Sun, 12 Jun 2005

Private Currency

A fellow local to me, Jason Rohrer, is setting up North Country Notes (NCN), a private currency. He means for it to be an exchangable currency which can only be spent locally. This is a poorly-thought-out idea. It's tied up in the mistaken idea of trade deficits. Worrying about America's trade deficit with China is as silly as worrying about your trade deficit with your local grocery store. Do they ever buy anything from you? Is this a cause for concern? Of course not.

Here's my explanation of how money and private currencies relate. Money is simply that thing which everyone will accept in trade. A private currency can serve as money. Here's how:

In a free market, a currency naturally deflates (becomes more valuable) over time. This is because each trade increases the value. Thus the natural tendency is for prices to fall. This is somewhat disconcerting to people, because wages fall, too. Thus, a good currency manager will keep prices constant (of course, the price of everything is changing over time, so this is at best a general guideline). He will print up new bills and spend them first. That is how the manager makes money. The incentives align here, because a good manager will make sure that as many things as possible are tradable for the currency. This increases the value of the currency for those who hold it.

Some people, called gold bugs, believe that a currency has to be backed up by gold. There are a number of reasons why gold makes a good backing for a currency, but, really, gold is not necessary. What is necessary is that a currency remain as money. If the currency manager makes a mistake, and does not ensure that the currency serves as money, then the value of the currency will decline.

One way (but only one way) a currency manager can keep the value of the currency stable is to offer to trade the currency for something else of value. Gold bugs want that value to be gold. Some economists say that a basket of commodities can be used. Rohrer is going to back his currency with US treasury notes; that is, for every dollar of his in circulation, he will trade it for a one dollar treasury note.

So if one NCN is always worth one dollar, what is the point? Well, Rohrer wants to discourage people from trading. Yes, he wants to make people worse off, only he doesn't see it that way. He claims (as do many others) that local trade is better. I don't want to address local trade here. Local trade is an idea which seems to be poorly thought out, but upon closer examination, it proves to be deeply stupid. By establishing a private currency, Rohrer means to make global trade harder than local trade. You see, global traders will have no use for the local currency except to spend it among people who will accept it.

Someone running a private currency doesn't want to restrict trade. They want trade using their currency to be as widely spread as possible. The more people trading, the more value available, and the more value the notes have. The more value in the notes, the more money the currency manager will make. Rohrer isn't in the business of making money, though. But look at it this way: If local trade really is a good thing, then why not more of it? Why not expand the region where the local trade occurs? If it's good for Potsdam, let's bring Canton in, and Morley, and Gouveneur, and Watertown and Plattsburgh, Syracuse and Albany, New York City and Boston, Miami, Denver, and Los Angeles, the entire globe, galaxy, and universe. There is no point at which the benefits of local trading diminish.

Tip O'Neill famously declared "All politics is local". Similarly, all trade is local.

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