Friday, February 13, 2015

Guest Post - Economic Life After the Collapse

I'm pretty sure that in the life of this blog, I've never run a guest post.  With the exception of comments and quotations, every word has been mine.  Tonight, that changes.

A couple of months, I got into a discussion with someone I've known for 10 years or so about how economic cooperation could exist after it hits the fan.  I think most of us agree that the prospects for the collapse of the dollar have never been greater, which would render our current dollars useless. Then what?  Many people think of pure barter, but barter has an immediate issue.  Both parties have to own something the other wants.  If I want to trade my tomatoes for your chicken, but you don't want tomatoes, no deal.  I can hear some folks asking "what about silver or gold?".  A reasonable agreement for the value of the metals has to exist.  Chances are, there will be a need to a way to make change.  These are among the reasons paper money got started in the first place. 

Of course, anything larger in scale than barter or help between two friends or neighbors requires a stable social environment.  You can't have a flea market if wide scale social disruption is happening; that's time to be locked up in your hidey hole.  But if the society is stable enough for a weekend flea market, my correspondent proposes an interesting model.

He suggested I post this under my name, but I'd rather he get the credit.  On the other hand, he didn't say I could use his name.  Consequently, I'll post this anonymously, and if he tells me how to identify him, I'll do that.

The Casino Model For Barter

When the currency collapses there will still be a need for something that can be used for commerce. Plain barter is a problem for many reasons. A new currency will be needed. A big problem with any new currency is that it is hard to trust. The Casino model is partly a way around this problem.  This will work for a small town or for a market place in a larger city. An exchangeable local scrip has the property of goods preference, you don't have to find a person who has what you want that wants what you have. The scrip also has the time preference, if you don't spend it you can convert it back to something stable. A scrip also preserves the price/value concept. An item can be priced at so much silver.

Money is a measure of value and a store of value. Money is a general medium of exchange. It is often used as a store of value because it is relatively stable. If the store of value property is separated from the exchange property it is easier to replace the dollars that are used now. The Casino model is a way to separate these two features. The value is stored in physical metal or in goods. The exchange is done with tokens or paper scrip. It can be done as a low trust activity.

When a person comes to a Casino to gamble, they trade their dollars for chips. When the person leaves the Casino they trade their chips for dollars. The chips are easy to use in the Casino but have no value outside of it. The local function is done with the chips and the longer term is done with dollars. The chips are only good in the Casino that issued them.  The goal of using the scrip is to allow a goods or service preference. Also the paper scrip is easier to use than big coins. Because the life time of the scrip is short it doesn't have to be as secure as a normal currency. Every night the scrip is exchanged back to metal and becomes scrap paper with no value.

When a person arrives at a trade area they may have goods to sell or they may have gold or silver to spend.  If the person has silver they exchange the silver for local trade scrip. If they have goods they sell the good for trade scrip. Some of the trade scrip is used to buy goods. When they leave the exchange they trade any remaining trade scrip for silver. The local fractional values are handled with the scrip. The long term store of value is done with the silver or other goods 

Value can also be stored with other commodities. Anything with a reasonable shelf life and low storage costs will work. It can be brass or guns or lumber. The local exchange operator can buy and sell silver or gold or foreign currencies. There can also be the equivalent of a pawn broker who is ready to buy and sell anything.

When a new currency is created there is a problem of counterfeiting. For a local trade scrip the problem is handled like a cryptography problem. Any code can be broken but it will take time. If it takes more time to break the code then the info is worth, the code is effectively secure. A local trade scrip doesn't need super security. It is intended to last for only a day or two and will be converted to a different more secure money. Each day or week the exchange can use a slightly different scrip. Each trade day a notice is given to the local venders which scrip is valid for the day.  A local market can have supplies of several different scrips. A different color or pattern is used each day. Some local merchants can get a discount on the exchange of scrip.

For fractions of a dollar, local coins can be used. These can be copper or steel and there can be a big variety of them. The current coins in use can continue to be used as long as someone is willing to convert then to gold or silver scrip or take them in exchange.

Robbery is also less of a problem because the scrip has no value outside of the local market. Inside the market it only has value for the day it was issued. This makes it almost valueless except to the local owner. If some scrip is stolen from the money changer over night it will not get redeemed and as such it will be worthless. During non business hours the scrip has no value.

