I’ll wager a good number of the visitors to this site have seen Money as Debt, here is the second installment of that feature.
Money As Debt Unleashed
I don’t agree with the “government creation” electronic gold idea at the end, but I do agree with their description of how the monetary system loots the public. They present a very accurate description of how the monetary system works and why it is unsustainable.
The reason why I think the electronic dollar idea is ultimately bad is that government cannot spend money into a system without distorting the market prices of that system, for instance take healthcare and education today, both are heavily subsidized by government. Because of this subsidization we see massive price inflation in these markets.
When government spends money into a system it is ultimately diverting resources that could be more efficiently allocated by the private market. It is also picking winners and losers, which distorts competition. Without competition, prices always increase. Solving this necessitates the creation of currency by the private market itself. What makes gold so attractive as a currency is that it’s creation is based on its price in the private market. As gold becomes more expensive, mining operations will increase as the profits that can be made by mining gold increase, due to gold’s price. This naturally expands the money supply at a rate determined by the market.
Where the electronic gold idea has some merit is that if you could exchange real mined gold into an electronic gold piece, then destroy the real gold piece, you could have the best of both worlds. You simply declare a new electronic gold piece can only be created upon the destruction of a real gold piece.
As insane as it sounds, taking all the gold that’s created and dumping it in the Marianas trench then creating virtual gold pieces based on that destroyed gold would actually be a very healthy way to base the foundation of a modern currency system.
Video games have been using similar mechanisms of monetary creation and destruction for a long time now with remarkably stable results within virtual economies. The key foundational principle behind these virtual gold economies is that money must take effort to produce and that its destruction and creation must be balanced so as not to cause inflation. Today, the cost of mining and the rarity of gold is what determines its price, and the “sink” is not the physical destruction of the gold, but the productive expansion of the economy which produces the same effect.
As the economic productivity of an economy expands, its money becomes more valuable (assuming a gold standard), thus essentially acting like a virtual “sink”, increasing the value of money by increasing its scarcity to necessitate the expanded number of transactions taking place in relation to the real goods being produced. Real physical usable goods constitute wealth as they take labor and effort to produce and have intrinsic value.
Ultimately the creation of currency, be it backed by gold, silver, a mix of metals, or some other hard commodity, must arise out of the private markets and also be competitive in itself. Currencies should not be the exclusive domain of government. As with all things, the best results will be achieved in currencies through competitive private markets.