The Numero: Beyond Gold and Fractional Reserve Banking

In reponse to my report of a dialog between a gold bug and an apologist for the US Federal Reserve, Tom Sullivan commented, and I paraphrase:

we need a currency whose value can not be easily manipulated. Neither gold nor fiat currency as managed by the World's central banks meet that requirement.

What monetary system, then, can meet that requirement?

Here I outline the most elegant possible solution to that challenge.

The Numero: A Monetary Unit Based Upon the Cardinal Numbers

A Numero, pronounced with emphasis on the second syllable, is a unit of currency designated by a unique whole number. If you "own" the Number 1, you have a unit of currency. To own the Number 1, you must have an account with the monetary authority or a bank acting as the agent of the monetary authority, which registers your ownership of the Number 1.

Additional units of currency are created by the use of additional cardinal, or counting, numbers up to a published total based on a country's existing stock of money (or in economist speak, M2), which for the United States is currently around $10 trillion. Thus, the ownership of every single number, i.e., each distinct Numero, would be recorded, the information held in a geographically distributed, nuclear-attack-hardened, and highly redundant electronic archive.

Although a bank statement would normally show only the total of Numeros owned by an account holder, the identity and ownership of each Numero, whether in hand or loaned, would be on record. Thus, the total quantity of money would always be public knowledge, and any attempt to inject units of currency with identity numbers that exceeded the authorized total of Numeros in circulation, or which duplicated the unique identifying numbers of existing units of currency, would be recognized as counterfeit and rejected by the bank system.

Because a number is not a physical thing, there will be no physical Numeros or cash. All payments will be made by means of a cash or credit card, requiring highly reliable verification of the user's ID, for example, by means of a retinal scan or some other form of bio-identification.

Converting From an Existing Currency to the Numero

Converting funds from US dollars or Renmimbi or Euros to Numeros is a conceptually simple process. Each unit of the old currency will be converted to Numeros at the current rate of exchange with, for the sake of argument, the US dollar.

Thus, for Americans, the transition will involve only a change in name of the unit of currency, while bank balances and amounts borrowed or loaned remain quantitatively the same. For those holding currency other than the US dollar, the transition will involve a change in the quantity of currency units, owned, loaned or borrowed. Holders of the British pound, for instance, would find the quantity of Numeros they owned approximately 1.58 times (at the current exchange rate) the number of pounds owned previously.

As more than one country adopted the Numero, we would have the beginnings of a global currency that facilitates trade by eliminating the need for currency markets, foreign exchange bureaux, or currency hedging operations.

Money Created by Fractional Reserve Banking

With the Numero, money is neither created (except under very specific conditions) nor destroyed. So what about the money created by fractional reserve banking, which goes out of existence when a loan is repaid?

There are several possibilities. One is that loan repayments would be made to the Central Bank via the lending bank. The Central Bank would then lend this money back to the commercial banks at a rate of interest that keeps all the money in circulation. For example, if there is a tendency for private sector debt deleverage, something of which the Central Bank would be immediately aware, interest rates would fall. Conversely, if loan capital was in short supply, the central bank rate would rise.

In addition to loans from the Central Bank, commercial banks would be free to borrow at interest from depositors to support their lending operations, but such loans would be restricted to the amount borrowed from depositors, not some indefinite multiple, as under the existing system of fractional reserve banking.

Alternatively, money presently in existence as a result of fractional reserve banking operations, could at the time of repayment, be distributed by the Central Bank among all citizens in proportion to the quantity of Numeros they already own. The implications of this are interesting but it would require a diversion of too great length to include it in this brief outline.

What About the Pennies?

If you buy an item for a dollar ninety-nine, how do you make change?

Just as you do now, using pennies or cents, each of which will itself be a unique cardinal number preceded by a symbol indicating it to be a cent not a Numero.

Those with goods to sell will carry a float of pennies, which will be bought and sold by the Central Bank at the rate of 100 to the Numero.

As with the quantity of Numeros, the quantity of pennies will be publicly known and fixed, and the identity of the owner of each penny registered.

The Numero and International Trade

The Numero would bring to international trade the stabilizing function that gold once served.

A country running a trade deficit would experience a decline in the amount of currency in circulation, which would drive down prices and wages (see discussion of adjusting wages while maintaining full employment here), thereby increasing its international trade competitiveness, which in turn would lower its trade deficit. Conversely, a country running a trade surplus would experience an increase in currency in circulation which would drive up prices and wages, thereby reducing its international trade competitiveness and hence its trade surplus.

