Need-based currency design with complementary taxation

Some time ago, I came upon an anonymous currency design/proposal while surfing the web. I found it quite refreshing comparing to a debt-based currency or a currency pegged to a debt-based currency, so I thought to improve on the proposal a bit to make it portable across countries.

Terminology

Some economics textbooks say that banks “create” currency by lending out money. There is rather misleading, as cash is not the same as debt or credit. The word “currency” in this article refer to physical currency (paper) or digital currency (not tied to any bank), not IOUs.

i.e. the word “currency” in this article is synonymous with “cash”.

Rationale: why a need-based currency

Currency design come before all other economic institution design, like the stock market.

“Assume everyone is rational” is a recurring theme in contemporary economics. Adam Smith sure doesn’t believe in it, as he criticized the Great Britain’s tendency to hoard gold and silver.

If everyone is rational, every shop would decrease price to maximize profit (as in purchase power) during currency shortage. In practice, people tend to expect currency to have a fixed value, and judge every product’s value by their price (nominal value).

If everyone is rational, medical care and social welfare can be privatised. In practice, people tend to be risk-adverse.

If everyone is rational, investment knowledge should be common sense. In practice, it’s impossible for everyone to understand any given subject.

The idea presented here is that currency design should happen once, and be done; much like the code of cryptocurrency, we need much effort to change its design/code, so it doesn’t happen often.

This is not a public policy.

Currency supply formula

Let
$T = domestic~trade~volume + \dfrac{( exports + imports )}2$
where the unit is the currency itself.

At the end of every year,
$(1 - \dfrac{T~\small{this~year}}{T~\small{last~year}}) \cdot currency~supply~\small{last~year}$
amount of currency is created (if positive) or destroyed (if negative).

Commentary
the original proposal uses GDP as the metric, but the $exports - imports$ of GDP calculation feels suspect to me. As Adam Smith says, the real value of a market is the total goods and services available in that market. The $\dfrac1 2$ within the formula is to prevent double counting.

Currency created or destroyed

Every year, a new currency is created, with a fixed exchange rate between every two years. This MUST be the only way “new currency can be printed”.

Physical cash can be stamped with a date to be exchanged with the bank for current year’s currency. Digital cash can be simply updated.

IOUs like debit/savings account provided by banks SHOULD update the nominal value accordingly, but there is no requirement for these institutions to do so.

Institution support – Ministry of currency

This institution calculates $T$ and publishes a trace of the calculation. It MUST be independent from rest of the government. In practice, it could be a part of public census, although it still must be independent.

Digital currency implementation concerns

Blockchain-based digital currencies today like Bitcoin, Ethereum, Monero fluctuate greatly in purchase power. I would rather want a national currency to be stable.

One other feature of a good currency is that it is hard to destroy; often illegal. It is harder to burn paper than to forget about a digital wallet with equal nomination.

The digital currency itself should also be anonymous and without transfer limit like its physical counterpart.

To date, I am unaware of any digital currency with all these features.

Fiat or not

I think this kind of currency should be another category, separate from fiat or representative. It could be a subject of debate.

Below are commentary.

Psychological effect of change in currency nomination

This design is meant to prevent currency shortage by anchoring the currency supply to domestic trade volume.

It frees gold and silver from their currency use, as they are much more important as production material.

It does not use debt as backing. How much money it prints and destroys is purely mechanical and not subject to the government’s will.

Under this currency, we should tell everyone that the price of goods and services should stay relatively constant over time. The goal is to give economic freedom to all, not to pursue growth.

Hopefully people will buy more things they don’t buy before if they see number go up. Hopefully…

Complementary Taxation

With this kind of currency, what would the ideal tax scheme be?

The null hypothesis is no taxation and no protection of private property, including copyright and patent.

No private land ownership

There is this thing called “property tax” in Canada. The tax amount is based on the value of the property. If you don’t pay it for a few months, your house gets confiscated.

For clarity’s sake, let’s call this tax “rent”. In these sense, the country has no private land ownership.

I think Georgism is necessary to prevent hoarding land without using it effectively.

_Wealth Currency transfer

The transfer scheme described here is less radical than wealth transfer, as cash-like IOUs and other assets are not counted. I do not call this a tax because it does not transfer wealth to its government, only to its people. It is essentially balanced wealth tax + negative poll tax.

The idea is to take 1% (example) of all currency supply (no IOUs!) every year and split it evenly to all citizens of that country.

• the tax percentage may change over time
• the currency owned by foreigners would flow back over time
• an independent institution is responsible for this redistribution of wealth
• citizens not yet born can be supported this way, counting from 0% of a person

Government income and services – US Edition™

This section is from the original proposal and US-specific. Not all culture consider economic activity as important as Americans. This section is for your reference only.

Abolish all taxes except value-added tax. The government should be incentivized to promote economic activities this way.

The government offers loans and collects interest.

Other service fees could be linked to performance and compete with the private sector. In a sense, health care and patent enforcement could operate like USPS.

Dealing with automation

Allowing people to own slaves that can’t own private property themselves is a serious economic problem, if not a moral problem. These mechanical and digital slaves consume few resources from the market.

How to live in harmony with high level of automation is outside the scope of this article. I mentioned it because it’s quite important.

Soros-resistant

Depending on where you live around 1997, you either want George Soros to exist on this planet or not.

This currency design goes aganst the IMF’s idea that a country’s financial institutions should be designed for foreign investment. I think that a country’s currency should be designed for domestic trade first.

With the real value (purchasing power) of the currency relatively fixed, it is resistant to short selling. However, there might be other attack vectors that can destabilize this kind of currency, which I am too ignorant about economics to know.

Loss of ability to adjust interest rate

Let’s go back to the original proposal that proposes replacing the current debt-backed US currency with this design. Whoever wrote it must hate the federal government very much.

No national bank imply no fiddling with national interest rate. Again, the null hypothesis is no intervention.

Epilogue

“Obviously we wouldn’t want to be owning anything that we thought was in a currency that was really going to hell.” – 2025 May, Warren Buffett, probably

Weh.