The money changer can also act as a bank for larger amounts. The amount of scrip is entered into an account that the person can write checks on for larger amounts. Again the value is in the scrip for only a short time.  A merchant can leave his gold or silver with the money changer to make it easy to change.

Because the scrip is converted back to another form within a day, the local bank cannot inflate the value. Because the time span is short there is no fractional reserve banking. Everything turns into something other than money every night. The scrip has no intrinsic value except for the promise to trade back into something else at the end of the day. There is no need to keep track of how much gold or silver is exchanged each day to prevent too much gold from coming in or going out. This is not  a problem because what is exchanged into scrip is exchanged out of scrip the same day. The daily conversion also means that there is no practical limit on how much scrip can be issued. The only requirement is to exchange out every thing that was exchanged in.

A bi-metal standard is hard to work with. The local scrip should be either gold or silver. The metal that is not used can fluctuate. There can also be two scrips, one gold and one silver.  The ratio of gold to silver will probably change over time.  Different towns will probably have different exchange ratios for gold  to silver. The people who use the scrip will work out the local ratio.

The same pieces of silver will probably get converted by local merchants each day. This will make it easier for the money changer to spot bad coins. An area will need a supply of silver or gold but not that much is needed since it is recycled each day. An example would be a gun dealer who converts an ounce of gold into scrip in the morning and then buys a gun. The person who sold the gun then buys some food. The person who sold the food buys some clothes. The single ounce of gold can support trades that would otherwise involve 10 or 20 ounces. At night, the gun dealer's store of value is gold or the guns he has.

Different other value stores can be used but they cause more trouble. For simplicity the scrip should be in terms of a single item like silver or gold. The money changer can exchange the different currencies like Euros, Pesos, Dollars, Yen, Silver, Gold. if the scrip is in terms of more than one item there might be a case where a person changes silver for scrip but wants to get gold when the scrip is changed back. There is also the problem of what kind of silver coin. Bullion coins don't sell for as much as US silver dollars.

They money changer or a local dealer can also use non money items for exchange. There can be a dealer near the entrance to the market that buys and sells things the region is noted for like grain or lumber. For transport to other areas there is still the need to change to some other form. A dealer can stock up on things by trading silver for scrip that is then exchanged for goods. Of course a person is still able to bypass the scrip if they find a person who wants to do a direct trade.

A trade scrip like this will allow a town to have a well functioning market place even if there is no valid local currency.  A person can save part of their wealth in dollars or gold or silver or many other forms. A person can also store wealth in goods like grain or copper or guns. Each day the local merchant for that good sets the value.

If a local entity tries to use a local scrip for long term storage of value it becomes more difficult.  The longer the scrip is in circulation, the more secure it needs to be from counterfeiting. There is always the temptation to inflate the value a little. If the scrip is converted back to silver every day this is not a problem. There might need to be some kind of tradable object that can be used for the scrip that is less than an ounce of silver or whatever size coin is available. In a pinch the person can be given a receipt for a fractional amount of silver. The receipt can be converted to scrip within a few days.

The money changers will get 2% or 5% for the service of changing silver for scrip or scrip for silver. The service charge can also be partly a sales tax to support the market place. It can pay for physical security of the market place. If the market has enough of an advantage over simple barter or bad currencies the market will still be popular. Towns or cities can compete on how well their markets function. The money changer that issues scrip can turn a profit from having a place where commerce can take place.

The scrip people can also do a banking service. If the person has less than an ounce of silver, they can start an account with the money changer. The fractional ounce can then be converted back to scrip when needed. Because it is on deposit, there is still the ability to change the scrip each day to prevent counterfeiting.

A pawn shop operator can also be an important part. If a person has something to trade but it is big they sell it to the pawn shop and get scrip to buy things with. Other people will buy the item from the pawn shop for scrip. The pawn shop gets some scrip in the morning by changing gold or silver for scrip. The pawn shop converts its scrip back to gold or silver at night. When there is a long term relationship between the pawn shop and the money changer, the pawn shop might take a paper promise of some gold/silver instead of the physical metal. The paper promise can be fractional ounces.

