The Tsunami of Currency

 

THE STATES commanded, and have paid, the Congress to regulate the value of its own and foreign coin.  Historically, Congress has degraded the value of every U.S. coin except the standard silver dollar, to such an extent that we now need to consult the newspapers to find out what even our own coins are worth.  As a result, business–men now confront a new unknown, “foreign exchange risk;” some of them profit, and some of them lose, by speculating on the uncertainty Congress has created.

            Why is this? Because the States – with few exceptions (Colorado, Nevada and Missouri) – have not adopted gold or silver coin as their legal tender, and the U. S. courts do not require “specific performance,” literal compliance with the terms of the contract: if the contract requires one to deliver a quantity of coal or gas, one can instead pay the price of so much coal or so much gas. What really happens is that one party hands the other a scrap of paper bearing the name of a bank.

            Let us think about banks.  If, by hard work and diligence, you have accumulated a hundred dollars, you don’t hide it in the mattress: as we know, thieves break through and steal.  Instead, you put it in a bank.  What does the bank do with it?  You know that they don’t put it in an envelope with your name on it and lock it in the safe: if they did, they would charge you for safe-keeping.  What the bank does is this: it gambles that you won’t come back tomorrow and take it all out again – it lends part of your $100 out for interest.  This is called “fractional reserve” banking.

            So then you still think that you have $100 you can spend, and someone else thinks he has, say, $20 he can spend: the quantity of dollars has, mysteriously, increased.  And the bank has acquired an income from the interest . . . everyone is happy!

            How much interest?  Suppose your bank – call it Alpha Bank – is very aggressive, and lends freely, at low interest rates: then the other banks will see their clients depositing lots and lots of Alpha notes, will draw their own conclusions, and will send those notes back to Alpha in a hurry, demanding money in exchange.

            Money?  What money?  What, exactly, does a bank promise to pay?

            We know – at least, once upon a time we all knew – that bad money drives out good.  The money you want to spend, the money that circulates from one owner to the next, is called currency.  As the text-books tell us, anything can be currency; some men will pay two cows for a wife (hoping that the wife will live longer than the cows.)  All those sophisticated articles in the business pages, which most of us can’t understand, are talking about currency.

            Just as the banks gamble on the future, so do their customers.  Land-owners let their property out, not always for a share of the crop, but often for so much money a year.  Organized labor will contract to work, not always for a share of the widgets manufactured, but instead for so much money per man-hour.  (“Organized labor” is, actually, badly organized; it has a habit of pricing labor as if it were a commodity, i.e. as if all hours, or days, of work were equally good, instead of fast-working crews getting higher rewards than slower ones – employers are paying for costs, not for results.)  Both landlords and laborers are taking the risk that the currency will depreciate.  To protect themselves against that risk, they ask for more next year than they did last year.

            Obviously, everyone else observes what is happening to rents and wages, and realizes that their costs will go higher.  Therefore, they buy goods today instead of staying liquid until the last moment.  Prices, accordingly, go up.  Everyone hastens to the banks to borrow cash to pay the higher prices: interest rates go up.

            If interest rates go up, then the banks are more and more eager to lend; more currency enters circulation.  Needless to say, prices go up correspondingly.  No-one, I hope, needs to be told what I am describing; it is called inflation.  (Why on earth, you demand, do the banks go on lending when it is inevitable that the loans will be repaid in depreciated money?  My guess is, that bankers are “conservative;” none of them has the nerve to be the first to stand up and shout, “Stop.”)

            Inflation is dangerous, destructive, in the extreme.  The way a business runs is to strike a balance on Day 1, strike another on Day 365, and find the difference: it is either a profit or a loss.  The effect of inflation is to make the later balance bigger, to make an actual loss look like a profit.  Thus businesses that are, in truth, making everyone poorer appear to be making everyone richer.

            But they are still making something richer!  The government rakes off a per–centage on every transaction, so it takes in more currency.  Governments don’t save money, they borrow it and spend it, so that they have nothing against inflation.  In fact, they love it: they can pay dividends to the owners of their bonds more easily (and some institutions, such as insurance corporations, buy government bonds willy-nilly.)

            The proof that governments love inflation is, that they prevent competition from exposing the risk-taking banks like Alpha Bank: they prefer monopoly banks that owe their very existence to government charters.

