Creating A New Currency - What Journal Entries?
VHarris001
based on barter. Everyone works, including the King, and trades for what he
can't produce and consume himself.
Because of my growing concern of terrorism, as King I have decided that
Greenspanland needs a national defense system - watchtowers at strategic
locations around the island. It seems that a tax is in order.
Rather than try to collect in taxes from what everyone produces, then barter
for the goods and services needed to build and man the watchtowers, I have
decided to form a federal reserve bank and issue coinage, borrow and loan,
allow for the development of a banking system, etc. You know, just like they
do in the USA, only on a somewhat smaller scale.
So I, King Alan, create the central bank, mint currency (conveniently called
$US and demoninated the same), and order the initiation of taxation.
1) How do I get the money out into the economy?
2) More importantly, what journal entries do I put on the books to account for
the money?
As King Alan, I could, of course, just print all the money I wanted and
increase Greenspanlands cash account by that much. But being a principled
King, and very concerned with inflation, I only want to increase the cash
account by the amount of the actual receipt of taxes. How can I do this?
Signed,
King Alan of Greenspanland
(VH)
William F Hummel
wrote:
This is a classic chicken and egg problem. In your scenario its
a tax and spend problem. But which comes first?
In a going system, the central bank issues its currency by buying
something. In the case of the US Fed that something is financial
assets, and in particular government debt securities. The Fed
simply creates a deposit for the seller or the seller's bank to
pay for the assets.
But why would anyone sell to the CB before its currency has been
shown to have exchange value? In a going system, the value of a
fiat currency is maintained by the need to pay taxes in that
currency. But since there is yet no currency in the hands of the
public, there is no way to enforce taxes in that currency.
There's the dilemma.
One way to resolve it is for King Alan to decree that the public
must sell, or risk imprisonment, goods to the CB in exchange for
its own currency. Then when a sufficient amount of currency is
in the hands of the public, King Alan would decree that the
public could no longer barter but would have to make all payments
for goods and services among themselves in the currency. He
would also decree a state tax on all such transactions. He has
now set up the necessary conditions for maintaining demand for
his currency.
The balance sheet of King Alan's CB will show assets
corresponding to the goods it holds plus the financial assets it
later buys from the public when its currency has been
established. The goods might be gold bullion for example, but
they could be any non-perishable good for which there is some
public demand. The financial assets could be private sector
securities, but preferably they should be the securities of the
government which have been previously issued to cover any
shortage of revenues from taxes that have been used in its own
spending.
The liabilities on the balance sheet are the currency issued by
the CB. They represent an obligation due to the public that
might not to obvious to them. They are in fact credits against
future tax liabilities. If King Alan enforces broad-based taxes
on the public, he can be confident that everyone will strive to
acquire his currency. Even those who owe no taxes will want the
currency because they know that others need it.
You might be interested in reading a couple of related articles:
"What is a Dollar Bill" at
http://wfhummel.cnchost.com/fiatmoney.html
"Money, Taxes, and Government Debt" at
http://wfhummel.cnchost.com/moneytaxesdebt.html
WFH
Ryan O'Rielley
VHarris001 <vharr...@aol.com> wrote in message
news:20020418132844...@mb-mq.aol.com...
> Suppose I'm King Alan of the Isle of Greenspanland. Our economy is
entirely
> based on barter. Everyone works, including the King, and trades for what
he
> can't produce and consume himself.
>
> Because of my growing concern of terrorism, as King I have decided that
> Greenspanland needs a national defense system - watchtowers at strategic
> locations around the island. It seems that a tax is in order.
>
> Rather than try to collect in taxes from what everyone produces, then
barter
> for the goods and services needed to build and man the watchtowers, I have
> decided to form a federal reserve bank and issue coinage, borrow and loan,
> allow for the development of a banking system, etc. You know, just like
they
> do in the USA, only on a somewhat smaller scale.
>
> So I, King Alan, create the central bank, mint currency (conveniently
called
> $US and demoninated the same), and order the initiation of taxation.
>
> 1) How do I get the money out into the economy?
>
> 2) More importantly, what journal entries do I put on the books to
account for
> the money?
Well, King, the second question will be answered first, as it is easiest to
answer. Since no money is in existance right now, you would make entries
just like a new business. This makes doubble entry accounting much easirer
than balancing a basket of eggs exchanged for a equal value of corn, etc.
So you would debit cash, and credit "Royal Family Equity."
As to getting the money into the economy this will take several steps.
First, you must establish some standard of what the money is worth. Most
places use gold, but you could in theory use anything. Does your kingdom
have oil? How about stocks of US Dollars? The key is that whatever you
back it by should be
1. In demand, and constant demand.
2. Something that is a natural resource, or not easily "copied" by your
subjects. (Otherwise they would make their own currency systems at will.)
3. Not easy to get, and not convienient to exchange. Like gold--in
demand, but heavy and inconvienient to haul around.
4. Finally, something the kingdom already has is quantity. There is
not much use in a gold standard if you only have 10oz of gold.
Next, once you have decided what the relative values are, which does not
really matter as the market will set your exchange rate with other economies
like it or not, you must make your "notes." If the notes are backable in
gold, for example, print a like amount of the notes. If you like, you can
print a few extra as not everyone will want to convert to gold at one time,
some will get destroyed, etc. Be careful with this, for once people know
what you are up to they will lose faith and flee your new currency.
Now, the hard part--getting people to accept your new currency. If your
government purchases anything from your subjects (and I know of no
government that does not) you could simply say this is how you will pay.
And insist that taxes be paid in kind. If your reputation is good, people
will support the currency. Expect this to take some time, maybe years.
Currency is as good as those who back it.
Grinch
>Suppose I'm King Alan of the Isle of Greenspanland. Our economy is entirely
>based on barter. Everyone works, including the King, and trades for what he
>can't produce and consume himself.
>
>Because of my growing concern of terrorism, as King I have decided that
>Greenspanland needs a national defense system - watchtowers at strategic
>locations around the island. It seems that a tax is in order.
>
>Rather than try to collect in taxes from what everyone produces, then barter
>for the goods and services needed to build and man the watchtowers, I have
>decided to form a federal reserve bank and issue coinage, borrow and loan,
>allow for the development of a banking system, etc. You know, just like they
>do in the USA, only on a somewhat smaller scale.
>
>So I, King Alan, create the central bank, mint currency (conveniently called
>$US and demoninated the same), and order the initiation of taxation.
>
>1) How do I get the money out into the economy?
First, you are going to have to get the people in your barter economy
to voluntarily want to use this new "money" thing among themselves,
for some reason that did not exist before.
You certainly aren't going to impose a developed monetary system
(complete with central bank!) on a bartering population that has no
need or use for it, against their will.
Money is very easy for people to create on their own when they have a
reason to use it. The great stones of Yap Island, beads, sea shells,
plants like tobacco, shiny pieces of metal, cigarettes, etc. -- money
arises spontaneously among people when they benefit from it.
So if there is no money in your barter economy, apparently people feel
they have no need of it.
Thus, you will have to arrange for your new "money" thing to provide
benefits to the population at Time 2 that they did not enjoy at Time 1
without it -- and which they couldn't have obtained from creating a
money of their own. How do you propose to do that?
This new benefit must motivate people to use your money among
*themselves*. If that happens then the money will have value to them,
and you will be able to sell it to them, and then you will be able to
collect some of it back from them in taxes, and use that to buy things
from them.
Remember that the reason why a government collects taxes in money is
so it can buy things with the money through voluntary transactions. If
the people don't value your money, they aren't going to sell you
anything for it. No forts, weapons, or soldiers' labor.
Then you'll be back where you started -- sending your soldiers to
collect taxes in chickens because everything else of value has been
hidden away.
>2) More importantly, what journal entries do I put on the books to account for
>the money?
More importantly???
How important are your journal entries going to be if the population
thinks the greatest benefit they can obtain from this "money" you
distribute is by using it as the new innovation, "latrine paper"?
>As King Alan, I could, of course, just print all the money I wanted and
>increase Greenspanlands cash account by that much. But being a principled
>King, and very concerned with inflation...
You're getting a bit ahead of yourself.
Money first must have value before it can lose its value to inflation.
What is going to give your little pieces of paper any value in a
barter economy to begin with?
> ...I only want to increase the cash
>account by the amount of the actual receipt of taxes. How can I do this?