If there is an active pawn shop or a few used property dealers then not as much gold or silver is needed. The scrip is for the daily use but other things are used to store value. Because value can be stored in different forms there might not be a big inflation in terms of gold.

There might be a virtual dollar that is used as the nominal measure of value. The virtual dollar can be pegged at $1000/oz. The price of gold in US dollars can change. The price of silver in virtual dollars can also change. The prices of items might go up or down depending on supply or demand. The ratio of silver to gold might change. The money changer can also issue silver based money. The only important thing is to be able to completely convert back at the end of each day.

Different towns will have their own barter setups. Different towns will also have different preferred stores of value. Some big bars of copper or aluminum might as as value stores.

When a big item is bought or sold the value is converted to a variety of items. A car, thru the use of scrip, might get changed into some gold, a few guns, and even some cases of food.

A manufacturing operation that sells to a big area will have more trouble. An intermediary will be needed to get the requested amount of value. This creates an opportunity for traders.

A gun company wants $500 for a gun. It sells it to a dealer who gives the company $500 in scrip for it that the company can convert to gold in the local market. The dealer takes the gun to the remote market and trades it for some furniture. The dealer brings the furniture back and sells it for scrip that can then be converted back to gold.

Every town will need a few big merchants that can trade a package that is worth many thousands of dollars in goods or services.  The goods travel between towns, the scrip does not.

An example would be a farming town. The farmers bring their produce to town and sell it for scrip. They use the scrip to buy clothes or tools. The dealer who buys the produce takes it to a city where it is sold for their kind of scrip and that scrip is used to buy clothes and tools and things for the farming town. There can be two way trade or three way or four way trade. The trade can be direct or indirect. A merchant can do all the links of the trade or only one of them.

As things become more stable a barter scrip can evolve into a new stable currency.

The money changers need to get better known. The idea of using something other than money for a store of value needs to be accepted.

It is possible that after using a service like this, people will get used to storing value in something other than money. Either trade goods or metal will be the store of value. Furniture or works of art can store larger amounts of value. A business can grow up that buys and sells value items. The items are not intended to be used for anything other than storing value. Guns have a very big value to size/weight ratio. Jewelery also has a very high value to size ratio.

If a person has a big enough storage place, almost anything can be a store of value. Even tons of scrap iron can store value. There will be specialists in different kinds of things. Some dealers will buy/sell guns. Some will buy and sell canned food. Many different things are possible.

After there is more trust, merchants can have goods in warehouses and trade warehouse receipts. This requires that there is a warehouse that can be trusted. it is possible to do a virtual exchange between towns if a merchant is active in both places, he buys in one place and sells in the other place.

A consignment shop is also possible. The merchant gets possesion of the item. The owner gets a promise of so much gold or silver or the item back after a period of time. The payment can be specified as so much scrip to be paid when the item sells or when the time is expired. Some small groups of merchants will trust each other more and will trade their own promises to deliver goods or gold or silver.

Surpluses or shortages do not affect the Casino model as much because the money is only a unit of exchange and not a unit of stored value. The value is stored in something else.

In some ways people are already adopting part of this model. The local currency is good for trade but not for storing value. In many countries there is an effort to keep from getting hurt when the currency is devalued like in Argentina or Venezuela.  In many countries they use the local currency for trade but they use US dollars for storing value. Many people in India and China use gold or silver to store value. Preppers are buying physical gold and silver and some trade goods. A large number of recent gun sales might be an effort to get something that has value to store.

There are many things besides gold and silver that are worth storing. The goods can be sold directly or through a middle man when the time comes. Anything with a long shelf life will work.

A larger town has an advantage because it is more likely that there is a buyer for a large valuable item.

Big companies look at how to avoid being hurt when a bank defaults. In some countries they try to keep their reserves in the form of commodities that they sell when they need cash.

