can.

 

read though the whole post. particularly my example scenario.

by allowing the government to print currency, you enable them to have an alternate means of aquiring wealth.

i suppose you could argue that inflation is a form of tax, and i would agree, but in this case it's a voluntary tax. there no prison time or any other punishment if you don't take out a loan.