In the real world, the money system typically exists before the
government arrives. (The way commerce in dollars predated the United
States). The government then adopts the money system that the people
use for the same reason they use it -- it wants to be able to buy and
sell things with the people who use it. The goverment just imposes its
taxes on existing transactions and gets its money that way, as the
U.S. did in its year one. (Thereafter, the government will no doubt
try to modify and control the money system, to greater or lesser
extent, with consequences better or worse, but that's another story.)
If a money system already exists, bookkeeping is no problem. The
Treasury just either deposits the taxes it collects in a commercial
bank account like anyone else, or it spends them. Either way the money
supply is unchanged and there's no inflation/deflation effect.
Nothing could be simpler. No problem.
(Of course, if you start printing money to cover your expenses, or
clipping coins to make them go further, then you may have a problem --
but in that case you really aren't overly worried about ethical
acounting.
And if you want your central bank to actively manipulate the
money supply with counter-cyclical intent ... well, then you are *way
way* far from a barter economy.)
However, if you are really starting with a true barter economy, and a
closed one (i.e., you aren't suddenly opening a south sea island to
the modern world by selling native artifacts for dollars), the real
question is how are you going to make it suddenly take a great leap
forward through several stages of development to a point where money
all at once becomes something everybody values and actually wants to
use?
VHarris001
>shown to have exchange value?
King Alan believes in "regulated" market mechanisms. That is, the King has a
set of rules for playing the game and enforces those rules. So when
introducing the first-ever currency, King Alan wants the market to establish
the exchange value of the currency. The only demand for the currency is
expected to be that from its exclusive use as the medium of tax payment.
> In a going system, the value of a
>fiat currency is maintained by the need to pay taxes in that
>currency. But since there is yet no currency in the hands of the
>public, there is no way to enforce taxes in that currency.
>There's the dilemma.
>
>One way to resolve it is for King Alan to decree that the public
>must sell, or risk imprisonment, goods to the CB in exchange for
>its own currency. Then when a sufficient amount of currency is
>in the hands of the public, King Alan would decree that the
>public could no longer barter but would have to make all payments
>for goods and services among themselves in the currency
Hmmm, King Alan of Greenspanland is a very popular king, as the economy has
prospered under his management. A decree like that above isn't favored by the
King. Further, the King prefers a market solution rather than an intervention
in the market.
> He
>would also decree a state tax on all such transactions.
Yes, okay, He likes this one.
>He has
>now set up the necessary conditions for maintaining demand for
>his currency.
>
>The balance sheet of King Alan's CB will show assets
>corresponding to the goods it holds plus the financial assets it
>later buys from the public when its currency has been
>established. The goods might be gold bullion for example, but
>they could be any non-perishable good for which there is some
>public demand. The financial assets could be private sector
>securities, but preferably they should be the securities of the
>government which have been previously issued to cover any
>shortage of revenues from taxes that have been used in its own
>spending.
>
The King has a personal income statement and balance sheet. But Greenspanland
has never had any income or held any assets. So Greenspanland will be starting
from scratch as it begins to issue currency, tax and spend for defense.
>The liabilities on the balance sheet are the currency issued by
>the CB. They represent an obligation due to the public that
>might not to obvious to them. They are in fact credits against
>future tax liabilities. If King Alan enforces broad-based taxes
>on the public, he can be confident that everyone will strive to
>acquire his currency. Even those who owe no taxes will want the
>currency because they know that others need it.
>
>WFH
So King Alan is willing to accept part of your recommendation. That is, he
will decree a "barter tax" of 1% of the value of every good or service traded.
The seller of the good or service is responsible to collect and pay the tax.
Naturally, in barter transactions, there are at least two goods or services
bartered, and the barter tax is due on each. For instance, if 100 bushels of
grain are traded for 10 pigs, then the seller of the 100 bushels of grain owes
the equivalent of 1 bushel of grain to the Kingdom, and the seller of the 10
pigs owes 1/10 of one pig to the Kingdom.
The King has decreed that transactions involving just one good or service in
exchange for the currency will, of course, only be taxed 1% for the one good or
service traded.
Lets suppose the tax went into effect April 1, 2002. Everyone was informed
about the tax, and everyone is keeping track of all transactions so that they
can pay their tax when due.
But the King doesn't want to force the currency into the market by edict, but
rather let the supply and demand of the currency float relative to other goods
and services.
The King believes that there is already demand for the new currency. further,
the construction contractor is ready to start work on the new national defense
system (watchtowers) and has several suppliers willing to take the new currency
for part of the supplies (exchange rate to be worked out later) and many
employees willing to take part of their salaries in the new currency.
How is the best way to proceed now?
VH
VHarris001
>answer. Since no money is in existance right now, you would make entries
>just like a new business. This makes doubble entry accounting much easirer
>than balancing a basket of eggs exchanged for a equal value of corn, etc.
>So you would debit cash, and credit "Royal Family Equity."
>
Hmmm. There is a long history in Greenspanland that the King keeps his own
private affairs separate from the public. Now that the Kingdom will have
revenue of its own, that will be kept separate from the King's affairs.
But I, as King, don't fancy the notion of printing up money and entering it as
a cash asset on the books. I prefer that the only assets that appear on the
books of the Kingdom are those that are rightly received as payment of taxes
from the subjects. So some other method will simply have to be devised to
account for the currency.
>As to getting the money into the economy this will take several steps.
>First, you must establish some standard of what the money is worth. Most
>places use gold, but you could in theory use anything. Does your kingdom
>have oil? How about stocks of US Dollars? The key is that whatever you
>back it by should be
> 1. In demand, and constant demand.
> 2. Something that is a natural resource, or not easily "copied" by your
>subjects. (Otherwise they would make their own currency systems at will.)
> 3. Not easy to get, and not convienient to exchange. Like gold--in
>demand, but heavy and inconvienient to haul around.
> 4. Finally, something the kingdom already has is quantity. There is
>not much use in a gold standard if you only have 10oz of gold.
>
Having witnessed the struggles of many economies with their futile efforts to
maintain a fixed exchange rate for their currencies, I prefer to allow my
currency to float. I King Alan, am willing to let the currency attain and hold
the value at which the market decides, even if those watchtowers NEVER get
built. Still, I believe that through careful monetary policy, the currency can
achieve and will hold value.
>Next, once you have decided what the relative values are, which does not
>really matter as the market will set your exchange rate with other economies
>like it or not, you must make your "notes." If the notes are backable in
>gold, for example, print a like amount of the notes. If you like, you can
>print a few extra as not everyone will want to convert to gold at one time,
>some will get destroyed, etc. Be careful with this, for once people know
>what you are up to they will lose faith and flee your new currency.
>
Yes, this is more like what King Alan has in mind, except lose the "tied to"
concept.
>Now, the hard part--getting people to accept your new currency. If your
>government purchases anything from your subjects (and I know of no
>government that does not)
Greenspanland has never had a "revenue and expense" type government before, but
that is about to change. Greenspanland has passed tax legislation -
representing the first ever national revenue - and is about to embark (spend)
on building a national defense system.
>you could simply say this is how you will pay.
Well, Greenspanland will only spend the currency with a contractor who will
voluntarily take it (King Alan is not big on the government compelling economic
behavior from the market).
>And insist that taxes be paid in kind.
Yep, King Alan will insist that taxes be paid with currency only, and will
leave it to the market to determine how taxpayers obtain the currency and what
the exchange rate is between the goods and services sold to the value of the
currency.
>If your reputation is good, people
>will support the currency. Expect this to take some time, maybe years.
>Currency is as good as those who back it.
>
Well, Greenspanland has absolutely no history with money, purchases, payments,
borrowing, lending, etc. NONE.
Summary to date: The currency will only be used by the Kingdom to pay its
debts to those who voluntarily agree to accept the currency as payment. Once
in the market, the currency is free to circulate. The currency must float.
The market must set exchange rates. Payment of taxes to the Kingdom, at 1% of
the free-floating value of the goods and services bartered, will only be
accepted in its currency.
Signed King Alan of Greenspanland
(VH)
VHarris001
>to voluntarily want to use this new "money" thing among themselves,
>for some reason that did not exist before.
>
Agreed.
>You certainly aren't going to impose a developed monetary system
>(complete with central bank!) on a bartering population that has no
>need or use for it, against their will.
>
Agreed.
>Money is very easy for people to create on their own when they have a
>reason to use it. The great stones of Yap Island, beads, sea shells,
>plants like tobacco, shiny pieces of metal, cigarettes, etc. -- money
>arises spontaneously among people when they benefit from it.
>
The central bank says they use the best available technology to create currency
that is resistant to the above problems.