Changing the Money Supply

If for some reason it were deemed necessary to change the money supply, this could be accomplished by the simple expedient of incrementing or decrementing the number of Numeros registered to each individual in proportion to the number of Numeros already owned.

But there is no obvious reason why the quantity of money need change over time, provided there is flexibility in prices and wages to accommodate changes in the availability of goods, services and labor. In time, with a fixed quantity of money, the World would grow used to the idea that allowing bankers to create money without limit according to their own perceived advantage or the political advantage of their political masters is always unnecessary and usually harmful to the public wellbeing.

The Impact of the Numero on the Incidence of Financial Fraud and Other Crimes

Because the legitimate ownership of every Numero will be known to the financial authorities, financial fraud, counterfeiting, tax evasion, the vending of illegal drugs, trading in slaves, money laundering, illegal political campaign contributions, bribery and the financing of terrorism will become virtually impossible without prompt detection and apprehension of the criminals concerned.

Is the US Fed Truly Evil? A Dialog Between a Goldbug and a Bank Apologist

In response to an earlier post about the operations of the US Federal Reserve, Harry raised the following question, which I paraphrase: Is not the Federal Reserve the creature of the monied interest, and if so, how does it serve that interest?

In answer, I have to admit that I don't know. However, I gained some insight into the question from the following dialogue between an advocate of gold as money (Goldbug), and a defender of the Fed (Fed Apologist).

Goldbug: Gold has been money for thousands of years and it has always held its value.

The price of an ounce of gold today will buy a suit fit for a United States senator, two thousand years ago, an ounce of gold would have bought a toga fit for a Roman senator. But in the span of the mere 99 years since the passing of the Federal Reserve Act, the United States dollar has lost 96% of its value.

It's time to return to gold, and time to abolish both the Fed with its freedom to print limitless quantities of fiat currency and the fractional reserve banking system that allows sociopathic banksters to print their own money. We will then once again have sound money that does not rob widows and orphans of their means of existence or deny savers the rewards of thrift.

Apologist: It is true that the dollar has lost much of its value since 1913, but to put that in perspective, 99 years exceeds the normal span of a man's life, and a devaluation of 96% in almost 100 years amounts to an inflation rate of only 3.1% per year, which, according to the economists, is almost ideal.

Moderate inflation is necessary as a stimulus to economic expansion. Without it, people will be inclined to hoard money, so driving the economy into a recession or depression for want of demand.

But, under the wise monetary policy set by the Federal Reserve to promote maximum employment, stable prices, and moderate long-term interest rates, US GDP per capita has increased in constant dollars from around $10,000 per person in 1913 to more than $48 thousand today.

Goldbug: That's all twaddle and bunkum, the idea that ...

Apologist: Wait a minute. Let me finish. When you talk of abolishing fiat money and fractional reserve banking, you display your ignorance of the history of money. There never was, what shall we call it, a golden age, when gold was the only medium of exchange -- at least not in the last thousand years or more.

Chinese merchants during the 8th Century Tang Dynasty used bills of exchange, or promissory notes, to finance trade, as did the Arabs of the tenth century and, a little later, the merchants of Europe. Even though backed by gold, the quantity of such paper could, and was, expanded far beyond the gold monetary base. And governments issued coins, whether of gold or other metals, with a face or fiat value far in excess of the value of the metal of which the coins were minted. For example, in the early 16th Century, Henry VIII of England doubled the money supply over a period of around 20 years by debasing the coinage, thereby creating one of the greatest bouts of inflation in England's history.

Goldbug: Yes, yes, we know that where there's a will to rob the citizenry of the value of their labor, the government will find a way. But the use of gold as money should severely limit the ways of government and bankster theft. If a bank loses all its money in reckless speculation, there will be no bailouts with freshly printed cash from the Fed because any fresh money must have a base in real money, which is to say gold, which cannot be conjured out of thin air, but is essentially fixed in quantity.

Apologist: So now you acknowledge that fractional reserve banking is a necessity, but bankers should be held more closely accountable for their mistakes? If so, then we are in complete agreement. The financial meltdown of 2008 exposed weaknesses in the system of bank regulation and the need to impose stricter discipline on bankers who may be so highly motivated by the existing system of remuneration as to take undue risks with their shareholders' capital.

