Tuesday, June 19, 2007

Go Money, Go! -- Why Faster Currency Is Better Currency

Everyone should already be familiar with the negative-interest currency of Worgl, Austria, and the known effects of demurrage. Effects such as being an intrinsically loose money policy (forcing government to rely on fiscal policy and work restrictions to prevent asset inflation, as it should!), realigning the discount rate towards a socioeconomic level and a future-orientation, decoupling currency interest rates from asset interest rates, and allowing the limited production of free money (free of inflation and debt). This post addresses lesser-known effects of increasing the velocity of money.

Inflation is the product of the quantity of money X its velocity exceeding the value of the goods and services in the economy. Theoretically, if you increase the velocity of money you need to decrease its quantity to get the same inflation. However, inflation is only one measure of the health of the economy. Unemployment is another.

As it happens, unemployment is not affected by the quantity of money changing hands as much as by its velocity. So increasing the velocity of money takes care of little problems called 'depressions'. Especially if you can do it in a debt-free manner (without putting yourself in hock to creditors) and without inflation.

Intuitively, circulating and causing exchanges is the FUNCTION of currency, so the higher the velocity of a currency, the better it is at being currency. But so much for intuition. Let's look at all four ways in which faster velocity is a good thing:

  • overhead
  • nucleation from stagnant pools, hoarding
  • high velocity jobs
  • taxes


If you have two currencies A and B and A has a velocity 10x that of B then you can choose to inject either 10,000 of A or 100,000 of B into the economy. Now when you inject money into an economy you usually go through bankers. Either the Federal Reserve Banks or foreign creditors. So if you choose to inject 10,000 of A then you'll owe the bankers maybe 1,000 (10%). If you choose to inject 100,000 of B then you'll owe 10,000 (10%) or 10x as much. This despite the fact that 1 A == 1 B, it's just their velocity is different. Now which would you rather owe, 1000 or 10,000? Of course, this was assuming you go through bankers instead of simply printing the money and spending it, which you can do. But even if you print the money and spend it, printing costs you. And printing 100,000 B costs 10x as printing 10,000 of A. For the exact same effect.


One of the effects of having slow currency is that you end up with large standing (stagnant) pools of currency. This is called "savings" and is supposed to be a good thing. Except it's not, it's a really bad thing. Because it is NOT savings. What it is is hoarding. The difference between savings and hoarding is that savings includes investments and hoarding excludes investments.

So those stagnant pools of money are not doing anything for the economy. They're not being spent and they're not being invested. Now since you're printing so much more money, you'd think those stagnant pools of money wouldn't matter ... except they do. Because currency behaves somewhat like a liquid.

Let's think on that for a minute. Money doesn't behave like a gas because it seeks its own level of return and doesn't fill the space of economic activity equally. Money also sticks together instead of automatically dislodging other money. And most relevant for our concerns, money can undergo a phase transition called a 'depression' where it freezes.

Now as everyone knows from physics classes, freezing occurs around impurities and around already-frozen nucleation sites. So basically, by eliminating all stagnant pools of money and by heating up the money, you are massively increasing your buffer against freezing (depressions). This is a Good Thing.

High Velocity Jobs

Are there any businesses that become viable only with high velocity money? Naively, you wouldn't expect any since businesses still receive money at the same rate either way, and each business chooses for itself how much money it hoards. But upon closer analysis, increasing the velocity of money by setting a floor under it does have some effects on businesses. Specifically, it has effects on businesses that extend credit to their customers and depend on payments.

The reason for this is that by setting minimum velocities for money, customers have an enormous incentive to avoid putting off payments. So long as they have money on hand, they have an incentive to pay off their debts rapidly and promptly. Payments may still be missed if customers don't have money on hand, but they will rarely be late. This greatly reduces the risk for a business that extends credit because they can expect a much smoother and steadier stream of income.

And because of that more predictable income stream, the business needs to keep less money on hand for its own purposes. It can operate under tighter margins, with less overhead, and be more efficient. Thus some marginal businesses that would not exist with slow money, do exist with fast money.


One of the surprising consequences is that government and government utilities are such businesses. While government can't typically go out of business, it can end up compelled to lay off people as a result of tax arrears. And as it happens, this is exactly what happened in Austria during the Great Depression and the exact opposite of what happened in Worgl thanks to its negative-interest currency.

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