>So if there is no money in your barter economy, apparently people feel
>they have no need of it.
>
True. Now the need is due the demand created via the new tax.
>Thus, you will have to arrange for your new "money" thing to provide
>benefits to the population at Time 2 that they did not enjoy at Time 1
>without it -- and which they couldn't have obtained from creating a
>money of their own. How do you propose to do that?
>
Will requiring the payment of taxes in that currency only stimulate demand? So
if, in my previously posted example, one farmer owes the Kingdom a bushel of
grain, and another farmer owes the Kingdom 1/10 of a pig in equivalent currency
(as set by the market), will that demand for the currency induce its voluntary
circulation?
>This new benefit must motivate people to use your money among
>*themselves*. If that happens then the money will have value to them,
>and you will be able to sell it to them, and then you will be able to
>collect some of it back from them in taxes, and use that to buy things
>from them.
>
Yes, well the currency will provide a mechanism for valuing transactions
relative to the taxes do on those transactions, and will provide the instant
fractional currency for payment of the taxes. But other than that, I can't see
that there would be any value to the currency. (That is, in Greenspanland,
there is already a vibrant system of valuing one commodity relative to another,
and clearing houses dedicated exclusively to facilitating the bartering system.
So the new currency, at least at first, will likely have minimal impact in
facilitating barter transactions. Rather, it likely will trade on the board
just as any other commodity - its sole value being the commodity accepted by
the government as payment of taxes for transactions.
>Remember that the reason why a government collects taxes in money is
>so it can buy things with the money through voluntary transactions. If
>the people don't value your money, they aren't going to sell you
>anything for it. No forts, weapons, or soldiers' labor.
>
>Then you'll be back where you started -- sending your soldiers to
>collect taxes in chickens because everything else of value has been
>hidden away.
>
Well, the penalties for failure to pay taxes are steep, so the motivation to
obtain currency is high (demand is high).
>>2) More importantly, what journal entries do I put on the books to account
>for
>>the money?
>
>More importantly???
>
>How important are your journal entries going to be if the population
>thinks the greatest benefit they can obtain from this "money" you
>distribute is by using it as the new innovation, "latrine paper"?
>
Kind Alan believes that few will use it as latrine paper when it is the only
"get out of jail" ticket there is. Further, since it is not to be dumped on
the market, but put into the market as the market demands, is there any reason
to suspect that it would have and hold no value?
>>As King Alan, I could, of course, just print all the money I wanted and
>>increase Greenspanlands cash account by that much. But being a principled
>>King, and very concerned with inflation...
>
>You're getting a bit ahead of yourself.
>
>Money first must have value before it can lose its value to inflation.
>
Right. It has no value when printed. It only has value when it is demanded.
That's why it seems sensible to NOT put the value of the money printed onto the
balance sheet as an asset. Rather, the assets of the Kingdom should only
increase once the tax revenue is earned. So how then is the correct way to
handle the journal entry for the freshly printed currency? No journal entry at
all?
>What is going to give your little pieces of paper any value in a
>barter economy to begin with?
>
Payment of taxes is all I can think of.
>> ...I only want to increase the cash
>>account by the amount of the actual receipt of taxes. How can I do this?
>
>In the real world, the money system typically exists before the
>government arrives. (The way commerce in dollars predated the United
>States). The government then adopts the money system that the people
>use for the same reason they use it -- it wants to be able to buy and
>sell things with the people who use it. The goverment just imposes its
>taxes on existing transactions and gets its money that way, as the
>U.S. did in its year one. (Thereafter, the government will no doubt
>try to modify and control the money system, to greater or lesser
>extent, with consequences better or worse, but that's another story.)
>
Right. That is why Greenspanland was used. The intent was to separate out the
influence of an existing system. Rather, to try to identify the fiscal and
monetary mechanisms that might be used to create new currency and getting it to
circulate.
>If a money system already exists, bookkeeping is no problem. The
>Treasury just either deposits the taxes it collects in a commercial
>bank account like anyone else, or it spends them. Either way the money
>supply is unchanged and there's no inflation/deflation effect.
>Nothing could be simpler. No problem.
>
In contrast, in Greenspanland, there was no "currency." Now there is. Not
only that, but if King Alan is right, the money supply is about to grow,
percentage wise, at an incredible rate. But because the King is unwilling to
force the currency into circulation via government mandate, then the money
supply should grow exponentially only because it is demanded to pay taxes.
>
>However, if you are really starting with a true barter economy, and a
>closed one (i.e., you aren't suddenly opening a south sea island to
>the modern world by selling native artifacts for dollars), the real
>question is how are you going to make it suddenly take a great leap
>forward through several stages of development to a point where money
>all at once becomes something everybody values and actually wants to
>use?
>
For the sake of argument, lets assume that Greenspanland is not a backward
nation. Rather, people are well educated and fully employed. The standard of
living is high. It just happens to be that, oddly enough, the country never
developed a currency. Now that is changing. There won't be great difficulty
in getting people to adapt to a new tax, nor a new currency in which to pay the
tax.
That being the case, and given the conditions I've tried to lay out, how is it
best to account for the newly minted money and how is it possible to get the
money into the market?
VH
Ryan O'Rielley
> Having witnessed the struggles of many economies with their futile efforts
to
> maintain a fixed exchange rate for their currencies, I prefer to allow my
> currency to float. I King Alan, am willing to let the currency attain and
hold
> the value at which the market decides, even if those watchtowers NEVER get
> built. Still, I believe that through careful monetary policy, the
currency can
> achieve and will hold value.
Well, King Alan, you are going to run into problems here. For the countries
that have tried to maintain fixed exchange rates have tried to maintain them
with other currencies, whilr not having anything of value to back it up
(e.g.: the old Soviet Bloc.) Or, they had the reserves to back it up, but
built too many watchtowers that they ran short on credit. You could ask the
King of Argentina this, but he will be replaced two times over by the time
you read this.
Secondly, you are confusing your Kingdom reserves with convertability. If
your Kingdom has good monetary policy, people will let you pay for anything,
even imports, with your own money. Let's say you live near the kingdom of
liberalland. You trade with the liberals who livre there in barter. Now,
you have printed currency, as have they. You back yours by the gold your
country holds. The liberals just keep on printing more so their subjects
can live well.
Now, it comes time to trade for goods. Do you want to be paid in someone
else's currency? Hardly. But then a funny thing happens. A small company
in liberalland notices his prices keep going up locally, while yours are
stable each year he visits. He says, "King Alan, could you do me a favor?
Pay me for my shipments in your currency instead of mine?" Since you make a
seioranage profit on your currency, you agree. As this goes on, you will
have a "hard" currency people want, unlike the subjects on the mainland, who
have "monopoly money" the government prints to pay their bills.
William F Hummel
wrote:
>>But why would anyone sell to the CB before its currency has been
>>shown to have exchange value?
>
>King Alan believes in "regulated" market mechanisms. That is, the King has a
>set of rules for playing the game and enforces those rules. So when
>introducing the first-ever currency, King Alan wants the market to establish
>the exchange value of the currency. The only demand for the currency is
>expected to be that from its exclusive use as the medium of tax payment.
If you really mean that the currency is for the exclusive use as
the medium of tax payment, then you have imposed a severe
constraint affecting the efficiency of exchange. The objective
of the government should be to foster the widespread use of its
currency and to tax money transactions in the private sector.
>
>> In a going system, the value of a
>>fiat currency is maintained by the need to pay taxes in that
>>currency. But since there is yet no currency in the hands of the
>>public, there is no way to enforce taxes in that currency.
>>There's the dilemma.
>>
>>One way to resolve it is for King Alan to decree that the public
>>must sell, or risk imprisonment, goods to the CB in exchange for
>>its own currency. Then when a sufficient amount of currency is
>>in the hands of the public, King Alan would decree that the
>>public could no longer barter but would have to make all payments
>>for goods and services among themselves in the currency
>
>Hmmm, King Alan of Greenspanland is a very popular king, as the economy has
>prospered under his management. A decree like that above isn't favored by the
>King. Further, the King prefers a market solution rather than an intervention
>in the market.
Well, King Alan will have to somehow sugar-coat his edict to get
the ball rolling. It won't happen automatically.
>
>> He
>>would also decree a state tax on all such transactions.
>
>Yes, okay, He likes this one.
