Currency as Debt: A New Theory of Money
A Practical Application of the Concept of Virtual Wealth
Part 3 of 7
 

The rate of currency circulation within an economy is a function of human actions. In the micro-world, you receive that paycheck on Friday as payment for your labor for the week and at the end of the month those mortgage payments and household bills are due. While most of your earnings might be committed, some might be discretionary. You spend or save those discretionary funds each month as you deem best. The manner in which you save or spend determines your rate of circulating currency. That same decision-making process applies to every person holding currency.

In the macro-world—a large economy, aggregate spending determines the rate of currency circulation. Normally, minor changes in the rate of currency circulation are sufficient to maintain economic balance during small or localized disturbances. Larger events, such as natural or man-made disasters, often require large scale intervention to restore economic stability.

There are other elements to be considered, however, things with systemic impact and lasting social consequences.

A banker collects a fee for monetizing a bank customer’s debt, admittedly a transaction of value to the bank’s customer or the transaction would never occur. Monetization is merely the act of creating and introducing currency into circulation through another person’s willingness to go into debt. That transaction represents a person’s willingness and desire to experience gratification today in exchange for future labor.

However, some people claim that the bank receives excessive compensation for the service provided—because the wealth that backs the newly created currency originates from within the community, not the bank. The value of wealth is determined by markets. Although bankers try to authenticate basic market values before agreeing to a loan, they do not assign the value of the debt/wealth they monetize; they merely validate a borrower’s future ability to repay the debt.

Based upon this observation, and our definitions of money, currency, and wealth; arguing against that original point is difficult when the homeowner buys the bank the equivalent of 1, 1½ , or even 2 homes while paying off a 30-year mortgage. Viewed in that light, such compensation does seem excessive for what is essentially a few bookkeeping entries.

Another consideration is the increase in world population. More people, each seeking participation in the economy, require more currency in circulation. People also seek to better themselves by controlling a larger share of the available currency. Obviously, very few of these additional demands upon an economy can be satisfied through an increase in the rate of currency circulation. Additional currency is needed.

Many people argue that an increase in currency is never needed; that the amount of gold and silver now in existence (if coined) is sufficient to support all commercial activity and any increases could come from additional mining of precious metals.

But the numbers don’t support the argument. There are literally billions of people who wish to live at American middle class lifestyle standards; and the world’s population continues to increase. More people expecting to acquire more wealth always requires more currency. Mining is a labor intensive pursuit; the rate of production of precious metals—for the use as currency—simply cannot maintain pace with population growth.

Even if it were possible to mathematically and continuously adjust the exchange value of an existing quantity of currency so that each unit of currency became more valuable, that is, deflate the currency, the basic problem of the desire for more currency still would not be solved. Americans suffered the trials and tribulations of the Great Depression under exactly the same circumstances. The exchange value of the existing currency increased but nobody had any in their pockets to use in the support of commerce. Strangely, 20 to 30 high-quality counterfeiters roaming the country and spending currency into existence would have quickly ended the depression.

Of course, the world’s population could be reduced by shooting every tenth person. However, that suggestion only serves to further demonstrate that mathematically possible solutions often turn out to be socially unacceptable.