I’ve been messing around with the idea in this article for a couple of weeks. Currency is a fun topic in my head, so I spend a lot of time thinking about currencies, barter in particular. This is meant to show how fiscal conservatism can assist a society. It really relates to any currency. Also, the effects are more quickly evident the smaller the circulation of the currency. In the case of a barter exchange, the effects are felt with weeks or months, especially in the case of a small independent barter exchange. I almost sub-titled it, “A Case for Fiscal Conservatism”, but I didn’t want to be pretentious, I just want to share some of my thoughts on the subject by a demonstration of real world effects. Here goes…
Once upon a time there were two currencies, both alike in scope and reach, each circulating across the hill from the other. The populations surrounding each currency were also alike, affecting the lives of about 500 people. Both were managed by men whose names were palindromes, Bob and Otto. No matter how you looked at them they stayed the same. Both thought they were making their currencies stronger, both had unchangeable ideas about how their currency should be managed.
Bob went out in to his community and spent the Bob dollars at will. His idea was to spread the currency around, keep it largely in circulation. His only contribution to the system was a monthly usage fee for record keeping. With 500 people paying that usage fee, he earned 5,000 Bob dollars a month. He thought that was a good start, but spent twice that amount every month. So, every month the total currency in his system increased 5,000 dollars. He enjoyed the original value of those dollars when he spent them. When the people he spent them with went to use them, they found that they had to offer more and more Bob dollars to buy the same thing, month to month. Bob dollars started losing value.
The problem ended up being that every month, every person that used the currency found themselves getting an average of ten more dollars. Over some months, people started to get so much currency, they started asking too much for their goods and services. Some businesses stopped taking Bob dollars altogether, instead waiting for something they wanted to buy before they took in more Bob dollars.
Bob started to get a little worried, but kept spending his dollars.
Instead, he thought of a plan to make his dollars more valuable. He went on a marketing blitz and recruited other businesses and consumers to use the currency. He managed to add a couple new businesses every week, and people started taking his dollars again. Then Bob had some loans he made go bad. Not being able to collect on the loans, those dollars stayed in the system, bringing the perceived value of Bob dollars even lower.
Otto took a different route. He managed to save the dollars he earned, spending them when necessary, but concentrating on making good loans to deserving businesses and owners. Because Otto dollars were hard to come by much of the time, businesses eagerly accepted them, often making attempts to lower prices on their goods to entice buyers to come in and spend their Otto dollars. Over time, Otto amassed a tremendous amount of dollars, and loaned them out more and more, which loans generated more dollars for Otto. The community enjoyed manageable growth, and eventually businesses and individuals outside Otto’s system found out how valuable and how much purchasing power his dollars carried, and he ended up letting dozens of businesses use his dollars. Otto also marketed his dollars in outside communities, and word got out fast…
I’ve got to apologize. This is a heavy handed approach. I should just make my point clearly. Trying to create a story to illustrate my point just isn’t working. I’m not great at fiction. Here’s the thing: the more buying power your dollar has, what ever dollar it is, the more you want it, the more you will work to get it. Deficit spending dilutes the buying power of your dollar.
The end.
