Declaring A Dual-Currency Economy

Could we have a two-currency economy? By this I mean that governments could officially declare a two-currency system. One currency to conduct official business, which the accountants can use to do what they do. The second currency would be finite, like bitcoin.

Image by Nattanan Kanchanaprat from Pixabay

Before delving too deep into this, let me clarify that I have not thought this through completely. It's just a thought that popped into my head that needs exploring.

We have had a semi-official dual currency in the past. The dollar, as well as other currencies, were backed by gold. What gave our money value was that we could trade it in for gold. We can't pay your taxes in gold. And gold is inconvenient for small transactions like BTC is.

If governments could have a digital gold, I think it could solve many problems for fiat. Let's call the new currency Reserve Dollars, or RD. People could convert fiat to RD for savings and a hedge against inflation. They could also exchange RD back to fiat. RD would only be available to trade for fiat such that if you wanted to pay Joe, you'd have to convert RD to fiat, pay Joe, and then Joe could convert to RD.

With RD being finite in number, we could count on it carrying the deflationary pressure. And fiat could continue to be inflated as needed to run the market. A problem that gold and silver faced was that we could not expand the money supply beyond what was available in reserves. Printing more money would devalue it relative to the gold and silver available. But, not printing more money caused liquidity problems.

Banks creates money by lending. However, the accounting money didn't match the actual dollars in circulation, which were tied to precious metals. On the books, you would have a jillion dollars. But, in reality, there was only half a jillion in circulation. This is a serious liquidity problem.

RD would not have to pay interest. You could earn interest in fiat, because fiat would be allowed to inflate. The value in holding RD is that as more fiat is printed to deal with liquidity problems, the price of RD would rise. The trick is to have RD readily exchangeable like we do between a checking and savings account.

The thinking is correct in having a Central Bank Digital Currency in which every citizen has an account which banks cannot shut down or interfere with in any way. CBDCs could easily implement this two-currency system, even manage the exchange, although that would be too tempting for economists to try their shenanigans.

My thinking of a deflationary currency and an inflationary currency is based on how penguins circulate blood to their feet. The blood vessels have a countercurrent exchange where the cold blood cools the oxygen-rich warm blood. And, the warm blood heats the oxygen-depleted cold blood. This reduces overall heat loss for the animal.

We need a deflationary store of value. At the same time we need to be able to inflate the money supply to get around liquidity problems. By having two currencies that are easily convertible at market rates, we are able to hold on to our wealth a little bit better than a single inflationary currency allows.

Gold, stocks, real estate, and even crypto currencies already serve as this second currency. On the books, these are "appreciating assets" when in reality they are mostly not losing value to inflation. It's particularly challenging to trade gold bars and properties as easily as we trade stocks and crypto. Plus, it's difficult for governments to tax a property that goes down in value. By creating inflation with money printing, governments pump the markets to create artificial capital gains. The property didn't appreciate in value. It is just denominated at a higher value.

This would be a danger for the two-currency system. Governments would be tempted to tax us on the "capital appreciation" of the Reserve Dollar.

One last thought. Governments have treasuries which no longer hold any actual treasure. It's all I Owe Yous. The treasuries hold debt obligations. At some point, debt became money rather than gold being money. If debt is money, then our treasury is the wealthiest in the world.

Having Reserve Dollars would not help the government directly. However, by allowing citizens to preserve our wealth, it indirectly benefits the government because they could play their monetary policy games without jeopardizing our individual solvency.

There are other details that could be ironed out. We could avoid rampant deflation by pegging the RD money supply to the population size. Let's say 1 RD for every person. They could create RD and burn RD as people are born and die. Immigration would also increase the RD supply, or decrease it with emigration. Since the feds would control the exchange of RD to fiat, this could be done without the involvement of wall street or banks. Non citizens would only have access to fiat. Non citizens would have to use their own national CBDC to preserve their wealth, which would involve a couple of conversions.

That's all I have. I'm tapped out. What do you think? Would it work if a dual-currency economy were official rather than unofficial as it is now?

Posted Using LeoFinance