The reason for the tax is not to obtain currency for the
government to spend. It is to create a demand for the currency
that is intrinsically worthless. This is a key problem in any
fiat currency, i.e. one not backed by convertibility into some
commodity. The government (which includes the CB) must spend
BEFORE it can tax in its own currency. There is no limit on how
much it can spend other than the inflationary effect of spending
more money into circulation than the private sector wishes to
hold for liquidity purposes.
>
>>He has
>>now set up the necessary conditions for maintaining demand for
>>his currency.
>>
>>The balance sheet of King Alan's CB will show assets
>>corresponding to the goods it holds plus the financial assets it
>>later buys from the public when its currency has been
>>established. The goods might be gold bullion for example, but
>>they could be any non-perishable good for which there is some
>>public demand. The financial assets could be private sector
>>securities, but preferably they should be the securities of the
>>government which have been previously issued to cover any
>>shortage of revenues from taxes that have been used in its own
>>spending.
>>
>
>The King has a personal income statement and balance sheet. But Greenspanland
>has never had any income or held any assets. So Greenspanland will be starting
>from scratch as it begins to issue currency, tax and spend for defense.
>
For all practical purposes, one can analyze this scenario under
the assumption that the King's and the government's books are
consolidated. There are basically two players in a closed
economy, the public sector and the private sector.
>
>>The liabilities on the balance sheet are the currency issued by
>>the CB. They represent an obligation due to the public that
>>might not to obvious to them. They are in fact credits against
>>future tax liabilities. If King Alan enforces broad-based taxes
>>on the public, he can be confident that everyone will strive to
>>acquire his currency. Even those who owe no taxes will want the
>>currency because they know that others need it.
>>
>So King Alan is willing to accept part of your recommendation. That is, he
>will decree a "barter tax" of 1% of the value of every good or service traded.
>The seller of the good or service is responsible to collect and pay the tax.
>Naturally, in barter transactions, there are at least two goods or services
>bartered, and the barter tax is due on each. For instance, if 100 bushels of
>grain are traded for 10 pigs, then the seller of the 100 bushels of grain owes
>the equivalent of 1 bushel of grain to the Kingdom, and the seller of the 10
>pigs owes 1/10 of one pig to the Kingdom.
>
>The King has decreed that transactions involving just one good or service in
>exchange for the currency will, of course, only be taxed 1% for the one good or
>service traded.
If the King decrees a tax-break for transactions using currency,
that could encourage the people to sell goods to the government
to acquire its currency. Whether an incentive of 1% to the one
party in the transaction is open to question.
>
>Lets suppose the tax went into effect April 1, 2002. Everyone was informed
>about the tax, and everyone is keeping track of all transactions so that they
>can pay their tax when due.
>
>But the King doesn't want to force the currency into the market by edict, but
>rather let the supply and demand of the currency float relative to other goods
>and services.
>
>The King believes that there is already demand for the new currency. further,
>the construction contractor is ready to start work on the new national defense
>system (watchtowers) and has several suppliers willing to take the new currency
>for part of the supplies (exchange rate to be worked out later) and many
>employees willing to take part of their salaries in the new currency.
The issue is not what the King believes, but what the people
believe. When you assume that some of the people, for reasons
unstated, are willing to sell to the government for its currency,
then the problem has been assumed away.
>
>How is the best way to proceed now?
>
Regarding your other question of how to account for the newly
minted currency, not yet spent into circulation by the King's CB,
that should be of trivial interest except to bookkeepers. The
only reason to account for it is to ensure that someone in the CB
doesn't steal it for personal use. The Fed does keep book on the
total of notes created and how much is in circulation. As of Jan
10, 2001, the total was $750.2 billion, of which $555.8 billion
was in circulation and $194.4 billion was held in Federal Reserve
banks. The latter component is not a part of the money supply
until issued to the public.
WFH
Grinch
<big snip>
>>However, if you are really starting with a true barter economy, and a
>>closed one (i.e., you aren't suddenly opening a south sea island to
>>the modern world by selling native artifacts for dollars), the real
>>question is how are you going to make it suddenly take a great leap
>>forward through several stages of development to a point where money
>>all at once becomes something everybody values and actually wants to
>>use?
>>
>
>For the sake of argument, lets assume that Greenspanland is not a backward
>nation. Rather, people are well educated and fully employed. The standard of
>living is high. It just happens to be that, oddly enough, the country never
>developed a currency. Now that is changing. There won't be great difficulty
>in getting people to adapt to a new tax, nor a new currency in which to pay the
>tax.
>That being the case, and given the conditions I've tried to lay out, how is it
>best to account for the newly minted money and how is it possible to get the
>money into the market?
All right. First, forget about turning a primitive closed barter
economy into a modern monetary economy by imposing taxes that the king
insists be collected in money. There are more absurdities in that than
in Alice Through the Looking Glass.
And forget the idea of a modern, rich, developed economy operating
without money. It's like saying "Suppose a higher-order mammal had no
heart, lungs, or circulatory system ... how could we introduce them?"
If your concern is central bank accounting, just stick to that -- it's
much simpler than trying to handwave centuries of economic evolution
into the short reign of Alan I of Greenspanland.
Let's take a more plausible scenario. Say you've got an island in the
South Pacific that's been cut off from the world, but which now wants
to join in. The islanders have discovered that they can greatly enrich
themselves by selling their native guano (as fertilizer) and native
straw hats and baskets (as tourist items) for dollars and euros and
yen that they can then use to buy life-improving goodies from the
developed world (such as soda and chips and beer to consume while
using the new satellite TV subscription to watch MTV and Comedy
Central). Globalization marches on.
Now, the simplest thing for the islanders to do would be just to trade
their stuff for dollars and euros and yen, and then trade the dollars
and euros and yen for the western stuff they want to buy, in a
libertarian sort of way.
This gives the islanders a new real reason to value and use money --
they can buy all this new stuff with it for the first time, and save
it to buy more stuff later, and borrow and lend it amongst themselves
as some save and others want to buy, etc.
However, King Alan the Interventionist reigns on this island, and he
is not a libertarian. Perhaps he is benevolent, and wishes to avoid
the confusion and inefficiency that would result if three separate
currencies circulated on the island. Perhaps he is vain, and wants
his picture in everyone's pocket. Perhaps he is greedy, and wants a
piece of every transaction made with the rest of the world. All three
are possible of course.
In any event, the King decides the island should have its own single
currency for all islanders to use -- call them 'Quatloos' (Qs) -- plus
a central bank to issue and manage and print his picture on the
currency, and to exchange the currency for dollars and euros and yen
as needed, charging a reasonable fee.
Now, what is the accounting involved in the creation of this central
bank, and the issuance of its currency? I believe this is your
question.
It's simple. The central bank must have a balance sheet of its assets
and liabilities, and the balance sheet must balance of course.
To get things started, somebody is going to have to contribute assets
to the bank. In the US commercial banks are required by law to pony
up capital to the Fed -- but as there are no banks to begin with on
our remote island, that is not possible.
Presumably the King will put up the capital, especially since he is
the one who will want to control the bank (and profit from it -- even
if that is only a secondary concern, of course) since in exchange for
the contribution to capital comes ownership and control (and profit).
What he contributes will need to have real value. Maybe it could be
the deed to the guano mines that have been the source of his family's
hereditary power. Or maybe his personal note, secured by his power as
King to tax the island's guano production. Maybe some cash from his
Swiss bank account. Whatever ... something.
Others can invest too, of course, if the King is willing to share
control of the central bank (and the political power, and profits,
etc., that flow from it) to get their capital in it. Other islanders,
maybe even foreigners, might get a share of the deal.
The capital will be used to set up the bank's office, buy the
computer, and buy enough dollars, euros and yen to get started, etc.
All this will go onto the "asset" side of the balance sheet.
On the "liability" side of the balance sheet will go the currency that
the bank issues -- since the currency notes will be IOUs against the
central bank's assets.
The basic accounting is really as simple as that, not complex at all.
To get the currency into circulation the bank (and/or island treasury,
if distinct) will start spending Qs financed from capital to buy
things, including the foreign currency floating about, and to make
loans of Qs to borrowers. Neither act affects the balance sheet
bottom line, as each creates offsetting assets and liabilities.
When the bank starts taking cash deposits in Qs and lending them out
to borrowers, the deposits will be liabilities on the balance sheet
and the loans will be assets. So again the bank's bottom line won't
change.
But deposit-loan transactions will increase the money supply of Qs
since both deposits and loaned cash count as money. Thus the bank can
vary the money supply (to affect the level of prices and economic
activity and the foreign exchange rate) by both varying the amount of
loans it makes and the amount of money it spends into the economy on
its own account (such as by buying really plush decorations for the
lobby, or paying really fat salaries to its chairman, King Alan the
Nepotist, and his friends and family members on the board) and/or on
the account of the island's treasury.
Fee-and-interest income, to the extent it exceeds expenses, will flow
through to the bottom line of the bank, increasing the asset side of
the balance sheet. (Since foreign exchange transactions presumably are
a bank monopoly, fee income there could be very lucrative).
To the extent that the asset side of the balance sheet exceeds the
liabilities, the balancing liability-side item of "shareholder equity"
will represent the growing value of the investment in the bank made by
King Alan & Co., LLP.
Thus the accounting and ledger items are very simple. That's pretty
much it.
The difficult part will be getting the people on the island to *use*
the money, as is necessary to make the whole scheme work.
No doubt King Alan the Enforcer will promptly decree a legal tender
law that requires all payments on the island (including taxes, as a
small part of the law) to be paid in Qs. And he will prohibit
ownership of foreign currencies like dollars, euros and yen, so that
his citizens will be forced to pay their satellite tv subscription
bills at the bank with Qs that the bank will then exchange for foreign
money that it will use to pay such bills on their behalf, after
subtracting a reasonable service fee.
Alas, that's not good enough. The list of failed currencies backed by
legal tender laws (including tax payment requirements, of course) will
run down one's arm, starting with "A" for Argentina (how many times
now?) In fact, pretty near all failed currencies have been backed by
legal tender laws, etc.
Currency prohibitions don't work either. Even dictatorial governments
with the worst secret police forces can never keep prohibited
currencies from circulating under the table and in black markets. And
Good King Alan certainly wouldn't want to go the secret police route
... not if he's trying to profit from his island's trade in the
tourist and memorabilia markets.
People inevitably use as currency what they *want* to use, wherever
they are and whatever the local legal tender law says. Right now
2/3rds of all US currency is circulating abroad, in foreign lands. To
the extent that the islanders don't like how King Alan the Spendthrift
manages his currency, dollars will keep circulating among them in
corresponding amount, no matter what he decrees.
So Alan the Shrewd is going to have to get his islanders to *want* to
use his currency. He'll have to combine carrots with sticks to do
that, until the people come to trust it.
His bank will have to be user-friendly with smiling tellers, to start
with. More importantly, its currency will have to consist of IOUs
backed by something of value sufficient to inspire trust.
In the early days of the US Federal Reserve bank, the dollar was
backed by gold. But a currency backed by say, five pounds of guano per
Q, may not be equally attractive, even if the value is there.
The simplest option might be just to make the Q freely exchangeable
into dollars, etc., at a fixed rate (without too extortionate a fee).
That would make Qs the equivalent of foreign currency, and so
eliminate the reason for holding foreign currency while keeping the
penalties for doing so.
(A fixed exchange rate can become risky after a while, as Argentina
and many other examples illustrate. OTOH, for a very small economy it
need not be -- many islands have successful long-time fixed exchange
rates with big neighbors, such as the Bahamas to the US. It depends.
But in any event, it ought to be possible to hold a fixed rate long
enough to get a currency started, say for a couple of years).
On the other side, King Alan the Operator can make a deal with the
OECD nations not to turn his island into the world's biggest tax haven
and refuge for copyright pirates, in exchange for their agreement to
arrange to run all their citizens' currency dealings with his citizens
through his central bank, rather than directly.
In that way both the domestic demand for foreign currencies and the
foreign supply of them can be largely eliminated for a period long
enough to get his own currency into universal circulation, and at
least a while thereafter.
If during that time King Alan operates his currency without being too
damn greedy, wisely enough so that he becomes known as Alan the
Bundesbanker and the people develop the habit of placing implicit
trust in it, it might even succeed.
At least until his son, Alan II the Kegmeister, returns from Vegas to
inherit the throne.
John Weatherby
possible to start off with some sort of commodity system. If King Allan owns
a lot of something that people will want, like gold, they he can back the
currency with it. The way most gold standards have gone to fiat is really by
printing money and not telling people they are maintaining the par to the
commodity.
Essentially this is what the US did in the Bretton Woods system. We were
technically on a gold standard with a constant par. The truth is the 50's
and the 60's saw all kinds of monetary policy and expansions with little to
no expansion in gold. The gold standard was never really there, there was
not enough gold to back the currency. When the US started "exporting
inflation" Europe threatened to demand gold for its dollars and Nixon went
off the gold standard.
It is an interesting question however, if a country could go straight to
Fiat without enforcing it strictly by law. For fiat to work people have to
believe the currency has value and then trade with it. It seems to some
extent there is a serious network externality. If you are the only one with
currency and no one else accepts it is useless. If you don't believe me try
walking into any store in America with a wallet full of pound notes, see if
you can buy anything. The more people who accept the notes the more valuable
the notes are. The real question is how to make people trade with the
currency and get enough people involved to convince the population the
currency will be accepted by merchants.
Note: I am using value in a loose term not the standard inverse of the
price level.news:20020418132844...@mb-mq.aol.com...
VHarris001
> I think the easiest way would be to easy into the system. It may be
>possible to start off with some sort of commodity system. If King Allan owns
>a lot of something that people will want, like gold, they he can back the
>currency with it.
I'm not sure I understand the reason the currency needs to be backed by
reserves. Nor why it's value needs to be tied to any particular commodity.
I'm wondering why it's value can't just float relative to everything else in
the economic system.
There is (or soon will be) demand for the currency - as taxes payable are
accumulating and must be paid. It seems reasonable to me that, if the farmer
who sold 100 bushels of grain, collected the value of 1 bushel of grain in
taxes from the buyer, and now that tax to the Kingdom - payable only in the
currency of the Kingdom, that the farmer, and all other subjects of the
Kingdom, will collectively demand that currency.
Since the Kingdom will be purchasing goods and services in providing for the
national defense, there will be a supply of currency. Since the goods and
services purchased by the Kingdom have value in the barter market relative to
the bushels of grain, and hence the taxes owed, it seems reasonable to assume
that a market solution (money traders) would shortly develop for facilitating
the flow of currency from the Kingdom through the suppliers of the Kingdom, to
the subjects who owe taxes, and back to the Kingdom.
Is there a falacy in thinking that this system could work?
> It is an interesting question however, if a country could go straight to
>Fiat without enforcing it strictly by law. For fiat to work people have to
>believe the currency has value and then trade with it.
The people know the currency will have value - in fact, since April 1, when the
tax went into effect - the currency is already owed to the Kingdom. The
subjects just don't yet know what that value is relative to the taxes they owe.
The question, though, is why should King Alan tie the value of the currency to
some commodity?
> It seems to some
>extent there is a serious network externality. If you are the only one with
>currency and no one else accepts it is useless. If you don't believe me try
>walking into any store in America with a wallet full of pound notes, see if
>you can buy anything. The more people who accept the notes the more valuable
>the notes are. The real question is how to make people trade with the
>currency and get enough people involved to convince the population the
>currency will be accepted by merchants.
Every subject in the Kingdom who trades will owe taxes. All taxes must be paid
in the Kingdom's currency. One would think this should be sufficient to get
everyone to accept it - to some degree, no?
Since King Alan of Greenspanland is a fiscal conservative, he would rather not
simply print money, declare it having a value fixed to a commodity, increase
the Kingdom's asset account by that amount, and compel subjects to accept it by
force of law.
Rather, King Alan wants to increase the asset account only by the amount of tax
revenue earned (the Kingdom uses accrual accounting, so the increases started
when the tax became effective on April 1). And King Alan wants to let the
market determine the value of the currency.
King Alan knew he could have accepted gold for payment of the taxes, but didn't
want to drive the price of gold up by hording, and didn't want the expense of
building and operating a place to store the gold.
Having read of all the wonderful benefits of money, King Alan would like to
secure those benefits for the Kingdom, AND build the national defense system.
-There is demand for the currency.
-The value of the taxes due is known.
-The exchange rates between goods and services - including those of the
watchtower contractor - are known.
-The contractor is ready to do the work.
-Suppliers and employees are ready to work, keeping in mind that as they supply
goods and services, they will owe taxes.
-Indirect suppliers are ready, and know they will owe taxes.
-Barter houses have orders piling up for the currency and so have placed orders
with the vendors who will be doing business with the Kingdom for currency.
It seems that only the value of the currency relative to everything else is
still unknown.
But given King Alan's restrictions, can this monetary system be implemented in
Greenspanland?
