How currency are created ?

Scarcity of currencies

In the paragraph "the concept of scarcity", it was established that in two goods economies the ”scarcest” goods would play the role of a currency. Indeed, the “scarcest” good is the easiest to exchange. Thus, it can be used as a reserve of value and has the quality to be easily exchangeable.

In the antiquity, precious metal as gold, silver and copper were used to create money. Gold is a scarce good which can easily be evaluated by its weight and purity (carats).

Since the abandon of the gold standard, currencies are not a consumer product but they are an institutional right. This right is based on the fact that a currency can make possible to buy a guaranteed monetary fund. Then, the monetary policy of the central banks acts in order to find out the best rate. The currency must be easily convertible in all the goods available on the market.

If the interest rate is too low, the money supply increase so as the scarcity of a good can become higher than the scarcity of the currency. This good becomes difficult to obtain. Its price goes up. This phenomenon is call inflation (*).

If the rate is too high, people don’t want any more to buy and reduce their consumption in order to buy a money market fund. The currency being the scarcest good, it easily can be exchange against a good but a good can't be exchanged on will against the currency. In other world, in our economy, it is easier to buy than to sell. Thus, a part of unemployment is the result of the monetary organization of our society. A country should have an interest rate as low as possible because the interest rate increases the scarcity of a currency which makes it harder to sell and increases unemployment up.

Remark:

(*) I have lived in Moscow during winter 1993 and so I experiment the case hyper-inflation (1000% inflation per annum). While people receive a payment in cash, they were keen to spend it by fear of the lost of values. In an inflationary economy, people had more confidence in the value of the goods than in the value of the currency. The reason is simply that the the Russian currency: ruble where creates in too large by the government in order to cover the budget deficits. The ruble produced to finance the bureaucracy which could not be financed by the tax collection. In this economy, consumer good had a scarcity higher than the currency. It is interesting to notice that the economy tend to be "dollarised" as American dollars look to be a safer haven to keep values.

Convertible currencies

The scarcity of a currency increases if a currency is convertible with the word hard currencies (dollars, Euro, Yens). Currencies can be convertible only if they have the same "scarcity". If a currency A has a scarcity lower with a currency B, B can be converted into A but A can't be used to buy the currency B.

Let us take the example of the German and Spain economies. Germany has many companies which produces high-technological products. High-technology products help to increase the productivity of the companies and so to improve the output of the capital and wages. High technologies are amongst the scarcest good of our economy and have so a scarcity similar if not higher than the currency. The reason is that these technologies ensure to companies an output higher than the interest rate. The countries that had kept the technological advantage take care of not to lose it. Underdeveloped countries had to pay an high prices to buy it. China and South Korea understood to buy high technologies to develop countries was difficult. Often, they often had to barter high-technology against market shares of the domestic market by creating join venture. Spain is poor in high technology. But, in order to join the EEC, the Peseta (Spain currency) has to be convertible in others European currencies which includes the German mark. With convertibility, the Spanish companies can be able to buy German high-technology but the scarcity of the Peseta had . Technically, Spanish monetary authority increases the scarcity of the peseta by increasing the interest rate of the Peseta. And with the increase of the scarcity of the Peseta, the Spanish companies have more difficulty to sell their product since interests rate motivates saving. This can explain the relatively high rate of unemployment (24,5 %) of Spain compares to Germany.

The conclusion is that the association of various countries at a stage different of technological development lead to a highest unemployment in the less develop countries. Country with the highest advanced technology have the lowest rate of unemployment as for example in 1995 Japan (3%), United States (5,5 %) and West Germany (7,9 %). Also, among the economy capitalist with intermediary technological level, the countries with the lowest unemployment have a currency control (in 1994, South Korea has a 3 % unemployment rate).

The effect of a change of scarcity of a major product in the economy

In a free market economy, an increase of the demand faster than the offer (or a decrease of the offer) of a good G have the effect to increase the scarcity of G. The economical effect is price of G increases of the product such as the demand is discouraged until it equilibrates the offer.

Many people will find the G overprice and the demand for G will decrease (even that the absolute demand will remain the same).

