Sunday, April 19, 2009

The Electrical Capacitor of Currency

This may seem contradictory or even hypocritical compared with my more basic position. I actually do see a place for a Fiat Currency. Not as is done now though - not a total fiat currency economy. The United States Note. This country functioned rather well for a long time with this Fiat Currency working alongside the metals backed currency of Silver and Gold Certificates. It functioned like an electrical capacitor absorbing the peaks and filling the temporary voids in the smooth flow of our national wealth. It had to be carefully controlled not to exceed the value of the true net income of the Government, so that it could be bought back with backed currency should the need arise. Contrast that to the present Federal Reserve Note which acts like a direct short circuit taking the wealth of the people direct to ground.
The United States Note is a smaller non-interest-bearing equivalent of Treasury Notes, eliminating the middle man and interest overhead of the Federal Reserve Bank. Should its value be debased, vendors could discount the bill with only banks and the Government required to accept it at parity at all times. This would provide incentive for the Government not to debase the currency, and the banks not to profit from the arbitrage of dumping the bills onto the public at parity and buying them back at a discount; while retaining the ability to have the movement of currency when natural growth outstrips the production of metals. This would prevent the deflation that would come from insufficient wealth to cover the actual product of the nation which could be just as damaging as inflation.
The backed currency would provide the stability while the US Note would provide a controlled elasticity.

Nope, our Government officials, elected and employed, no longer have the discipline or responsibility for that.

Note: picture intentionally altered to comply with anti-forgery regulations - though I don't know why with the Government issuing an infinite amount of unbacked currency.

No comments: