Imagine If….

In the recent future:

The dollar has been dropping and dropping. It isn’t the Weimaraner Republic but it is bad. Finally the people DEMAND sound currency. I don’t mean a few people but the kinds of numbers which if they can not absolutely guarantee elected officials loose their positions at the next opportunity they can turn a guaranteed solid seat into a real dicey proposition. Since at the end of the day elected officials are the voice of the people (at least if they want to get re elected;) they act.

Congress finally started listening to what Ron Paul had been talking about in his typical slightly stammering way where the word Constitution must be mentioned in at least every other sentence. They had been told very clearly that inflation must stop for them to have a chance at keeping their jobs. Finally the people realized that if prices went up 20% and the value of their house went up 20% and wages only went up 10% they were not doing better. The people demanded that a dollar earned today would spend the same in a year or 5 years or even longer.

Obviously the only way to do this was to link our currency to precious metals and gold was an easy choice. After all those Tea Party folks kept demanding a move back to the gold standard so it has nice historical underpinnings.

There were two camps on what to do they considered moving purely to a free market solution of having gold and silver or whatever else people decided to use as currency but some other folks wanted to stick with some form of the dollar. One side thought it would be difficult to so radically modify contracts and having a patch work of currencies would make taxation and a variety of other government functions difficult. The dollar had been Americas currency for longer than anyone can remember and though somewhat tarnished it has a good reputation throughout the world.

The other side thought that an artificial pegging of the dollar to an amount of gold was what brought the Brenton Woods Agreement’s downfall. They also realized that at least to some degree if a government had the opportunity to print paper money there was a high likelihood they would print a little bit more than they were supposed to and if that was OK print a bit more than that which was the downfall of Brenton Woods. Eventually everyone involved realized that as unfortunate as it was the dollar was going to have to go, at least in the traditional sense. Having the dollar pegged to gold and redeemable on demand did not work long term before and there was concern that it would not work now.

The eventual solution was to use gold as it has all the characteristics which are desirable for money and people trust it. The decision was made that government employees and taxes would be handled in gold. A couple of very reputable organizations started doing electronic transactions and bank accounts in gold (and silver). This made paying people a lot easier as it deals with taxation (I can’t accurately cut 7% off of a gold coin) which is a fact in modern society and also the fact that gold is pretty darn valuable. Coins smaller than 1/20th or so of an ounce are not worth the effort of dealing with and the hazards of forcing the market via a bi metalic standard were something to avoid. Of course folks who wanted coins in their hands could get silver anywhere thought it was at a market rate instead of a fixed one.

People who got paid cash now get paid in gold. Those who got direct deposits now get a direct deposit of gold into their account with any one of the several reputable dealers. They can keep it in their account or withdraw it via their debit card at any bank. The business model for these companies is very similar to the older ones. If folks choose to just keep their gold in the account and use a debit card to purchase stuff the companies they purchase stuff from pay a small premium. Companies were already paying these sorts of fees and without them many potential customers will go elsewhere.

Americans were collectively skittish about paper currencies and avoided them for several years. They eventually realized that paper currency does in fact have a place as using cards for all transactions is a pain and having a purse full of coins is sort of a pain. The decision to name this paper currency the dollar was a foregone conclusion. However the decision was to have its value be that of a specific weight of gold. Really the only reason it is called the dollar was the names strong historic connotations. 

Dealing with foreign governments was a bit tricky for awhile. The American government dealt in gold, that was clear. Since we pay debts in gold we expect other companies to do the same. There is no way we are going to send them gold and receive paper currency in exchange! American companies can of course do whatever they please. Pretty quickly most of them realized that for short term discrete transactions it did not matter what they were paid in. They after all would just have it sent to their bank which would deposit that amount of gold in their account at the days exchange rate. For longer term arrangements and debts the smart companies chose to make contracts in gold because fiat currencies would bounce around but 1,000 ounces of gold today is going to be 1,000 ounces of gold tomorrow or in a hundred years.

Thus endith the imagining session.

The one big thing I did not mention was how to transition from our current fiat system to another system. I don’t have a clue how we could manage to reasonably honor (equitable value) the savings and obligations we have and end up with a sound hard money system. If it became clear the dollar was getting swapped for gold (or whatever) the only way people could exchange dollars is to the government. Who would I suppose give them gold? It would take a substantial investment to honor these obligations of trust and unlike our current system it would be difficult to print a whole bunch of gold coins. If there has ever been a currency exchange/ replacement where people didn’t get screwed I have missed it.

I don’t have an answer to this significant part of the solution.

Thoughts?