Replacing a debt-backed currency with an asset-backed
currency and restoring an actual standard to the currency can be devastating,
relatively painless, or positively beneficial.
It all depends on how bad the situation is, and how it is done.
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| Rice currency in Japan, 1946. |
The first method (the devastating) is the easiest . . . for
those who have wealth and power, “wealth” meaning not money or currency, but
assets that produce marketable goods and services. As long as such assets continue to produce, the
value of the currency is, ultimately, meaningless. If the currency has a stable and uniform
value, a producer will accept it for the goods and services he or she produces,
and use it to exchange for goods and services that others produce. If the currency is inflating or is otherwise
untrustworthy, a producer will refuse it (unless compelled by force of some
kind), and accept something with recognized value. In Japan right after World War II, the actual
currency was rice. In Germany, it was
cigarettes.
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| Germany, 1923: Money to burn. |
For the first method, then, those in power simply demonetize
all the old currency and institute a new currency. Usually this is done by giving a period of
time during which the old currency can be exchanged for the new currency, but
in disaster situations that is often meaningless. When Hjalmar Schacht instituted his reforms
in 1924 in Germany, the official rate of exchange for the old Reichsmark to the
new was a trillion to one, and was pegged to 4.2 to the U.S. dollar. Since you could purchase anywhere from 16 to
24 trillion old Reichsmarks for $1 in U.S. money on the black market, it sounds
as if smart operators could purchase black market old Reichsmarks valued at 4
to 6 times the official rate and exchange them for new Reichsmarks, making a
400-600% profit . . . right?
In theory, yes.
However, picture what 24 trillion Reichsmarks looks like . . . and then
tote up the cost of truck rental and labor required to haul massive amounts of
paper down to the bank. A truckload of
the old Reichsmarks was worth a little over 33¢ in U.S. money, but probably
five or ten dollars as waste paper. Any
takers?
The second method usually just drops zeros off the old
currency, and the old coin and currency continues to circulate alongside the
new. If that’s all that’s done, it
usually doesn’t take too long before the country has to do the same thing all
over again, with no real benefit. It’s
just a way of maintaining the status quo.
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| An energy currency . . . is ALIVE! |
We think that the only way to do it is to carry out a
three-step program. 1) Peg the existing
currency (assuming it still retains value) to something of value, and make
certain it’s convertible into that thing on demand. Traditionally this has been silver. More recently gold was the metal of
choice. If you read yesterday’s posting,
we recommend energy — specifically, the Kilowatt Hour (Kwhr). You can’t really convert your currency into
energy, but you can convert it into a certificate or voucher to pay for your
energy at the conversion rate (we went into all this yesterday). This gives you a de facto convertible currency.
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| Sir William Petty, velocity of money pioneer. |
2) If at all possible, mandate that ALL (and we do mean all)
new money is backed by the present value of existing and future marketable
goods and services. We’ve described how
to do this in many previous postings, but to summarize, bills of exchange represent
the present value of future marketable goods and services, while mortgages
represent the present value of existing marketable goods and services. New capital can be financed by discounting
and rediscounting bills of exchange, thereby turning the future increases in
production into current money to finance the capital that will produce the
goods and services. Existing inventories
can be cleared by selling securities backed by the mortgages, which are turned
into current money through central bank open market operations, and redeemed
when the inventories are sold. It is
theoretically possible for the effective quantity of money in an economy to be
exactly equal to the present value of all existing and future marketable goods
and services in that economy. (We say “effective
quantity” of money, because we have to factor in the “velocity” of money, or
the average number of times each unit of currency is spent in a year. Otherwise the quantity theory of money
equation would be “M = P x Q” instead of “M x V = P x Q.”)
3) Create ALL
new money (and, again, we do mean all)
in ways that create new owners so that every single child, woman, and man can
produce all that he or she consumes, either directly or by exchanging with
others through money, by means of both capital and labor.
Yes, it really is that simple. Tomorrow we’ll finish up by looking at some
side issues that need to be raised, such as how the value of the currency would
reflect reductions in the cost of energy.