Q_offerG_2 < Q_offerG_1 -> ScarcityG_1 > Scarcity_G_2 -> PriceG2 > PriceG1 ->

Q_absolute_demandG2 = Q_absolute_demandG1 but Q_demandG2 = Q_offerG2 < Q_demandG1

Describe in such way, the economic mechanism works well and the economy is regulated. The product began more "scarce" so as enough people give up to consume it.

But unfortunately, in many case, people will keep on consuming the product G and in order to have the cash, they will save their cash from the consumption of other products (B) so it will increase the abundance of (B). It is the unwilling side-effect which take place in our monetary economy.

An historical example is the famous petrol crisis of 1974. The increase of price of gas due to the instauration of quota by the OPEP has the effect to reduce the offer and to increase the scarcity of the gas.

But, people were not in position to reduce their consumption of petrol sufficiently. Thus, they reduced their consumption in others products and so it was the start of a world economic crisis. Petrol price keep increasing as the demand were still too high. The offer and demand equilibrate while OPEP decided to increase the quota. Face to this situation, the monetary authorities decided to decrease the interest rate in order to sustain the demand of abundant product and limit the crisis but as the scarcity of the currency were decreasing compare to the scarcity of petrol (and other scarce products), the economies face an increase of inflation.

The scarcity of currency

The soft currencies

The currency of the communism

A soft currency could be defined in a currency not convertible in hard currency (US$, Euro, Yen). This mean that the soft currency could be acquired from a hard currency but not the opposite.

The ruble, the currency of former URSS is an example of soft currency. The ruble could be compared to a kind of certificate of hours of work of the unqualified labor. The quantity of currency created was produced in proportion to the output of the labor. The advantage of this kind of currency was a nearly complete absence of unemployment. As this currency could be produced as much as the workforce availability, the unemployment was null in the former URSS.

But the disadvantages were important.

- The first was the difficulty of trading with the capitalist countries as the impossibility to obtain hard currency; This point leads the former communist country to an accumulation of the technological delays compare to capitalist countries;

- The second was the effect of fixed prices and the non guarantee of availability of products. To avoid inflation, communists practice policy of fixed price; the result is that certain products which have a "scarcity" higher than the currency was regularly missing from the market. During stay in the USSR (1991) and Russia (1993), I find out that most products necessary to the housewife were available in store except for some specific goods at some specific times. I can imagine the frustration of the Russian consumer who spends a lot of energy to search for "scarce" missing goods. Many people got goods by relation or barter.

In term of scarcity, this currency could be defined as a currency equal to the average of the scarcity of the consumer goods. This means that contrary to hard currency, many goods have a higher scarcity than the currency. So, these goods were only temporarily available. So, the common sense was to acquire products with the highest scarcity and to store them to be in position to exchange them latter. Thus, the consumer find it beneficial to buy the scarce good when they are available and to store them because of the fear to be one-day victim of shortage of goods.

The disadvantages of a partially convertible currency

A partially convertible currency is a currency whom the exchange is controlled by the state. In general, the economy of the country is not competitive in the world economy so it is preferable to restrain the exchange of the currency against hard currency in order to limit the import of foreign goods. This limitation is a problem for the local companies which need to invest in foreign equipments. So countries which uses a partially convertible currency (like South Korea) offer to the industrial companies a preferential access to hard currency in order to modernize their equipment. Fortunately, the like of guarantee for convertibility dissuades the international investors to invest in the companies of the local economy. They fear not to be able to convert back their profit in their original currency. So, the investors prefer to invest in the countries who guarantee the total convertibility of their currency than to the countries which practice an exchange control.

In term of scarcity, a partially convertible currency has a high scarcity compare to the products of local market but a scarcity inferior to foreign goods and to the hard currencies. So, it is necessary to restrict the import of foreign product and the exchange in foreign currency. The economical advantage is to have a not too scarce currency and to have a better monetary circulation in order to increase exchanges in the local economy.

The hard currencies

Effect of the scarcity of the currency on unemployment

Consumer goods have a different degree of scarcity. For example, Gold and energies are scarcer than bread. In the past, people choice precious metal as currency because their scarcity was higher than most of the products of the market. Thus, precious metal could be exchanged easily against any kind of consumer goods. The inconvenient is when currency are scarcer than service or products which are produced by work. So, this lead to a high level of unemployment.

