Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

The Egg Standard

There are a lot of articles talking about a gold standard for currency. The real question is why gold, what a standard is supposed to accomplish, and what other alternatives there are.

So the first question is, what is currency? I would say it is a medium of exchange that allows you to separate transactions, so you are not forced to barter to accomplish them. It provides society with a distributed memory of how much you have contributed to society, and how much society owes you as a result. A lot of things can go wrong - there can be errors in the valuation of your contributions, there can be theft and counterfeiting, and there is the issue of repudiation. While generally people have a knee-jerk reaction that all these things are bad, errors in valuation are just going to happen, and theft and repudiation are not always bad. Banks and speculators are legalized thieves who contribute to society by smoothing transactions when they do not take too much of the intrinsic value of the transactions they engage in.

Generally, you do not want a medium of exchange to be a resource that has intrinsic value to people. It needs to be issued in small enough units to be able to participate in the smallest individual transactions. Resources can be limited, and there is value to society in depreciating prices for resources. Individuals and society are better off when they can get the resources they need at lower cost to themselves. However, the producers of the resources are negatively affected by declining value of the resource they produce and wind up producing less of it. If the resource is essential to society, then society winds up worse off as a result.

You also do not want a medium of exchange to be something that can easily be created by any individual or any segment of society. Currency facilitates transactions by acting as a store of value between transactions, and if any subsegment of society could create and issue it easily, then that subsegment can enrich itself without contributing to society. You also need it to be instantly recognizable, and counterfeits easily detectable by most people, otherwise transactions using the currency would be slowed down by the process of verifying the authenticity of the offered currency.

Gold meets the two criteria above. It has no intrinsic value to people. It is a relatively rare commodity which is quite expensive to produce. Because it is one of the most dense metals around, counterfeit materials are easy to detect, especially when molded into standard sizes. The fact that it does not corrode easily, is instantly recognizable, and has a long history enhances its value as a medium of exchange. However, there is one fundamental problem with gold - there is not enough of it to support the growing number of transactions in the economy. The US economy by itself would place an absurd price on gold if it were used as the primary medium of exchange.

Paper currency meets the criterion of having no intrinsic value to people. It is instantly recognizable, and most segments of society are prevented from issuing counterfeits by the police power of the government issuing the currency. The evolution of paper currency into digital entries in bank accounts brings currency holdings even closer to its ultimate purpose of serving as an accounting and memory of an individual's net contributions to society. However, all fiat currencies are compromised by the centralized issuing and counterfeit prevention authority - vested interests that acquire undue influence over this authority can steal enmass from a society with serious consequences to society - and without any liability whatsoever. In fact, without some link to things of intrinsic value, there is not even a basis for establishing some liability.

There is a fundamental disconnect between the interests of society and the individual. Society generally does not much care about what an individual contributed a long time ago or will contribute in the future - but individuals typically contribute during a productive period in their lives, which has to pay for debts incurred before the productive period and provide for themselves afterwards. The time shifting aspect is extremely important to them. Because of the possibility that assets can be acquired through fraud, or that they can wind up concentrated in a few hands with nothing available to the mass of individuals in the rest of society, society has a deep need to be able to repudiate debts, especially extremely large ones. However, given the time evolution of an individual's productive capacity, society in general has an interest in preserving values and debts upto the basic needs of an individual, and also significantly beyond that. Ultimately, there needs to be a link to resources of intrinsic value to an individual if there is to be any hope of establishing liability for a fiscal official involved in issuing a fiat currency.

So what are the basic needs of an individual? One can look to Maslow's hierarchy of needs - at the bottom are food, water and shelter. An individual who has made sufficient contributions to society and has not frittered away his or her account should be guaranteed that he or she will have enough of these to support themselves. A link to these could provide the basic backstop of value of a currency, and a means for establishing the liability of the central authority.

So the proposal would be to link the dollar to an egg. Any real person presenting a dollar to the Federal Reserve or some authorized outlet would get (lets say) 6 fresh eggs the same day. The promise would not hold for more than say 10 dollars a day and would be printed right on the bill, and may cover some other items as well. It would also not hold for bank deposits - you would have to produce a real bill! In the United States, the egg is a widely consumed food and provides most of the nutrition needed. In other countries different items would be promised. Politicians over the ages intuitively understood the attractiveness of this concept, for example, in southern India in the 1970s there was a promise made to supply "1 measure of rice per rupee". Unfortunately, keeping the promise has been impossible. So importantly, eggs (the promised resource) spoil quickly, so they cannot be stored for vast lengths of time, and are essentially tamperproof. People will be unable to hoard the linked resource, they will have to keep the currency instead. The redemption limit is important too - that will limit hoarding of the currency itself. Maintaining the ability to keep the promise would require that egg producers remain profitable, and indirectly force the control of prices in the supply chain. But the central bank would be able to print as many "egg dollars" as necessary to support the total volume of transactions in the economy.

Any fiat currency suffers from the willingness of the central authority to honor any promises it makes with regard to its currency. Time has shown that fiat currency promises are regularly abrogated and there needs to be an accountability mechanism that cannot be compromised. So finally, to close the chain of accountability, individuals should have the right to possess ANY weapon. If the promise was not kept for any individual on any day, that individual would be able to use them on any current lawmaker of the government or officer of the central bank.

Guess what - the United States had such a system. Not anymore, because the framers of the Constitution got squeamish about being explicit about the last part! If even our Founding fathers could not bring themselves to be clear on effective accountability, it is very unlikely that our current set of pols would do so.

However, all is not lost. One can still establish a clear link, while reserving the ability to renege if absolutely necessary. The indirect accountability via the ballot box would still be there, and the measurement tool would be the clearly published link, especially if a recall mechanism triggered by failure to maintain the link existed.

Think this cannot happen? This article discusses a bill - HR 1638 - that explicitly links the dollar to gold, and a side benefit of a strong currency. Investors in gold and other inflation protection assets would be well advised to consider hedging their investments.

Sentiment against fiat currencies is increasng all over the world. One can even conceive that the UN (or the IMF plus the World Bank) might introduce a worldwide tied currency. Current discussions are focussed on a currency that banks trade between themselves and is not in general circulation. But really a worldwide currency should be available in units small enough for for the smallest transactions so the entire population can police the value of the currency.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is a resubmitted article incorporating feedback on prior submission.