: Another thought I forgot to mention...I'm pondering the
: origins of currency, inflation, etc, and it's effects
: on the overall system's Net. I generally like the idea
: of... can't remember the term now, but money that has
: value because we say it does, not because it's an IOU
: for something else with actual value. So I want to
: stick with that.
I think you're referring to the Paper Standard over the Gold Standard. Both standards have their advantages, though most nations now prefer a Paper Standard in large part due to the fact that the supply of gold (or other items of tangible value) simply cannot keep up with the demand for money. A Paper Standard offers a much greater degree of flexibility, but is inherently unstable. For example...
If I were to deposit a $1,000 bill in my checking account, I would still have the grand, but not the bill. My bank could then give out $900 in bills to another customer, who would spend the money. Who ever received the money would then deposit it, and $800 of it could then be reissued. $1,000 has now become $2,700 even though there aren’t enough bills to cover it. On a gold standard, if there were a run on the banks, what couldn't be paid back in paper would be paid back in gold used to secure those deposits. But you would never have that kind of lending or financial extension on a gold standard. There's not enough gold. On a paper standard, the economy can expand much faster, but will fold like a house of cards if there's a major run on the banks.
: But how much money is in the system?
: When do you print more of it? Some thoughts I'm
: considering are, is there actual value added to the
: system every time someone performs a value-added
: service? Basically, is all personal profit actually
: adding value to the system, at least in theory,
: because you're DOING something with a value where no
: such value existed before you did the thing? What
: about when new people are born into the system -
: should there be new money printed for them?
This is where things start to get complicated. Based on the model I mentioned in the earlier post, the system as it stands, as its own self-contained little microcosm, has a net of zero. At the end of the day, after taxes are calculated, the net of each tier should be zero, provided the system exists in a vacuum. Without being acted on by outside forces, even changes in population are naturally corrected for. The government would have to issue new money at a slow pace to compensate for the law of diminishing returns as the population expands, but outside of a vacuum, even this may not be necessary.
In a real world system, a little inflation is not a bad thing. Gradual inflation that matches the growth of a nation helps keep the value of that nation's currency high against the value of other currencies. The best way to achieve this is a steady profit coming in from other nations. If a nation under this system were to be a profitable exporter, the system would be flush with cash, which it would then distribute to maintain a zero net. The units that received the money would then be spending it on more and more goods and services, driving the price up gradually with the increased demand.
If inflation occurs too slowly, or if deflation occurs, a nation's buying power abroad drops off sharply. This is what's currently happening in Japan and beginning to happen here. If a nation's rate of inflation climbs too rapidly and domestic goods become too costly and uncompetitive compared to goods in foreign markets, money begins to flood out of the economy. This is what happened to Germany after the First World War. Either way, the system will eventually balance itself out, but it can take a long time and a great deal of damage can occur in the meantime.
The amount of money that a system begins with is rather arbitrary in a system with a Paper Standard. The government could set values at what ever it liked initially. On top of this, because the government in this system always has a net of zero, it has no money of its own to loan out to banks and has almost no control over prices. The government would only need to issue new currency (a very small portion of all the money in the system) when there was demand from a bank. Unfortunately, without any sort of regulation, this could lead to hyperinflation; the issue of new currency without new profit leading to seriously devalued currency. This is controlled by the Federal Reserve here, but would be difficult to achieve in a system with no real financial assets.
: Does that sound like it would work?
I'm not an economist, so I have difficulty saying that this wouldn't work. However, the only way I can see it working is if the highest tier keeps a significant portion of the national profit and uses it to create an institution similar to the Federal Reserve. An institution that loans money to banks so they can insure and cover the vast amounts of intangible money they issue, so the banks are not always demanding new issues of currency. But government control of national profits and regulation of financial institutions and bank practices seems to stand in sharp contrast to the ideals of your system.
-Phil.
