Freedonia & Moronia: A Sovereign Currency Parable

In the emerging but scattered country of Freedonia, the people decided one day that they wanted to band together to protect their freedom as a nation, their individual rights, and to grow their economy together. They establish a constitution to form a government, courts, police, an army, and the ability to empower their government to build roads and infrastructure needed for defense, well-being, and commerce. They also wanted a way to provision for their elderly and needy. 

With their constitution in place, they excitedly asked for volunteers to come and perform all the work needed in the new government … but no one stepped forward. They were all too busy working to meet their own needs and run their farms & businesses.

Freedonia's economists convened and suggested that the government create and issue a national form of money to pay for their needs. So they created a national currency called ‘Liberties’ and printed the first issue of notes. Before long, they were proudly announcing the new money to the people, promising to give it to anyone who would come and fill the government jobs and build the roads and other infrastructure projects. Again, to their dismay, the people all declined. The new money had no value to them and they’d rather keep working their fields and making their goods.

Now there was one wise history professor who had studied all the economies throughout the ages. She urged the new Freedonia government to 1) create a small tax on every household (initially suggesting the amount of 100 Liberties), 2) require that the tax can only be paid back in Liberties, and 3) ensure the new tax was collected. They debated the radical proposal (Freedonians love to debate), wondering if it would work and if the people would accept it. Eventually they all agree to proceed. The people of Freedonia had followed the debate and were well informed; the new tax passed in a national vote. Most of Freedonia really wanted a functioning government with its institutions that would protect property rights and help facilitate commerce, and to accomplish their collective goals for a great nation. 

To their surprise, as soon as the tax was imposed, applications for all the work came flooding in and businesses were also willing to accept Liberties in payment for their goods and services. Everyone was willing to work for wages in Liberties because they all now needed them to pay the Freedonia government tax. Many people even began saving lots of Liberties for future needs.

They noticed something else that was new... unemployment has been created! People were looking for work to earn Liberties but couldn't find enough jobs. 

The government quickly got busy issuing new Liberties whenever it needed to build a road, a hospital, or to pay judges, court staff, police, and the army. Even those not working for the new Freedonia government now accepted Liberties as payment for goods and services because they knew they needed them to pay their taxes, or they could exchange them with someone who did need them. Before long, everything in Freedonia became priced in Liberties and it become the standard unit of accounting and the sole means of trade throughout the land.

A sovereign currency was born!

The Freedonians marveled at the simple yet effective tool they had created to facilitate the provisioning of their collective needs. The small tax would regularly remove some of the Liberties that the government created when it spent, but not all of them. Occasionally, they had to increase the tax to remove more of the Liberties from the economy when it was “overheating”, but most of the time, they had to keep the taxes low and even spend more Liberties to make up for the amount that were being saved by the people. 

They realized that since every business and household now used Liberties, whenever too many Liberties were saved, businesses couldn’t sell all their goods and had to lay off workers. No one in Freedonia wanted to be unemployed or to waste idle labor when there were so many things they could do, so they found endless creative ways to get their people working again that benefited society. They simply issued new Liberties to pay for this work and to make up for the Liberties that were being saved. Everyone was employed that wanted to work.

Now the neighboring king of Moronia, who still used gold coins in his kingdom that he dug from his mines, borrowed, or received when exporting to other countries, was amazed at the success of Freedonia and went and met with the government to find out how their amazing new currency worked. 

He had so many questions...

How did you get these Liberties to be accepted? Did you promise to convert them into gold? 

No! We simply created a small tax that could only be paid in Liberties, and that created the demand for Liberties throughout our land. 

But don't you have to borrow the Liberties from the people in order to spend them? 

No! The people of Freedonia had to first obtain Liberties from the government before they could pay them back for taxes they owed. We never needed to borrow because we control the creation of Liberties ourselves. Sometimes we choose to give people a chance to hold Liberties in a special account and earn interest. It might look like borrowing, but it's really a policy choice to give interest to savers and our foreign trading partners.

Well then, was the government of Freedonia restricted from issuing new Liberties until the last ones have been collected back from the people in taxes? 

No! We could issue as many Liberties as needed for whatever the people authorized. Remember, we are a public monopoly - the sole issuer of Liberties on behalf of our people!

Okay, but you could issue too many Liberties at once, right? Your currency is surely going to fail when you keep making more of them. I saw how big the number was getting.
No, dear king. It appears you can't see past your gold money. Yes, in theory we could just create endless Liberties, but we only do what is in the interest of our people. We have put in place a budget process to make sure we only issue what the people want and to ensure our people are fully employed and the economy is productive.

But surely issuing more new Liberties than those you tax back from the people causes prices to rise? 

No! A lot of people want to save Liberties for retirement and other needs, so we have discovered that we actually need to issue more than we tax just to keep everyone employed. We also buy goods from other countries and they receive our Liberties in exchange, which means we need to issue more back home to make up the gap and keep everyone employed. Since we pay them interest (remember how we described "borrowing" earlier), they are happy to keep saving our money in exchange for selling us their goods. 

Still dazzled by his gold coin collection, the confused king of Moronia hurried home, fearful his subjects would rob his vault in his absence.

Meanwhile, the people of Freedonia had begun making plans for more schools and universities to train their next generation for the needs of the future, more hospitals and medical centers to provide care for their growing population, plans to care for their elderly with housing and income, and a new rail system that would enable them to move goods and people rapidly around the nation and facilitate trade.

Their best days lay ahead!