In Part 41, I described what I believe to be an optimal monetary system, which is based on commodity money and 100% backed receipt money. It is simple, it does not allow for any manipulations of the money supply, and it should be very stable from a value standpoint as well.
In this post, let’s sketch out a pathway toward that kind of monetary system for the U.S.
There are two different methods to getting there: the catastrophic method and the gradual method. I’ll describe the former in this post.
The catastrophic method is pretty straightforward. For whatever reason, the government loses all restraint with how much new money it’s creating and kills the goose that’s laying the golden eggs (which is its 0% backed fiat monetary system). By creating too much new money, it induces hyperinflation, and the monetary system collapses.
I’ve already outlined possible ways this could happen in earlier posts, but something I never explicitly stated is that any major innovation that significantly brings down the wealth prices of things and generates a lot of economic growth–such as the impending AI revolution–could trigger hyperinflation.
It would happen like this: the government loosens the purse strings as it soaks up all of the unmeasured inflation without people noticing, the potential for unmeasured inflation decreases again as the economy gets back to more normal rates of innovation and growth, the government can’t tighten those purse strings back up, huge government deficits are no longer hidden by unmeasured inflation and turn into measured inflation, government has to print even more money each year to maintain programs, and the death spiral of hyperinflation ensues.
We actually saw a mini version of this during and after the COVID-19 pandemic. Government spending to stimulate the economy and also to deal with the costs associated with the pandemic (including higher prices due to disrupted global supply chains) skyrocketed, which caused tons of inflation, and then even after the pandemic ended the government wasn’t able to get back to pre-pandemic levels of spending.
The central bank will do everything it can to shrink the money supply to restrict inflation, but there’s a limit to how much it can do before it starts interfering with economic growth (and, thus, innovation), which then kills the potential for unmeasured inflation. And if there’s no capacity for unmeasured inflation, then all of the inflation will be measured inflation, which works against what the central bank is trying to do, so it has to shrink the money supply even more aggressively, which slows down the economy even more, which requires even more aggressive constriction of the money supply. . . . Do you see how that turns into a downward spiral too? The point here is that central banks don’t have an unlimited capacity to prevent hyperinflation. They do what they can to stabilize inflation–and they succeed 99% of the time!–but there’s a tipping point where they become helpless too.
People, seeing the rapid rate of inflation, realize that if they don’t spend their money this week, it could be worth half as much next week, so they start spending like crazy, probably including buying crypto. Short-term demand for food and other non-cash assets skyrockets, which increases prices.
Businesses are also realizing that they need to price things to take into account how much less the money they’re getting will be worth next week, so they are pricing with an anticipation of further rapid inflation.
All these factors combine to cause prices to launch up so fast that people are soon paying with wheelbarrows of money. We’ve seen this many different times in history.
When the value of money drops so rapidly like this, it soon becomes completely worthless, which means people lose all their cash assets. Luckily, most people probably have more assets stored in non-cash assets, so many people do okay in this situation. But not everyone. Those who didn’t have any food storage or emergency supplies (like a generator for when the power grid goes down as a result of all of this turbulence) are going to have a rough go of it. There will probably be starvation. Also, many creditors who had long-term contracts suddenly have no claim anymore because their debtor just paid off their entire loan with worthless money, so many financial lives and financial institutions are ruined.
And then there’s the effect on the economy as a whole. When an economy loses its monetary system, which acts as the grease that lubricates the gears of the economy to keep it moving forward, economic activity grinds almost to a halt. Very quickly you discover the incredible utility of having a common medium of exchange and the reliable prices that arise from that common medium of exchange. Having an economy without those would be catastrophic. That’s why I called this the catastrophic method.
The upside of all this comes when there’s no official money anymore. Initially, people revert back to the very beginning of the evolutionary road of money and enact trades through barter. And, soon enough, generally accepted commodities to facilitate exchange start to naturally arise. We call that commodity money. My hope is that this is the point where 100% backed cryptocurrencies would come into common use as a convenient means of storing and transferring that commodity, which is what I described in Part 38. But, with crypto or not, a society in this situation starts over with the progression of money that we just went through in this entire series.
If 100% backed crypto fills the giant void left by the collapse of the 0% backed fiat currency, it may stay there permanently. But I doubt it. Any owner of a crypto company–even one that is 100% backed–is susceptible to looking into those vaults full of a valuable commodity “just sitting there doing nothing,” and sooner or later we’re back to a fractional reserve currency again. So, before that happens, the country has a prime opportunity to lay the foundation for a permanent sound monetary system by enacting some constitutional amendments to prevent money from ever going down the same road again, which is the road that always terminates in 0% backed fiat money.
A country has never capitalized on that situation to achieve this, but I am hopeful that one day it will happen, especially if the theory explained in this series becomes general knowledge at least among country leaders and their advisers. I would love to see this happen. It would be a million times more persuasive than anything I could ever write at convincing people that sticking with a commodity money (plus 100% backed receipt money) is far and away the best way to improve the quality of life for the people in that country.
That completes my description of the catastrophic method. In Part 43, we’ll talk about the gradual method, and then you can decide which is more likely to occur.
P.S.: As I learn more about different issues related to government, I have been realizing lately that my learnings always seem to consolidate into clauses that I would put into a constitution. A well-crafted constitution is the holy grail of setting up an optimal government, and I think getting to be involved in writing one would be a pretty incredible opportunity. Maybe one day I will put the thought and research into writing an optimal constitution [Edit July 2025: I did that.] But, in the meantime, I will accumulate my recommended clauses, which already include insights from studying money, lots of things about how government should and should not get involved in markets (including healthcare), how to structure checks and balances in a way that prevents would-be dictators from killing the democracy (I learned about this in How Democracies Die by Levitsky and Ziblatt), and structuring the voting system to allow for greater cooperation and freedom of ideas than our current American system allows (I learned about this in The Politics Industry by Gehl and Porter).
Clear Thinking on Healthcare 