Business Idea: A Commodity Coin Standard for the World’s Informal Economy

An interesting idea occurred to me today while reading a review of Stealth of Nations: The Global Rise of the Informal Economy written by Robert Neuwirth. The book is about how the estimated $10 trillion world informal economy, that employs an estimated half of the workers in the world, operates. Here, Neuwirth is looking at “non-illegal” enterprises. Meaning that he does not consider narcotics or gambling. I do recall hearing about this book last year. Indeed, I was able to find an interview with the author that first alerted me to his work.

There are a myriad of obstacles that confront those who work outside of their local legal system. Property rights in land are insecure as there are not title deeds that would be acknowledged in court. Access to official courts for dispute resolution is unavailable. All merchants are effectively tax evaders, so using banks is dangerous as it would leave a paper trail that could lead to prosecution. Etc. Yet, despite such difficulties, the informal sector is growing rapidly and is the only means of survival for billions of people.

The last obstacle that I mentioned, lack of access to banks, led me to think about the role of money in the informal economy. Locally, the local currency would suffice for transactions. However, what about a case like that of Zimbabwe? Here, I imagine that actors in the informal economy were the first to abandon the hyperinflating currency and use US dollars and/or Euros. Let’s consider a country that is not experiencing hyperinflation but only the ordinary inflation rate of <10% that is the norm for all of the world’s fiat currencies. A successful informal entrepreneur would accumulate savings from his business activities. Since he cannot use the formal banking system, he cannot open a savings account, money market account, brokerage account, etc. If he puts it under the proverbial mattress, he will suffer a loss in real terms due to inflation. He could invest his surplus in other informal ventures, but he will still have a need for a cash balance to cover unforeseen expenses and even to invest in new opportunities. This entrepreneur has a need for a highly liquid asset that will not depreciate in value. For example, there is an exchange rate for the Congolese franc and yuan. However, this must be a thin market with enormous bid/ask spreads that may be highly volatile. It would only take a whiff of turmoil in the Democratic Republic of the Congo for the Congolese franc to devalue against the yuan to such a degree that an entrepreneur suffers a real loss. To avoid this problem, it is in his best interest to only accept payment in a major currency that will not move violently versus the yuan.

How do actors in the informal economy handle transactions in different currencies? Clearly, one form of business that must emerge is that of foreign exchange dealer. Such dealers may face the problem of handling transactions in many different currencies, so, in practice, I imagine that local currencies are changed into the world’s major currencies and then changed back to the local currency. For instance, I have heard anecdotal evidence that there are cities in China with a number of people from all over Africa exporting goods to Africa. I assume that the local Chinese businesses demand payment in yuan, so the African traders must exchange their local currencies, that they receive as payment, for yuan.

At this point in history, the US dollar, for the past few decades, has been the currency of choice for actors in the informal economy to avoid the problems cited above. Unfortunately, the US dollar is rapidly approaching the intrinsic value of all fiat currencies, 0. As the debasement of the US dollar continues, it causes the same problems of that of a depreciating local currency. What is needed is an alternative.

The obvious alternative is an international commodity coin standard. I can envision a combination of silver coins, both alloyed with a base metal to facilitate small transactions and pure for larger transactions, and gold coins. This would allow people to escape from depreciating fiat currencies. Legal tender laws are moot as the actors in the informal economy are operating outside of the local formal legal structure. The liquidity of precious metals spot and futures markets means that quotes with reasonable bid/ask spreads are readily available.

Now the question arises as to how to introduce this coinage so that it will be accepted and trusted. On the surface, it appears that one only has to mint quality coins, denominated in mass of precious metal content and clearly labeled. Agents could approach the informal foreign exchange dealers and perform quality tests on the spot or find some way of gaining their trust. This is only a vague suggestion. I have no idea what type of proof of precious metals content would be demanded by dealers.

The real problem seems to be production and distribution. Let us assume that someone decides to produce this coinage in a given country but will not introduce it in his home country due to fear of the authorities. Let us also assume that he was able to successfully introduce his coins into various informal economies. As word spreads, there is an increasing demand for his coins. This also creates a buzz that will inevitably attract the interest of various governments. Would there be a push by the world’s central bankers to pressure his home country to shut him down? Central bankers are terrified of the idea that the people of the world would abandon government fiat currencies. This is probably the most worrisome objection to the entire idea.

I do think that this is an intriguing idea. I certainly don’t claim that it is original, but I have not seen it proposed elsewhere. If some groups were to attempt this, I would hope they would be more clever than I in overcoming the objects that I have stated and others that have escaped my notice.

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