VHarris001
>In any event, the King decides the island should have its own single
>currency for all islanders to use -- call them 'Quatloos' (Qs) -- plus
>a central bank to issue and manage and print his picture on the
>currency, and to exchange the currency for dollars and euros and yen
>as needed, charging a reasonable fee.
>
>Now, what is the accounting involved in the creation of this central
>bank, and the issuance of its currency? I believe this is your
>question.
>
>It's simple. The central bank must have a balance sheet of its assets
>and liabilities, and the balance sheet must balance of course.
>
Agreed.
>To get things started, somebody is going to have to contribute assets
>to the bank.
Taxation started April 1, so the Tax Revenue Earned and the Tax Revenue
Receivable accounts have already begun to increase. These are assets, yes?
Aren't they sufficient assets?
> In the US commercial banks are required by law to pony
>up capital to the Fed -- but as there are no banks to begin with on
>our remote island, that is not possible.
>
>Presumably the King will put up the capital, especially since he is
>the one who will want to control the bank (and profit from it -- even
>if that is only a secondary concern, of course) since in exchange for
>the contribution to capital comes ownership and control (and profit).
>
As certainly everyone reading in this ng will be aware, King Alan of
Greenspanland is benevolent..
But King Alan most certainly will not put up any of his personal assets as
reserves for the Kingdom. King Alan insists that Greenspanland be a separate
legal entity unto itself, for which the King will realise no personal gain nor
bear any personal liability.
The King expects the Kingdom to build its own asset base through taxation of
the subjects.
>The capital will be used to set up the bank's office, buy the
>computer, and buy enough dollars, euros and yen to get started, etc.
>All this will go onto the "asset" side of the balance sheet.
>
>On the "liability" side of the balance sheet will go the currency that
>the bank issues -- since the currency notes will be IOUs against the
>central bank's assets.
>
>The basic accounting is really as simple as that, not complex at all.
>
While King Alan understands the scenario you've painted above, it sounds to him
as though you are describing investing in a corporation in order to commence
operations. The King disputes the notion that the Kingdom is a privately held
corporation owned by the shareholders. Rather it is a public entitity owned
(but not necessarily controlled) by its subjects. Further, the King believes
that the asset accounts should be increased only by taxation, and that
taxation, then, is the "investment" that subjects make in the Kingdom, and thus
in the defense of the Kingdom.
Regarding the "liabilities" of the Kingdom, the King, being fiscally
conservative, would rather not issue "IOU's," unless absolutely necessary.
Thus, if the King had declared that taxes be paid in gold, then building the
national defense system would have been paid in gold (not an IOU). But
instead, since the King doesn't want to tie up the gold supply, he want's to
use Kingdom issued currency which is received from taxpayers in place of the
gold they otherwise would have paid.
In this scenario, it seems to me that the currency itself becomes the asset,
rather than representing the asset stored elsewhere. And the currency is
traded as any other asset due to the inherent value of the asset in payment of
taxes. I wonder, is this possible?
>To get the currency into circulation the bank (and/or island treasury,
>if distinct) will start spending Qs financed from capital to buy
>things, including the foreign currency floating about, and to make
>loans of Qs to borrowers. Neither act affects the balance sheet
>bottom line, as each creates offsetting assets and liabilities.
>
In your discussion above, you established reserves but you didn't declare a
value for the Qs. Either you must declare a value, or the market must, yes?
And even if you declare a value, if the market doesn't like it, it will set
it's own value anyway, yes? Isn't that the same problem King Alan has with his
proposal, the one that you're trying to address here?
King Alan would like the market to establish the value of the currency rather
than trying to establish and hold it by government declaration. Possible?
John Weatherby
> >From: "John Weatherby" jjwea...@earthlink.net
>
> I'm not sure I understand the reason the currency needs to be backed by
> reserves. Nor why it's value needs to be tied to any particular
commodity.
> I'm wondering why it's value can't just float relative to everything else
in
> the economic system.
>
revokes the currency at least there are tradable goods that the government
can trade for currency to bring it out of circulation.
> There is (or soon will be) demand for the currency - as taxes payable are
> accumulating and must be paid.
But how do you introduce it? Does the government buy something with it?
Do you just give a bunch to a few people and let them trade with it. Each
seems terribly unfair. In the first case the defense industry gets the
currency. They basically have a monolopy on the currency. This means higher
prices and fewer goods traded. In the second case someone gets wealth for
nothing.
Demanding currency for taxes puts a big strain on people and at least
initially means currency is going to overvalued. The few who are lucky
enough to get will supply little and this means lots of goods will be needed
to trade for currency. Over time this might even out but not with out making
a few people very wealthy.
Well perhaps you could just give everyone enough to pay the first tax.
Then will people trade the currency. No they have to pay taxes it with. If
the currency is paid then to the defense industry then the stone masons and
tower builders again hold an oligopoly on the money supply.
The easiest thing is to create a national bank. Pegg currency to a
valuable non-perishable commodity. Provide guards to guard the commodity and
issue notes that represent so much of the commodity. Eventually you can slip
away from pegging the notes to commodities. If you have a fractional reserve
banking system set up soon the loan process will mean the par is pretty
meaningless. Furthermore if the national bank takes deposits from citizens
and keeps them for them then they do not have assets rather liabilities that
must be paid on demand.
The trick is to get the currency in circulation without transfering
wealth due to the fact few people have the currency which will be high
demand. There is no fair way to choose who these people will be. So start
with commodity then move to fiat or simply force people to trade with the
currency by threating imprisonment if merchants do not accept it. Even at
that it is difficult introducing the currency. How much do you print? Who
gets it? Does everyone get an equal amount? This is no easy question.
> It seems reasonable to me that, if the farmer
> who sold 100 bushels of grain, collected the value of 1 bushel of grain in
> taxes from the buyer, and now that tax to the Kingdom - payable only in
the
> currency of the Kingdom, that the farmer, and all other subjects of the
> Kingdom, will collectively demand that currency.
>
There will be demand the question is who will it be issued to and how
much will the value of currency overshoot early on.
> Since the Kingdom will be purchasing goods and services in providing for
the
> national defense, there will be a supply of currency. Since the goods and
> services purchased by the Kingdom have value in the barter market relative
to
> the bushels of grain, and hence the taxes owed, it seems reasonable to
assume
> that a market solution (money traders) would shortly develop for
facilitating
> the flow of currency from the Kingdom through the suppliers of the
Kingdom, to
> the subjects who owe taxes, and back to the Kingdom.
>
Perhaps but I am not convinced shortly. Those suppliers of defense will
hold the only currency. It depends on how much currency they supply. The
owners may initally ask a very high rate on the currency. Eventually their
need for trade will get the currency in the economy. The problem comes with
saving currency. The defence industry might even become bankers loan
currency out and charging interest. It really depends on how much currency
these people wish to save to pay future taxes and their demand for goods.
The point is that it is very possible that the brand new concept of saving
is born. How much is saved will affect the velocity of money.
In fact the identity MV=PQ should give some hints to how prices will be
set. In the beginning the money supply is set by the need for defense and
the price of defense goods. Holding quantities constant means that the
velocity will be a major determinate in how prices are set. Prices will be
set according to defense expenditures and also saving decisions on the
defense industry. Since there is no banking system any saving of cash in the
first stage is almost like taking money out of the system.
> But given King Alan's restrictions, can this monetary system be
implemented in
> Greenspanland?
>
Perhaps. There will be prices and currency will be traded to what extent and
how fast is the question. Will people trade currency for everything at first
or only trade enough to pay taxes and barter the rest in case the system
suddenly folds. It depends somewhat on how people view the permenancy of the
system. Will people hoard at first? I am not sure. If people are hoarding
two things will happen as tax day gets closer merchants will demand only
currency. The question is if the currency is in the hands of only a few
people how much will prices overshoot.
The other problem is that you imposed a per unit or an ad valerom tax.
This does mean that trade will be lower than with no taxes. There will be an
incentive for a black market. The currency traded for a pig will not buy as
many bushels of corn as the pig would in barter with no tax. So part of the
problem is enforcing the tax. The government can do that but they have to
pay tax collectors meaning higher taxes. A black barter market could be a
real problem here.
John
Mike Coburn
Money (currency or journal entries) is and always has been what the
gorilla will take instead of taking your chickens. In the beginning
the soldiers took the chickens, then they accepted gold, and then
they took bank notes. It is high time to remove the bankers and
just use fiat money as it was intended. There should be no national
debt and no interest thereon. The currency is no less nor no more
a currency if the bank (interest) is removed from the loop. The
currency is placed into circulation as the government allocates and
spends money in its capacity as government. The currency is then
required in payment of taxes and sought for the proper reasons.