Goldbug: In no way are we in agreement. Far from it. I do not concede a necessity for fractional reserve banking. What we need is a system that combines the stability of gold with a cashless, digital currency one hundred percent backed by gold. Such systems already exist: Gold Money, for example. All that's needed is to establish such a system on a nation-wide and international basis with secure, distributed gold storage and an equally secure, distributed computerized administration.

Under such a system, physical cash would not exist. All payments would be by the use of a cash card employing highly secure bio-identification (e.g., a retinal scan). Payments would instantaneously transfer the registration of the specified quantity of gold from one account to another.

Apologist: So under that system, how could the US economy continue to function? At present, consumption accounts for 73% of the US economy, and most of that consumption is financed with credit.

With no bank credit creation, there'd be no economy!

Goldbug: What you mean is, there'd be no Fed- and bankster-induced booms and busts. There would still be credit. But it would be based on real money. Thus, if you had cash, which is to say gold, surplus to your immediate requirements, you could lend it to a bank at interest, thereby providing the bank with funds for car loans, mortgages, etc.

Apologist: But under the system you propose, the quantity of credit would be totally inadequate to the need. Moreover, the quantity of money would be fixed, not by the needs of the economy, but by the amount of gold, a purely accidental quantity. Under such an arrangement, there would be persistent deflation as the economy grew. That is to say there would be deflation if the economy grew.

But in fact, the economy would likely go into a never ending depression as people hoarded money as its value rose, the effect of which would be to make the value of money rise even further.

Goldbug: If Americans have such an insatiable appetite for consumption that under the Fed's "wise" monetary policy they borrowed their brains out during the housing boom, why are we to believe that in the absence of credit, they will refuse to spend even what little cash they actually have. In fact, one can assume just the reverse, that as debt is greatly reduced, so also will be the tendency to save.

Furthermore, we know that the Great Depression resulted from the failure of Fed monetary policy. The monetary expansion during the Twenties, which the Fed failed to check, resulted in the Great Crash, which caused a collapse in money supply, which the Fed also failed to check. Only a World war, it seems, and the near total destruction of the industrial base of all of America's competitors, was sufficient to restore American prosperity.

Apologist: It cannot be denied that the Fed made mistakes in the Twenties and Thirties, but that was due to inadequate information and the primitive state of economic models of the era. Today, the Fed is much better equipped to handle booms and busts as it has demonstrated since the credit crisis of 2008 by bailing out the World's banking system with an infusion of $16 trillion, all of which, incidentally, has been repaid.

Goldbug: Oh well done! The Fed saved the World from a disaster of its own making. It was the Fed that allowed credit to expand without limit, until a true Ponzi economy was achieved, when money was borrowed primarily not to finance consumption or investment but to invest in assets that were rising in price because people were borrowing money to invest in assets that were rising in price.

The Fed created this mother of all bubbles by driving the Fed Funds rate from 6.5% in 2000 to a low of 1% three years later, with Alan Greenspan claiming all the while that you can't recognize a bubble before it's burst. Well Ol' Al must have had his suspicions about a bubble since he set about deliberately sticking a pin in the economy with 17 consecutive Fed Funds rate hikes from 1% in 2003 to a high of 5.25% in June 2006, when the property crash and the consequent global financial meltdown, began.

During the early years of this century, bank deregulation, predatory lending, mortgage derivatives combined with Greenspan's injection of low interest stimulant, drove America's private indebtedness to an insane all-time high in excess of 300% of GDP.

And you congratulate the Fed for saving the World from the inevitable bust. LOL.

And we're nowhere near out of the woods yet. Unemployment according to the metrics of the 1930's is still as high as during the Great Depression. Black youth unemployment approaches 90% and folks think blacks are especially prone to crime: no, they're especially prone to unemployment in a system that educates black youth poorly and then denies them the right to work for less than the minimum wage.

Apologist: You're just ranting. The Fed has nothing to do with black education, which I agree is deplorable in its failure to prepare the average black youth for productive employment. And the Fed has nothing to do with minimum wage laws, which I agree are damaging in their impact on those at the margin of employability.

Goldbug: But as for the Fed's role in the creation of booms and busts, I note that you have nothing to say.

Apologist: Far from it. I was just pointing out ...

At which point, I fell asleep and can, therefore, report no more of the conversation. However, the comments of others would be appreciated.