Some Thoughts on Currency Value

I’ve been reading a lot of stories lately about the value of currency. There are a lot of people that are worried about the value of the American dollar, assuming that the value of the dollar is going to plummet in the very near future. Many radio pundits and survivalists are declaring that we need a return to the gold standard and are suggesting that you invest in gold and silver now, in big ways.

There are new community currencies being created daily. Some groups are choosing paper money as their medium of exchange. Others are having silver coins minted that are then used inside the community for purposes of exchange. In a more innovative move, some are turning to time banks, which value one hour of whatever work you perform as the medium of exchange. All of them have problems, all have drawbacks, and all of them miss the mark in some way.

Starting with paper community currencies…most of the community currencies I have read about are being created as a complimentary currency to the national currency. Most of them are limited to communities, which isn’t terrible in itself, but they also are requiring an exchange of national dollars to acquire the community dollars.

Coined currencies have the same problem. You have to give up your national dollars in exchange for a coined currency. The proponents of this system want a return to the gold standard, assuming, falsely, that the value of gold has always been solid, is very solid, and will always be solid. Ditto for silver. The problem I see is this…in the middle of a famine, who will care about gold and silver? If the survivalists are right and the apocalypse is around the corner, then food and water will hold their value and increase much more than gold and silver.

There is another problem with coined currencies: they are based on scarcity. There is never enough coinage to go around, so economics becomes an endless chasing of precious metals. The same could apply with any commodity that a community used as its currency.

It also seems there isn’t a great concensus on how to get community dollars out in to a community without resorting to a straight currency conversion for the national currency. Let me ask you this…if you owned a business, would you pay cash to buy a community dollar, even if it was slightly discounted (as many of them are)? I wouldn’t.

Then there is the barter system. In its classic sense it is a quid pro quo system. I give you my eggs, you give me your milk. This part of barter has been done to death in the last couple of years.

Move on to barter exchanges. They are closer to the real solution, in my opinion. Barter exchanges don’t require you to turn in your cash dollars for barter dollars. Instead, they become issuers of credit and managers of a currency. You own a business, you belong to a barter exchange, chances are you have a credit line that you can use for your business. Once the line is used, you can start marketing yourself to other participating businesses and off it goes. In theory, it remains a zero balance economy, with exactly the same amout of credit issued as outstanding barter dollars to be used. Barter exchanges do run for a cash profit, and thus a small downside is that you pay a cash transaction fee for every transaction you participate in, generally. That drains your national dollars a bit, as does the drain on your inventory, but considerably less than working inside community dollars.

Now, to incorporate value in to the conversation….the American dollar is backed by the U.S. Treasury, which declares that all loans made to the government will be repaid from tax dollars, and the Federal Reserve, which regulates the amount of currency in circulation. In other words, the American dollar is backed solely by the social agreement that we have in the world that the government has authority to tax our work, and pay its debts. And we all agree that it is the medium of exchange of preference.

Community currencies are backed by the same principle, the social agreement, as are barter dollars. The call for a return to an objective standard of currency is based on scarsity, because there is never enough of any one commodity to go around. Our current system of fiat currency backed by a social agreement is more efficient, and more effective at promoting growth than any other system available to us.

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