People will still attempt to gather the currency for future use.
--
Mike Coburn
"It's the tax system, stupid. No, it's the ludicrous
banking system. Well, actually, its both. With proper
consideration we find these injustices are made
possible by the lack of representation of The People
in their government". -- http://GreaterVoice.org
George
>But how do you introduce it?>
How about the recent introduction of the euro? How did they introduce it? Set
its value? Determine how much to print? What journal entries?
VHarris001
>
>"VHarris001" <vharr...@aol.com>
>> I'm not sure I understand the reason the currency needs to be backed by
>> reserves. Nor why it's value needs to be tied to any particular
>commodity.
>> I'm wondering why it's value can't just float relative to everything else
>in
>> the economic system.
>>
> Solely to show people it has value and to reduce risk. If the country
>revokes the currency at least there are tradable goods that the government
>can trade for currency to bring it out of circulation.
>
Won't requiring the currency as payment of taxes show that it has value?
Wouldn't simply stopping making purchases with, and accepting as payment of
taxes in that currency bring it out of circulation? Thus, no reserves
necessary?
>> There is (or soon will be) demand for the currency - as taxes payable are
>> accumulating and must be paid.
> But how do you introduce it? Does the government buy something with it?
Yes. It seems to me that the only significant problem King Alan has is how to
let the market set the price.
Suppose he settles with the contractor on a final contract price for
construction of the watch towers of Q1,000,000.00 (One Million Q's). In that
event, the market estimates the relative value of the watchtower contruction
and so is able to set the value, in Q's, of all other goods and services traded
in the market.
> Each
>seems terribly unfair. In the first case the defense industry gets the
>currency. They basically have a monolopy on the currency. This means higher
>prices and fewer goods traded.
I'd have to disagree, or at least I can't see a reason why this necessarily
should be so. King Alan, being benevolent, could issue an anti-hording
proclamation, require a full accounting from the contractor of the transactions
made with the currency, and monitor the value of the currency for indications
for hints that someone was trying to control the market.
Secondly, the payment of tax is due in currency, the taxable amount due being
relative to the value of the transaction. Thus, even if the currency were
horded, the high relative value of the currency to other goods and services
seems largely irrelevant, as the strong currency simply buys more goods and
services AND pays the full taxes due on those goods and services.
> Demanding currency for taxes puts a big strain on people and at least
>initially means currency is going to overvalued.
Hmmm, it seems this problem might be remedied if King Alan issues his
anti-hording proclamation, and watches the market for signals of foul-play.
> The easiest thing is to create a national bank. Pegg currency to a
>valuable non-perishable commodity. Provide guards to guard the commodity and
>issue notes that represent so much of the commodity.
Since the market will eventually set the value of this type of currency anyway,
I don't see the point in building reserves and pegging the value of the
currency.
> The trick is to get the currency in circulation without transfering
>wealth due to the fact few people have the currency which will be high
>demand. There is no fair way to choose who these people will be.
It seems that once the currency value for the construction of the watchtowers
is set, and the market knows, then there can ONLY be a fair distribution of the
currency. And this is why King Alan thinks so.
With the value of the contract, and the quantity of currency to be issued for
the contract is known by the market, the prices of every other good and service
can be set. Now suppose that, even with King Alan's proclamation that there is
a crime to horde currency, the construction contractor hordes some currency
anyway. Doing so drives up the value of the currency, but may make traditional
suppliers to the construction contractor unwilling to provide goods and
services for currency (rather they would want to barter 100% as was done
before). Thus, since the market knows the relative value of the currency,
suppliers in the market should know when their trades are fair and refuse to
trade for currency when they are not fair.
Additionally, as stated above, the tax payable is on the value of the trade at
the time of the trade, so as the value of the trades fluctuate relative to the
currency, so does the tax payable. Thus, trade should not be influenced by the
value of the currency relative to the trade.
So start
>with commodity then move to fiat or simply force people to trade with the
>currency by threating imprisonment if merchants do not accept it. Even at
>that it is difficult introducing the currency. How much do you print? Who
>gets it? Does everyone get an equal amount? This is no easy question.
>
Restated just as a reminder - Q1,000,000.00 (One Million Q's) will be printed
and payable in payments to the defense contractor over the term of the
contract. Note also that King Alan, having seen the marvels of taxation
payable in currency, will likely order other public works contracts. But he
will always announce the agreed upon price of the contract and the payment
terms so that the market will be able to value the currency in the market and
respond as needed.
>The problem comes with
>saving currency. The defence industry might even become bankers loan
>currency out and charging interest. It really depends on how much currency
>these people wish to save to pay future taxes and their demand for goods.
>The point is that it is very possible that the brand new concept of saving
>is born. How much is saved will affect the velocity of money.
> In fact the identity MV=PQ should give some hints to how prices will be
>set. In the beginning the money supply is set by the need for defense and
>the price of defense goods. Holding quantities constant means that the
>velocity will be a major determinate in how prices are set. Prices will be
>set according to defense expenditures and also saving decisions on the
>defense industry. Since there is no banking system any saving of cash in the
>first stage is almost like taking money out of the system.
>
Aren't all these effects to be expected anyway, when introducing a currency
into a barter economy? That is, won't all these problems surface and have to
be dealt with regardless of the method King Alan uses?
>> But given King Alan's restrictions, can this monetary system be
>implemented in
>> Greenspanland?
>>
>Perhaps. There will be prices and currency will be traded to what extent and
>how fast is the question. Will people trade currency for everything at first
>or only trade enough to pay taxes and barter the rest in case the system
>suddenly folds.
King Alan has issued no restrictions on barter and fully expects barter to
continue so long as it is useful to the subjects. He initially expects a
mixture of mostly barter with some currency purchases, eventually changing to
mostly currency purchases with some barter.. The only difference now is that a
1% tax is due on the value of EACH item bartered, payable in currency..
>It depends somewhat on how people view the permenancy of the
>system. Will people hoard at first? I am not sure. If people are hoarding
>two things will happen as tax day gets closer merchants will demand only
>currency. The question is if the currency is in the hands of only a few
>people how much will prices overshoot.
Again, aren't these problems that are likely to exist regardless of the type
and method of currency introduction King Alan uses?
> The other problem is that you imposed a per unit or an ad valerom tax.
>This does mean that trade will be lower than with no taxes. There will be an
>incentive for a black market. The currency traded for a pig will not buy as
>many bushels of corn as the pig would in barter with no tax.
Agreed, there will be, say, a 1% reduction in trading as a result of the tax,
PLUS some reduction due to the added cost of collecting, accounting for and
paying the tax. On the other hand, the currency will help facilitate trading
and may actually increase trading if the cost of transactions are reduced due
to the availability of currency.
>So part of the
>problem is enforcing the tax. The government can do that but they have to
>pay tax collectors meaning higher taxes. A black barter market could be a
>real problem here.
>
Yes, like it would be under any system of taxation and currency? Any more so
under King Alan's proposal than it might be under any other method of
introducing currency?
>John
>
VHarris001
>The currency is no less nor no more
>a currency if the bank (interest) is removed from the loop. The
>currency is placed into circulation as the government allocates and
>spends money in its capacity as government. The currency is then
>required in payment of taxes and sought for the proper reasons.
>People will still attempt to gather the currency for future use.
>
>--
>Mike Coburn
>
This seems a reasonable approach. And even if the King slows down spending
money, he can either reduce or eliminate the taxes. OR he could keep
collecting taxes and, since the currency is highly fractional, as the value of
the currency rises in the marketplace (due to reduced supply), the relative
value of the transactions drops, and so does the tax required in payment for
that transaction.
It seems that there is no reason a fully functioning, free and open market
ought not be able to easily value and incorporate Greenspanlands new currency
into the trading mix. There is supply (The Kingdom's national defense
contract). There is a stated value (Q1,000,000.00 for the watchtower
construction contract). There is demand (payment of taxes). There is an
anti-hording proclamation. There is a requirement for full-transactions
accounting from the contractor (to make sure that - at least at the contractor
level - there is no hording). There is no requirement that barter be stopped
(so no one is compelled to trade at higher than market value {or their own
preference} for the currency).
At first blush, it seems that King Alan's plan for Greenspanland's new currency
just might fly. And it should have the benefits you describe above.
