Thursday, April 01, 2004

April 1 - A New Red Cent

A New Red Cent

Fernando Zayas is an engineer involved in the manufacture of computer disk drives, and a native of Cuba who was raised in Nicaragua. The following satirical piece is published in celebration of April Fool's Day.

John Law didn’t get it wrong; he just lacked the technology and bureaucracy to deliver on the promises. In the 21st century, with computers and government, we can succeed where he failed. Let me explain…

Mr. Greenspan is to be applauded for his efforts. The injection of liquidity into the global economy has avoided a depression, a much worse problem than asset inflation and its attendant bubbles. But easy credit has its failings. Instead of stimulating industrial growth and creating jobs here in the United States, the effect has been to do the same overseas.

Is there a way to achieve mild inflation whilst motivating industry to build factories, source components, and create jobs within the borders of the United States? The answer is a resounding yes!

I propose the creation of a parallel currency to the US dollar, a currency that would be “…legal tender exchangeable for assets meeting the content rules of the United States of America”.

This new currency would be a distinctive red color so it could not be confused with the existing greenback (a slang term for the US dollar, whose bills are green in color). It would be denominated in cents, rather than units of 100 cents, so that we are reminded that each penny, each red cent, has value. The currency would be minted in bill form, starting with the 100 cent bill. The new currency also forgoes the presidential portrait for the old penny’s Indian head, commemorating a time in our history when anything was possible and individual hard work was rewarded.

To avoid the pitfalls that Mr. Greenspan is now exploring, the new currency has restrictions: it cannot be banked, it cannot exist in promissory or representative form and it can only be used to purchase goods made in the United States.

The new red cent cannot be banked. If the new currency is allowed into the fractional reserve banking system, it would multiply the currency in an uncontrolled manner. Even though a reserve requirement could be set, the government cannot control credit demand and thus the velocity of money.

The new red cent cannot exist in promissory or representative form. The red cent cannot be used to denominate credit. Purchases must be made in the actual currency. The new currency becomes a facilitator for barter.

The new red cent can only be used to purchase goods made in the United States. To establish content requirements of “made in the USA”, a new agency reviews and documents the content of everything that is for sale. The job of the new government bureau, the Homeland Content Assurance Agency (HCAA), is the most daunting challenge of this proposal. Only assets approved by the HCAA can be purchased with the new red cent.

Consider how HCAA agents would review even simple items. A shirt from cotton grown in the United States, made into cloth in Mexico, cut and sewn in Vietnam, and sold in the United States may or may not qualify depending on the citizenship of the crew of the ships that transport the cloth to the Far East and the shirts to the USA. Each line item of each bill of materials of each item for sale must be assigned a “made in the USA” percentage and combined to fall either above or below the content rule. Without an efficient bureaucracy and the aid of computers, this task could not have been attempted in the past.

On initial issue, an assumption of parity (100:1) to the US dollar is made. The government is creating a barter currency with no multiplicative effects, so no inflation can occur. As the HCAA approves more products and as new products are introduced that meet content requirements, the new red cent should rise relative to the US dollar. The appreciating red cent could be used to pay down US dollar denominated debt at perhaps bargain rates. An important factor for consumers is that red cents cannot be used to pay taxes, although they can first be exchanged for US dollars at market rates.

Seeding the nation with the new currency could also be handled by the HCAA. A certificate equivalent to 10% of gross income reported in 2004 taxes could be issued to each taxpayer. The taxpayer, after presenting identification, exchanges the certificate at an HCAA office for red cent currency. Governor Ben will notice that no expensive helicopters are required to introduce the new currency as the travel expense to the HCAA office is borne by the taxpayer.

After the creation of the new currency and the HCAA, the miracle of our free market system would take over. Companies the world over would create products in the United States to qualify with the HCAA. Factories would be built within our borders and our employment would rise. The United States would again become a focal point for capital formation.

Unlike the weak knob used by the Fed -- setting of the funds rate -- the new red cent has much more effective controls. The HCAA can control the percentage of wages that can be paid in red cents, contract or expand the supply of red cents directly, and control what products qualify for sale in the currency.

Future questions about the parallel currency are left for the markets and the HCAA to resolve. Should the red cent be backed by a hard asset, such as copper? Or a basket of commodities to include oil? How will the foreign exchanges handle trade in the red cent? The future may have some promising twists.

Since each cent is roughly equivalent to one Yen, Japan may wish to switch its currency to the red cent thus avoiding the transaction and printing costs to purchase US dollars. This could unify our two economies. Another European Union perhaps?

With a little creative license, the portrait of the Indian on the face of the red cent bills could be made to look more like an Indian from New Delhi than an Indian from New Mexico. An economic block composed of India, Japan, and the United States could render impotent the power of China.

Protectionism in the form of currency creation and control confirms that creativity in financial matters remains our strength. As long as we make the rules, free markets can go where they will. God bless America. ...Link

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