Unemployment could be defined to be a situation of a person who cannot work as much as he wishes to. If an unemployed person proposes his services at a lower rate, his working hours will increase in accordance to the free market theory but the loss due to the drop in prices will not be compensated by the augmentation of working hours (work are usually inelastic). Thus, in accordance with the theory of elasticity of the chapter first, one will have:

Honorary1 > Honorary2 = > Working_duration1 < Working_duration2

with Honorary1 * Working_duration1 > Honorary2 * Working_duration2

A person who works in a sector where products are abundant (negative scarcity), finds out an anomalies in the economical system by the fact that price drop more quickly than costs of productions. In this case, one reflex is to compensate the lost by selling more and increasing the production, which leads to a price collapse of the product.

The price of work is governed by the law of the offer and demand. The situation of unemployment can be explain by the fact that the offer is more extensible than the demand. The will of the producers to increase their income implies a drop in prices higher than the increase of the production. Thus, the income of producers drops despite the increase of the production.

In term of scarcity, work is more abundant than the currency so the currency can always be exchanged against the work but the work can not always be exchange against the currency. People could so in their life never work as much as they will. The interest of the monetary authorities is to find a right level of scarcity for the currency (by adjusting the level of interest rate) in order to avoid the non availability of some goods against the currency (which leads to inflation) and to have the lower of unemployment as possible.

The polity of quota and the limit of working time

To solve the problem of unemployment, European government established a policy of quota: dairy quota, reduction of the working time. The collective choice to reduce the production makes it possible to maintain prices and to guarantee to the producers whose scarcity work is insufficient, a level of income higher than this would have in a free exchange economy.

This quota should be compared to the practice of communist countries. In the USSR and Poland, certain goods as cars or refrigerators were not directly accessible so a waiting list had to be established in order to access the good.

In social democrat countries, the production of many good is abundant so it is rationed to fit the insufficient of consumption. For example, a milk producer has daily quota of production which limits his market share in the European milk market. A new farmer who wants to produce milk will not settle up because all market shares had already been attributed. The situation is identical for drugstore, taxi driver whom the profession is regulated by a license (governmental authorization to practice the activity). So, each drug store have a market shares. If other actor as big surface enter on the market, the price of the due to the reduction of the market shares.

The effects of a strong currency in a free market economy

In this paragraph, a free market economy will be defined by an economy completely regulates by the market laws. The regulator does not act in order to adjust to the market situation.

Classical free market theory estimates that unemployment of the professional categories whom offer is abundant should suffer of unemployment. How can a person escape unemployment if his work offers is too abundant in the economy ? On this point, free market theory is wrong because it does not take into account the concept of scarcity. The theory supposes that the economy can be regulated at best by price fluctuation.

Let us take the example of two professions in a situation of abundance: a shoe-maker and a meat producer. The scarcity of their production is negative. They live in a situation of shortage of money. They will pay attention to the least expenditure which includes the expenditure which concern the abundant products. The shoe-maker will reduce his meat consumption. The meat producer might repair his shoes himself. In our civilization where people cannot get goods and services with money, a person in lack of money is in difficulty to access to all product including product and service more abundant than their work. This is the major drawback of our economic and it explains that in fact the level of economical exchanges in the economy are far inferior tthan their potential.

In a barter economy, our shoe-marker and meat producer would be in lack only of goods whom the scarcity is superior to their work and not with the others. An interesting social experimentation took place in United States and in Europe: "bondinism" (economy based on exchange bonds which represent the number of work hours). An association proposes to exchange working hours between citizens: dental care against hours of car repair for example. Such an association joins together 40 000 peoples in England. The majority of the members are under employed or allocation beneficiaries and they can't sell their competence in a world where money becomes hard to gain. It is comprehensible that the tax administration fights against this kind of association which helps people to escape from the economic systems and avoid taxes. But, I would show in the chapter about multi-currency economy that it is also the way to escape of the consequence of the strong currency ( and scarce) for weakest economic actors. If work is exchanged against bond which are exchange against work. Thanks to these bonds, our meat producer will not consider that to repair his shoes by a professional will reduce his cash reserve and so will profit from this innovative exchange vehicle. This bond will allow him to acquire the services of the shoe-maker. In the same way, the shoe-maker has bond which will allow him to buy the meat in desired quantity. And, here is the miracle!

