A recent running joke with my friends and I has been the question, “Could an economy use eggs as a currency?” The question started when I remembered a scene from the boneville graphic novel. The wiki for boneville summarizes the scene by saying:
It is then that Phoney discovers that the residents of the valley use products and services as pay — Phoney’s drinks cost “two eggs”; Phoney gives Lucius two dollars, which are ripped apart, much to Phoney’s shock; Smiley explains to him Lucius is asking for real eggs.
The real question here is “Does decentralizing the control of the amount of currency in circulation without inflation spiraling out of control?” Using eggs as currency decentralizes the control over the amount of currency in circulation because anyone might be able to have chickens and therefore make their own eggs. I propose that a decentralized of currency system would generate runaway inflation. This would cause the value of its currency fall until it became worthless. So before we start, let’s “lay down” some rules. (get it? eh? “lay down” … eggs?)
- The American economy is the only one switching.
- There are no more dollars, there are only eggs.
- Only chicken eggs will be a valid currency
- The entire population will willingly switch to eggs, there are no egg riots or egg protests.
- Dollars just disappear into thin air, so nobody values dollars anymore.
- Chickens lay eggs at a rate of one egg per day
- Eggs spoil over a period of 30 days, and lose value as they spoil.
Eggs are surprisingly similar to paper currency, but have many differences. Firstly, eggs could be traded for goods and services, just like any currency because they can be handed from one person to another. In this universe, eggs would be “widely accepted and circulated from person to person,” which is consistent with Dictionary.com’s definition of currency. The down sides of using eggs as currency are at least that eggs are fragile, they lose value extremely quickly, and they smell when they lose value. But let’s not dwell on the downsides.
Now moving away from eggs for a moment so we can understand how the US controls the money supply using the Federal Reserve. The Federal Reserve controls the money supply in the US by increasing or decreasing the overnight lending rate on loans to banks. The Federal Reserve increases the overnight lending rate to reduce the money supply, and it decreases the overnight lending rate to increase the money supply. The overnight lending rate is the interest rate banks pay the Federal Reserve for overnight loans.
This brings us to the role of the banks. Banks borrow money from the Federal Reserve every night, hence “overnight loan”. They lend that money to people for houses, businesses, anything the bank is willing to make an investment in. The banks aim to lend money to their customers at a higher rate of interest than they pay to borrow from the Federal Reserve.
Using this system, the Federal Reserve hopes to influence the rate of inflation. The Federal Reserve increases the overnight lending rate to cause the banks in turn to raise their interest rates. When the banks raise their interest rates, people are less likely to want a loan, so less people will be borrowing money. Borrowing money is the only way for money to get into circulation, the banks have to borrow from the federal reserve, and people have to borrow money from the banks. So by raising the overnight lending rate, the federal reserve can affect the amount of money that gets into the hands of the American people.
That’s a huge simplification of an element that drives inflation, but that plays into why currency needs regulation. It’s because without a properly regulated currency supply, there wouldn’t be a way to slow down inflation.
In our egg system, we’re giving the power to create currency to the people. So the people are going to do whatever they think is best for them, which is obtaining as much money as possible. The money supply wouldn’t ever decrease or slow down production in an egg-based system because no chicken farmer would regulate their egg output to make sure inflation isn’t getting out of control. That’s what the Federal Reserve does: it regulates the amount of money that’s being put into the system.
How does someone do this correctly though? Eggs have the flaw that they’re impossible to control how much is produced, but Bitcoin does inflation control correctly. Bitcoin is a decentralized currency, but there’s a limited amount of bitcoins in circulation. Bitcoin mining is similar to chickens laying eggs because both take a certain amount of time to produce. But an egg’s supply graph would look more like this.