            Thus, when the market becomes flooded with currency, instead of a few over-aggressive banks failing, the government fails; there emerges a Strong Man who promises order, but who in fact destroys the order that would have appeared with free competition.  Vide republican France and the Corsican, vide the Weimar Republic and Adolf.

            Therefore, in a civilized society – which, effectively, means one that keeps books and distinguishes profits from losses, which creates order among equals – we recognize the difference between currency and specie.  A specie coin is one that has intrinsic value, approximating its value as money: in principle, it is valuable anywhere in the world.  Accounting in specie means that banks, and governments, cannot conceal the devastation they inflict upon the actors.

HERE AND NOW

            If the U. S. courts recognized the distinction between currency and specie, then one could make all forward contracts payable in specie: neither land-owners nor laborers nor money-lenders nor annuity owners would be robbed by the depreciation of the currency.  And if the States made either gold or silver coin their legal money, their corporations would keep accounts in specie: the accounts of businesses in “gold” states could be compared with those in “silver” states, and one would be able to see that gold was becoming more valuable relative to silver, or the contrary.

            But what can we do, here and now, when governments perennially levy taxes on transactions, and thus have a vested interest in raising prices?

            Land-owners, and labor unions, and anyone else making forward contracts, should forthwith specify, in explicit language which will stand up in court, that payment be made in barrels of oil.  Why barrels of oil?  Because oil is traded world-wide: no government can tamper with its price (even if, and when, the U. S. government tries to supplement its Strategic Reserve, the price barely moves.)  When Congress dictates a maximum price, the owners of oil simply stop selling it.

            What about the Organization of Petroleum Exporting Countries, you ask?  Yes, I reply, what about it?  Plot the price of oil on a base of gold, and you find that O.P.E.C. has not succeeded in raising the price of oil: all it has done is, keep the price from going down as the U.S. dollar depreciated.  We can now watch the price of oil in the [golden] Islamic Dinar, and see what happens.

            Let me explain a technical detail.  The land-owner, or the laborer, will not really get a black, dirty barrel delivered on a truck: the renter and the worker can merely pay the price of a barrel of oil on the day the payment is due.  Why do I not suggest the Canadian Maple Leaf (pure gold,) the Krugerrand (hard gold/silver alloy,) or the Manx Noble (platinum)?  Because sometimes the courts are reluctant to demand the money of foreign nations – and we want results tomorrow, not after years of litigation.

            Please observe that all I have proposed is a way to avoid the demand for dollars bringing inflation about.  I have not said anything about safeguarding the country from the very real threat of inflation caused by government spending in excess of its revenues, and selling bonds to obtain currency, i.e. bank notes.  We can hardly imagine a bank promising to pay the bearer of a note one-tenth, or one-hundredth, of a barrel of oil.

            Once the people who use the currency realize that it is only paper-and-ink, and set themselves to spending it, the bank is doomed: a bank’s only real asset is its reputation.  The question is, can the society survive the failure of a monopoly bank?  Or is it inevitable that the government be swept away in the tsunami of currency?

            It can, if it so wills. The Congress could mandate that the Treasury deliver a $20 coin – the traditional “double eagle,” known and respected world-wide – to whomsoever hands in the appropriate quantity of gold and $20 in currency (that is, twenty Federal Reserve Accounting Unit Dollars.)  On a day when the price of gold, in currency, was $400, the seigniorage  – that is, the fee paid for the coining of the metal – would be $20/(20/20.67)x400 = 5% approx. Modern gold coins such as the Krugerrand cost half as much as that, so citizens would acquire U. S. gold coins only for special occasions, perhaps to give to their sons at age one or twenty-one.  However, when the price of gold, in currency, reached $1000, U. S. coins would have a seigniorage of less than 2%, and they would become the most popular coins in the world – the gold of the world would gravitate to the United States Mint.  (The Islamic Dinar is only a tiny coin, something like a sovereign, unimpressive and easily lost.) And thus the green paper would assuredly always have some value –– it would enable one to have one’s metal coined by a reputable mint.

{This system I call “Currency as Seigniorage:” it would, if adopted by the Congress, provide the link between currency and commodity that is currently absent.}