William F Hummel
wrote:
>From: Mike Coburn mik...@gte.net
>>The currency is no less nor no more
>>a currency if the bank (interest) is removed from the loop. The
>>currency is placed into circulation as the government allocates and
>>spends money in its capacity as government. The currency is then
>>required in payment of taxes and sought for the proper reasons.
>>People will still attempt to gather the currency for future use.
>--
>This seems a reasonable approach. And even if the King slows down spending
>money, he can either reduce or eliminate the taxes. OR he could keep
>collecting taxes and, since the currency is highly fractional, as the value of
>the currency rises in the marketplace (due to reduced supply), the relative
>value of the transactions drops, and so does the tax required in payment for
>that transaction.
>
>It seems that there is no reason a fully functioning, free and open market
>ought not be able to easily value and incorporate Greenspanlands new currency
>into the trading mix. There is supply (The Kingdom's national defense
>contract). There is a stated value (Q1,000,000.00 for the watchtower
>construction contract). There is demand (payment of taxes). There is an
>anti-hording proclamation. There is a requirement for full-transactions
>accounting from the contractor (to make sure that - at least at the contractor
>level - there is no hording). There is no requirement that barter be stopped
>(so no one is compelled to trade at higher than market value {or their own
>preference} for the currency).
>
>At first blush, it seems that King Alan's plan for Greenspanland's new currency
>just might fly. And it should have the benefits you describe above.
At second blush it won't fly. This defines a primitive "cash
only" economy. For example, the only way one could buy a home
for himself is to save enough cash over the years to pay for it
outright. Credit is the lifeblood of a vigorous economy. But
credit is offered at a price, i.e. interest payments. No one has
an incentive to offer free credit.
WFH
John Weatherby
What happened was this.
In the 1990's Europe fixed the exchange rates between countries. These staid
constant
Prior to introducing the Euro they let it trade on the market, I believe
some transactions used Euros.
Finally when it was officially introduced the exchange rate of that
country's currency to the Euro was used to convert their currency to Euros,
ie. Deutsche Marks to Euros.
This is quite different from introducing money where there was no money.
John
"George" <gchan...@aol.com> wrote in message
news:20020428150751...@mb-cb.aol.com...
John Weatherby
> >From: "John Weatherby"
> Wouldn't simply stopping making purchases with, and accepting as payment
of
> taxes in that currency bring it out of circulation? Thus, no reserves
> necessary?
>
now instead of say sheep. It is easier to save bills than acculumate sheep
for trade. So if the currency is revoked people loose all their savings.
People will not trade say sheep, they wished to hold as stock of wealth for
currency to save if their is a high risk that the currency will be revoked
and over night your wealth is gone. This is also why currency trades drop in
hyperinflation people want wealth they can save not something that is going
to be devalued by 1000% overnight.
> Suppose he settles with the contractor on a final contract price for
> construction of the watch towers of Q1,000,000.00 (One Million Q's). In
that
> event, the market estimates the relative value of the watchtower
contruction
> and so is able to set the value, in Q's, of all other goods and services
traded
> in the market.
>
Initially it will be high if the builders wish to save. They may hoard
the money for taxes. These initial payees will be paid very dear for
currency in fact they will have a corner on the market on currency. There
will be an enormous transfer of wealth. This is like putting the water
supply in the hands of a few people and seeing what happens to prices.
Initially prices will be distorted as the builders save.
> > Each
> I'd have to disagree, or at least I can't see a reason why this
necessarily
> should be so. King Alan, being benevolent, could issue an anti-hording
> proclamation, require a full accounting from the contractor of the
transactions
> made with the currency, and monitor the value of the currency for
indications
> for hints that someone was trying to control the market.
>
You mean forbid saving make them spend all currency over than taxes?
Sounds like this country has gone from freedom and fairness to a
dictatorship over night.
> Thus, even if the currency were
> horded, the high relative value of the currency to other goods and
services
> seems largely irrelevant, as the strong currency simply buys more goods
and
> services AND pays the full taxes due on those goods and services.
>
Right but the saving decisions of the builders set the value of the
currency. They can get an enormous transfer of wealth by offering only small
amounts of currency on the market.
> Aren't all these effects to be expected anyway, when introducing a
currency
> into a barter economy? That is, won't all these problems surface and have
to
> be dealt with regardless of the method King Alan uses?
>
I do not know there is no modern example of introducing currency where
there was no currency and currency civilizations pre-date history. In fact
having a currency is a common characteristic of civilization. Even those
termed uncivilized still traded with currency. I am not really sure if
there exist a hypothetically situation where these problems are addressed or
not.
>The only difference now is that a
> 1% tax is due on the value of EACH item bartered, payable in currency..
>
To get a one percent tax means you need a price. What if only stone is
bought with currency. How do find out what 1% of the value of a pig for 2
chickens trade is if no one is trading currency for pigs or chickens? You
see barter can not be taxed unless there are developed markets for at least
one item traded and these markets trade in currency.
John
Dan Parker
news:pstqcuo6u00e19l3s...@4ax.com...
Below is an experiment describing the creation of a
new currency. It happened to be an interest-free
currency. Keep in mind that this locality was not
a tax haven when it was solving its currency problem.
dp
[The following brief account of the history of Guernsey is largely taken
from The Guernsey Experiment by Olive & Jan Grubiak and The Debt Virus by
Dr. Jacques S. Jaikaran]
As Olive & Jan Grubiak describe, Guernsey in 1960 was ... a small but
beautiful island ... well favoured by nature ... occupying an area of only
24 square miles .... having a population of fifty to sixty thousand ... and
where resides that most uncommon of human attributes ... common sense. It is
the second largest of the Channel Islands in the United Kingdom, next to
Jersey.
In 1815, Guernsey was nothing like it is today. They only had a rudimentary
marketplace and the roads were only cart-tracks 4½ feet wide. Even though
there were many able-bodied men and women to repair the roads and fix the
dykes, they were leaving the island in great numbers because of the high
level of unemployment.
To be sure there was lots of work to be done, but no way to pay for it. The
sea walls and dykes were crumbling, the coast was eroding and the English
Channel was fast making claim to what little there was left of the island.
The Island Accounts in 1816 looked something like this:
Island Debt £19,000
Annual Income: 3,000
Interest Expense on the Debt 2,470
(@ 13% interest; compounded)
______
Net Revenue £530
But repairing the sea walls was estimated to be £10,000. So, the island was
not only impoverished ... it was literally sinking ... in a sea of debt.
What could they do? They couldn't increase taxation. The islanders were
already taxed to the limit. Nor could they afford to borrow any more money
from the banks. Whatever more they borrowed could never be repaid.
It just so happened, though, that in 1815, those concerned gathered together
to try to figure out a way to improve their decrepit Public Market ... the
hub of their local economy. During that meeting someone came up with the
brilliant idea of issuing their own "interest-free money" ... more money
which the Island Government could print at little cost, spend into
circulation and eventually retire, if need be ... money on which they would
not have to pay any interest.
In 1816, they decided to issue £6,000 of their own "interest-free" Guernsey
State Notes. This was in addition to the current supply of English pounds
which two main banks were circulating on the island already.
By 1837, £50,000 had been spent into circulation by the government for the
primary purpose of local projects such as the sea walls, the roads, a new
marketplace, a church and a college. This £50,000 more than doubled the
money supply. But there was no inflation.
In 1914, while the British restricted their own money supply, Guernsey
issued more ... another £140,000 over the next four years. By 1958, over
£500,000 of interest-free money was in circulation on Guernsey and still no
inflation.
By 1990, there was a total of £6.5 million in circulation issued
interest-free. There was no public debt as in the rest of Britain which was
still paying for its war debts. And yet on Guernsey, prosperity was very
much evident everywhere.
When Dr. Jacques Jaikaran visited Guernsey in 1990, he reported on the state
of the Guernsey economy in his book The Debt Virus:
There were about 60,000 permanent residents; the average family owned 3.3
cars; their unemployment rate was zero and their standard of living was very
high. Also, there was no public debt and a surplus of public funds was
earning them interest. The Guernsey Treasury increased the money supply by
50% over a 3 year period and this increase did not cause any inflation. The
price for a gallon of gas in the UK was about $5, but the price in Guernsey
was about $2. Contrary to the teachings of economics in all higher
institutions, inflation, it was claimed, was not related to the volume of
money, but rather to the size of the commercial debt.
Dr. Jaikaran also mentioned that Guernsey's income tax was only a "flat"
20%. Not bad, compared to the rest of the world.
>
> WFH