Currency as Debt: A New Theory of Money
Rate of Circulation
 

My Dear Friend,

Recall from a previous letter that for the aggregate society, the equation Supply = Demand may be functionally rewritten from the definition as:

(Volume of Goods and Services)×(Price) = (Desire)×(Volume of Currency)×(Rate of Circulation)

In times past, a relatively constant volume of currency adequately served the needs of the economy. The straightforward reason: The world was largely a slow moving agrarian society. Most families were much more self sufficient than in today’s world with a high division of labor. Many families were debt free or had very little debt. Barter was common. In short, the need for currency was much less than in today’s world. Although not perfect, the naturally restricted volume of gold and silver coin in circulation served the needs of the world for many centuries.

The explosion of technology and industry in the past 160 years upset this previous balance. For the past century and a half, mankind has struggled to understand the true nature and function of currency. Although intents were good, converting to a paper currency introduced many new problems. Because paper currency can be created almost at will, unlike a commodity currency, the exchange value of paper currency is heavily dependent upon public confidence. When public confidence wanes in a paper currency, people tend to spend that currency in the hopes of exchanging that currency for wealth (goods and services). The faster that confidence wanes, the faster the paper currency circulates throughout the market place.

An understanding of currency circulation rates is important to understanding the many booms and busts our economy suffers. Some scholars refer to the rate of currency circulation as velocity of money or just velocity. These terms are not describing some kind of mechanism, but only the speed or rate at which people exchange currency for goods and services.

In an agrarian society, with a high self-sufficiency, a low division of labor, and low debt levels, the rate of currency circulation is low and of little, if any, concern. In such an environment, currency is either available or is not. Being more self-sufficient, people easily resort to barter to meet their needs.

In our modern industrial and information society, self sufficiency is low, the division of labor is high and debt levels are often high as well. Under such conditions, the rate of currency circulation will be higher than in an agrarian society. In other words, for a given volume of currency per person, more goods and services will change hands in a modern society than in an agrarian one.

Public attitudes have a direct impact on the rate of currency circulation. Inflation causes people to spend money faster because they fear the currency will continue to lose its exchange value. That is, the desire for goods and services is greater than the desire for currency. Economic downturns (recessions and depressions) cause people to save currency in anticipation of future needs. That is, the desire for currency is greater than the desire for goods and services.

To offset those fears, some people recommend going back to a commodity currency. Yet, as we have already seen, returning solely to a commodity currency is impractical and probably impossible, although for the sake of definitions, and to remain Constitutional, a monetary policy connection to the real world is essential.

However, when a paper currency is used and the quantity of that currency is irrationally increased, the rate of circulation suddenly becomes more important. If the rate times quantity value of circulating currency increases faster than the available goods and services, the economy experiences currency inflation, the exchange value of the currency decreases and its future purchasing power decreases. Society begins to lose confidence in the currency. This reduction of confidence tends to increase the rate of circulation because people tend to buy today rather than tomorrow creating a false economic boom.

During currency inflation, people without cash today tend to borrow currency for today’s purchases. They do this despite the price of borrowing (interest payments) because they believe the exchange value of the currency will decrease tomorrow. That is, the value of the currency they return to the lender will be less than the value they received today. However, the lender is no fool, and correspondingly charges higher interest rates to offset that anticipated future lower exchange value. The result is a further expansion of the false economic boom.

During economic downturns, people tend to save currency instead of purchasing goods and services, thus reducing the rate of currency circulation while its volume remains unchanged. Monetary authorities often respond by increasing the currency volume. However, the saving tends to mask this currency inflation. In addition, a lower rate of currency circulation influences producers to lower prices, thereby further offsetting or masking the currency inflation.

As people regain confidence in the economy, they release saved currency back into circulation to buy goods and services. This increase in currency circulation tends to raise prices and compounds the effects of the existing currency inflation already in place.

Taken to its logical conclusion, if people completely lose confidence in the currency, the rate of circulation might soon approach practical limits. As the rate of currency circulation increases, prices tend to rise. As prices rise, the rate of circulation increases because people no longer have confidence in the currency’s future exchange value. Monetary authorities might respond by pumping more currency into circulation to meet the rise in prices and perceived need for currency. People soon need wheelbarrows to carry their cash. The snowball result is no fantasy, as the world has witnessed hyperinflation several times in history.

Human nature is unpredictable in many circumstances, but within the context of a paper currency, the confidence factor is an unknown attribute puzzling and scaring many experts. However, if we eliminate or greatly reduce the chance that people will lose confidence in the exchange value of the currency, experts can rest much easier regarding the rate of circulation. As long as the exchange value of the paper currency remains stable, confidence should remain high and the rate of currency circulation should remain stable. In such an environment, the rate of currency circulation again becomes a minor issue, just as in the days of a commodity currency.

As I mentioned in previous letters, The National Economic Stabilization and Recovery Act, NESARA, provides the necessary tools to promote a stable currency exchange value and thus help stabilize the overall economy. The tools work in one of two ways: 1) by increasing or decreasing the volume of currency available to circulate and, to a lesser extent, 2) by influencing the rate of currency circulation through adjustment of interest rates when necessary. Maintaining the currency’s exchange value promotes public confidence in the currency, thus stabilizing the rate of circulation, and is therefore an important element in stabilizing the nation’s economy.

With all due regard and affection,

Your friend
 

Editor’s Note:

To better understand the concept that the currency represents unclaimed wealth, please read Back to Basics—The Nature of Money.

To understand how NESARA restores the national currency to being a true public utility, please read the following portions of the bill:

• Part I. Banking and Monetary Reform, Section 2 Findings
• Part I. Banking and Monetary Reform, Section 3 Congressional Control Of The United States Monetary System

To understand how NESARA establishes honest and moral characteristics for the national currency, please read Part I. Banking and Monetary Reform, Section 4 Provisions For United States Currency (Note: Section 4B, the characteristics necessary for Congress to lawfully define United States Treasury credit-notes).

To understand how NESARA maintains stable purchasing power and maintains a stable exchange value of all currencies in circulation, please read Part I. Banking and Monetary Reform, Section 9 Regulation Of The Exchange Value Of Treasury Credit-Notes.

To understand the implications of restoring the national currency to being a public utility, please visit the What’s In It For Me? section.
 

“Suppose,” he cried, with feeble violence, “that all the debts in the world were called up simultaneously and immediate payment insisted upon. What, under our present conditions, would happen then?”

I gave the self-evident answer that I should be ruined man, upon which he jumped from his chair, reproved me my habitual levity, which made it impossible for him to discuss any reasonable subject in my presence, and bounced off out of the room to dress for a Masonic meeting.

Reporter Edward Malone, from the novel The Lost World, by Sir Arthur Conan Doyle