Real Money is
a medium of exchange
a store of value
a measure of value
a standard of value
no one else's liability
moves purchasing power through time and space

A trade scrip in a barter Casino is not perfect but it is better than simple barter.
yes - a medium of exchange
no - a store of value
yes - a measure of value
yes - a standard of value
yes - no one else's liability
yes - redeemable
no - moves purchasing power through time and space


  1. The 'casino' model isn't all that different from normal's really more a matter of scale. And like ALL schemes involving transfers of value clever people will find a way to game the system to make a profit. The first among these will be the
    'casino'. It will get a cut every time something is traded for 'scrip' or 'scrip' is redeemed for something of tangible value. In fact this has to happen otherwise nobody would be willing to do the actual work of creating and exchanging 'scrip'. History shows that it's not the methodology used that leads to economy's collapsing. It's the use of whatever model that is currently in play to benefit the insiders at the expense of the majority that leads to the system collapsing. It always's just a matter of how long. The longer a monetary/scrip scheme is in place the bigger it becomes and the more disastrous the inevitable crash. We are a clever species...not an intelligent one. That's why this happens over and over throughout history.

  2. I think that in a modern world an economic collapse will not mean that we don't have a national currency or that it becomes worthless. We will still have "dollars". They will either be worth less or the currency will be revaluated.
    Two possibilities: 1. That the collapse is along the lines of the great depression and we slog through it with the same currency but with more government mandates/regulations. 2. That the government creates a new currency worth some fraction (such as 10%) of the value of a dollar.
    I tend to think that in situation #1 we simply slog through it some people doing worse than others and generally everyone suffering somewhat.
    I think #2 is the bigger crisis. The way I see this happening is that as the pending collapse becomes obvious the government would secretly print $800 billion or so of the new currency and then one long holiday weekend they close all banks and ATM's etc. Maybe even extend it a few days and when the banks open the government comes on TV at primetime and tells us all that there is a new currency and the old currency can no longer be used. You will be allowed to bring old currency to a bank and exchange it; $10 old dollars equals $1 new dollar. That there will be limits on how much you can exchange, perhaps $1000, and that all money in bank accounts will automatically be converted (that is if you had $1000 in your savings account you now have $100 new dollars). That monthly withdrawals would be limited to perhaps $300 a month. There would most likely be some confiscation/buyback of gold and maybe silver and laws to make it illegal to own gold and maybe silver.
    Both of these are "survivable" collapses and not the TEOTWAWKI that most people fear. But both will savage the middle class and probably hurt the welfare class so bad that they might be forced to look for work.
    I have very little faith in our current cadre of politicians as well as any I can see on the horizon, to do the right things to get us out of the mess. So I would assume it would last for years and maybe like the last great depression require a world war to pull us out of it.

  3. I've heard this plan before: "Socialism works if only the right people are in charge, which happens to be us. Now, fork over your mandatory volunteer contributions, citizen!"

  4. When it all go's Tango Uniform , the things that have value will be the things that always had value; Gold , Silver , Copper, Lead, Tin, Good Steel, Food, wine , Beer and spice. Well crafted Shoes and clothing. We are spoiled by easy availability to every thing WE cannot make for ourselves to the point that we think that there MUST be a banker; a middle man, a "system" or as you suggest a "casino" to back a fiat money. Nothing could be further from the truth. We have no need of any of the "institutions" that have groan up to make the organized theft from "them that make - to them that take" as safe for the vampires as possible. Barter works, and works well. Gold and other coin , or by its true name "personal wealth" are better. That is why it is so hated by the parasites that are government and "the economy" Everyone should stop fearing "the big crash" and start looking to the possibility that for the first time in our lives we have the chance at real freedom-a thing that our people have not known in over 100 years. Rejoice!! At the ending of this evil! I will---Ray

  5. And here we see the miracle of the internet. The same idea is accused of being socialist and giving too much to banker-types.

    I'll write more later, but I know the guy and his motivation was neither of those. It was quite simply, "I'm too old to carry a hundred pound ruck and fight, so what can I do to help?"

  6. ???????? What did this have to do with rucking, fighting or helping???

  7. "I think most of us agree that the prospects for the collapse of the dollar have never been greater, which would render our current dollars useless. Then what?"

    The same thing that happened after the collapse of the Papiermark, or the peso argentino, or the old ruble, or...

  8. Change could just be actual, you know, "change".
    Quarters, nickels, dimes...

    I'm sure if "something" happens, then pennies, pre 1982 ones anyways, will end up being, um, utilized for something else.

    Maybe. My thought anyways.

    Secret Code: ofndu

    There are some things I "ofndu".