The economic exchanges between the shoe maker and the meat producer are facilitated. These bonds can be characterized as a soft currency without a null interest rate with a value bases on their convertibility with hour of unqualified work. With the insufficient hypothesis of the two actors, it does not have any effect of substitution. In a system with scarce currency, the two actors would have preferred to place their money in monetary fund rather than to do this transaction in hard currency. The bond doesn't allow to buy the money market fund, the transaction can exist. Thus, there is an increase of the economic activity of the shoemaker and the meat producer. These bonds are really a factor of creation of wealth.

This paragraph makes it possible to show that creation of a currency which has a degree of scarcity equal to work facilitates the exchange and the real income per capita increased. A second currency is a genuine weapon of fight against low wages and under-employment.

The dangers of a scarce currency in social democracy

Europeans are increasingly sensitive to the problem which are caused by the policies of governmental subsidies and quota of production. The government puts a limit in the production or in the number of hour of the salary men. Salary men had so a reduction of their income especially because taxes remain the same in an absolute value so their percentage increase and the remain of cash for consumption and saving will be reduced. The consumer will reduce their consumption. Thus, this policy is like a vicious circle and the government must even more reduce the production to respond to the fall in consumption.

For example in the housing sector, due to the taxation and reduction of working hour, people can't pay for the rent and get a poor accommodation. During this time, house builder undergo bankruptcy to bankruptcy.

The social-democracy countries are in a worst situation because their citizen face a tax pressure whose percentage increases as the income is high. The "repartitionist" aspirations of social democracies make that high wage earners are often victims of an aberrant real tax rate. These people which should be motivated to work more, prefer to limit their work to prevent that the increase of the tax rate, took away their earning. The quantity of scarce products produce is thus weaker than what it should be if the high wage earners were taxed less.

The scarce products ( high technology) constituted an exported products and so they support the currency. The tax increases on the companies which produce high-technological product as the effect to decrease the motivation and makes these producers less competitive. The product which are resulting from high technologies are so less available and so they have an higher scarcity than other products. In order to guarantee the power of buying of these products, the monetary policy should be more restrictive and currency scarcer than high technology. The final result of this policy is higher under-employment.

Over-employment

A person in situation of over employment is a person whose the competence is lacking in the economy. Company must maintain its production because the shortage of competences would induce a rise of wages too strong and would make their products inaccessible.

For example, the TGV is a scarce and exportable product. The employee of GEC-Alsthom are high level technician and so their level of remuneration is strongly reduced by the fiscal pressure. There is a division of 2,5 between the cost to the employer and the tax remaining after the taxes (*). So to bear the fiscal cost, the price of the train ticket in the TGV fare has to be very expensive and the French train ticket is one of the more expensive of the world (* *). The price of the products of GEC-Alsthom is fixed by the market law. A fall of the selling price of the train engines could not be compensated by a fall of the wages and would involve the departure of the qualified workforce towards foreign companies and maybe the loss of the technology. So, GEC-alsthom is burdened by the tax constraints. It can not benefit from an increase of the production due to the price reduction of its products. Thus, it must sell his product at a high price to face the tax cost. It will not try to increase his market shares by decreasing its prices.

This example shows that even the companies in situation of over employment end up with limiting their production in order to control the prices.

(*) In the France of 1995, a salary person which a gross monthly salary of 15000 FF /par month cost to his employer 22000 Francs per month. To have the real cost for the employer, it is necessary to add 20,6 % of VAT and 4 % of professional tax so we have a mostly cost of 22000 * (1 + 20,6 % + 4 %) = 274000 Francs. This employee will bring an add value to the company if his work generates a sold production of at least 27400 Francs monthly. This employee will have to pay many social tax, income tax and so he will receive an after tax salary of 10500 Francs. Thus, there is a division by 2,6 times between his cost to the company and the cash he is receiving.

(* *) Korean people who has in 1995 an average gross salary 20 % lower than the French wages pays a train ticket to travel 300 km only 60 francs. The same distance with a standard French train costs 200 francs and is even more expensive if the trip should be done through the TGV.

Author: Hector Archytas