The People's Currency

The Problem

Worries about inflation currently dominate the financial news. Inflation is just a devaluation of a currency. While consumer price inflation has been rising, we've been seeing inflation in financial assets - including house prices - for a long while. When people buy a home at a fixed interest rate they are, in one way, hedging against future inflation.

Image Source: Pexels

Sometimes investors invest in order to augment their wealth. Other times they invest only to protect it. This has been the theoretical logic behind Bitcoin, inflation-adjusted Treasuries, much of the runups in stocks and even investment in gold. 

The challenge is that all of these stores of value are also based on hard-to-measure benchmarks. Just consider the Consumer Price Index. Major questions include: what products and methods of purchase (e.g. rent/buy) are included? how are geographies weighted? how do you factor improvements in technology?

Maybe, in these uncertain times, it is time for something new. 

The Solution

Why not make a currency effectively fixed to the value of work (e.g. earnings)? After all, it is people's effort that they are trying to protect.

The benefits of tying the currency to earnings are that they are relatively easy to calculate value. They reflect the value of individual human effort rather than trying to capture the value of outputs. We know this is the case because people regularly use median earnings to capture the real cost of goods. How many times have you read: "Average car/house/TV/phone purchases are X times median earnings." We even use it to show the relative wealth of a country. A recent statistic I heard pointed out that in 1970s Australia it took 1,000 days' earnings to buy a refrigerator.

This is a stable currency that reflects not the value of goods, but the value of work. Your efforts won't be inflated away.

The Approach

The first tool necessary to establish this sort of currency is a target value. This value should be frequently updated (or slow-changing) and accurate. This would exclude the direct measure of earnings as they are too infrequently and unreliably reported. GDP / population, although more indirect, would be a more frequent and reliable value. In the U.S., GDP estimates are updated as often as weekly with population statistics changing more slowly and being updated with the decadal Census updates and annual American Community Survey. GDP per capita would thus form a reasonably accurate and frequently updated target.

For the purposes of providing users with a tangible feel for the value of the currency, the target would be that 100 units = 1 average day's work. Each unit would thus be worth about $1.70 in today's dollars. This is per capita GDP / 36,500.

The second tool necessary to establish this sort of currency is a method of actually targeting the value. This too is relatively simple. Targeting the value requires methods of limiting both increases and decreases in value.

There are two mechanisms used to accomplish this. I call these the "exchange" method and the "market" method.

The "Exchange" method.

Limiting increases (e.g. preventing Bitcoinitis) in the currency is done by the exchange having a standing offer to issue new currency at the current per capita GDP rate with a transaction fee of 1%. So if the currency target value is $1.70, the new currency could be issued at $1.717. Because the exchange would always be willing to issue currency the price could never inflate beyond this benchmark. The currency would never be worth more than 1% more than the average GDP / 36,500.

Decreases would be limited through a similar means. The exchange would hold the cash from sales. No money markets, no investments, no bonds. There would be a standing offer to exchange previously purchased currency for the lesser of the average sales price to date or the current rate (minus another 1% transaction fee). Using the $1.70 baseline: if nominal GDP increases so that the currency targets $1.90, the exchange will still be willing to buy back currency at $1.683 if $1.70 was the average purchase price. If the nominal GDP decreases so that the currency targets $1.50, the exchange will only be willing to buy back currency at $1.485. This prevents the currency from falling significantly below what people paid for it. In reality, this baseline would constantly push the redemption price close to the target value.

The "Market" method

In addition to transactions with the exchange, people would be free to exchange the currency amongst themselves, without the 1% transaction fee. The exchange could offer to facilitate this at a significantly lower rate or other exchanges could be formed. Previous purchasers of the currency could thus sell their currency to others for a value closer to $1.70. This would cap the issuance of new currency by the exchange until there is more market demand for the currency than there is supply within that 1% band. This would further limit increases. But it would also limit decreases. By limiting the new supply, the price of the currency would be buoyed forming an effective floor of value close to $1.70. 

The market method would also allow updates based on predicted GDP shifts (albeit with the maximum and minimums set by the exchange sales).

The Technology

This currency could be a blockchain 'crypto' currency, but it could also be simplified somewhat. All that is really necessary is authentication that the currency is real. Electronic dollars currently manage this without blockchain. This could actually be far easier to implement than many cryptocurrencies today. And no expensive, wasteful, or polluting mining would be necessary.

The Pitch

This currency would be completely distinct from typical cryptocurrencies for one reason: it wouldn't be an investment. It is only a currency - a means of storing and exchanging value as measured in per capita earnings - and a pretty simple one at that. Any exchange that underwrote this would have the opportunity to collect transaction fees as demand for the currency grew beyond the existing supply. 

This currency may either lead or trail inflation as earnings are not in lockstep with inflation. Nonetheless, over time, it would both target and protect the value of an individual's earnings.

I know if such a currency existed and was supported by trustworthy institutions I would be very interested in protecting the fruits of my labors by holding it.

What do you think? How could this be improved? Do you have something better than per capita GDP as a target? Does this already effectively exist?

Last but not least, if you like the concept: do you know anybody who could pull it off?