On the previous page
, the creation of a new currency -
The Smackeroonie ($1) - was described.
Smackeroonies are just cards, and it is clear that there is never a need or even sense
to the idea of the government "borrowing" cards in order to pay for things. If more cards
are needed, the government just prints them.
Once the cards have been given a value, through taxation and Leon, they will quickly
become used to facilitate all sort of trades over and above the need to pay tax: the cards
have become accepted as 'money'. But in reality they are just cards.
If the government prints more cards than there are goods and services produced by the economy,
there are now "too many cards chasing too few goods". If neither works nor products can be
fast enough, prices will be bid up as people try to get their hands on the limited goods.
Printing too many cards can result in price inflation. On the other hand, if too
few cards are printed,
the tax imposed drains cards from the economy, leaving people with not enough cards to pay for
the things they need: prices and production typically decline to match (a recession).
who for whatever reason accumulate more cards than they need
will want to "save" them - that is: defer consumption. Deferred consumption is problematic in
that, just like printing insufficient cards, the result is not enough cards to purchase
the output of the economy. (See
Lack of purchasing power
Saving cards in a sock is one possibility, but if the banks were to offer a small interest, the
sock savings would preferentially be lodged with the bank, together with the additional
advantage of better security. (Why do banks offer interest? See
Banks as a state franchise
Governments typically offer bonds to the public (and/or banks) as very secure savings: the
chance of the government defaulting being essentially zero, so long as they have Leon. A small
rate of interest is usually payable to bond holders. This looks like borrowing, but it is not.
The reason that the government pays an interest rate on bonds is to maintain a lower bound on
interest rates in the economy. Anyone offering interest rates lower than the government
would get no takers for the obvious reason that it is more lucrative (and safer)
to hold government bonds.
It may be quite wrong for the government to maintain a lower bound on interest rates, but
that is a matter of ideology and concomitant policy. The payment of interest is also beneficial
for the government's rich friends: they earn an interest for holding government securities
at zero risk.