The Basic Tenants of Calvo Monetary-Economic Theory

The Basic Tenants of Calvo Monetary-Economic Theory[1]

Classical reliance on specie and debt related models of backing for money have no basis in economic reality and are merely psychologically motivated crutches used in the absence of understanding of the bio-economic reality of monetary theory.  Like the Piltdown man, the gold standard is a fraud.

Money Supply:

Money is a medium for economic circulation and there needs to be enough in circulation to represent not only the actual aggregate of goods and services but the reasonably potential aggregate.  That is because without the synergistic addition of a potential goods and service factor, it is unlikely to be realized.

Additional influx of money to reflect an increase and a potential increase in aggregate goods and services should always be introduced at the poorest levels of society, not only for moral but for pragmatic reasons, i.e.:

  1. The poor generally put all the money they have access to quickly into circulation, they have to.
  2. The wealthy do not, creating systemic inefficiency.
  3. Money introduced through the poor is most likely to circulate throughout all levels of the economy, eventually reaching the wealthy anyway and generating the greatest quantity of consumer-purchasers.

Ironically, governmental requirements that financial institutions (in which the wealthy store their excess supply of money) maintain reserves, i.e., money outside the circulatory system, also dramatically decrease the efficiency and health of the economic circulatory system.

Credit plays an artificial role in increasing the supply of money by artificially increasing the means of circulation, but diverting a large portion of the economic benefit to creditors.  As creditors tend to be wealthy and slower to put money in circulation, the net result is a drain in the real means of circulation making it an inefficient and distortive factor, albeit sometimes useful in the short term, like a band aid or tourniquet.

Government Finance:

Taxation is an inefficient means of financing government as it is relatively easy to evade and leads inevitably to corruption.  Without considering the moral implications of corruption, it tends to be tied to short term benefits and negative long term consequences, even for those initially benefited, as it distorts the proper circulation of money and hence, of the goods and services for which it acts as the carrier.

Increase in monetary supply by the government to fund government operations, tied directly to an increase in the aggregate actual and potential growth in goods and services, is the most efficient system.

  1. At worst, if growth lags behind government spending inflation will result, but the economic impact of that inflation will be less than that of withdrawal from the private economy of the funds taxed, leaving more real economic benefit in the pockets of the citizenry.  That is because the inefficiency of collection related costs and cheating are eliminated.
  2. At best, if the economy grows at a rate equal to or greater than the rate of inflationary pressure from an increased money supply, that pressure will be cancelled out leading to either no inflation or, in fact, a justifiably positive deflation without depressionary tendencies.

Biological Analogy:

The biological function of blood circulation provides both useful analogies and experimental models to test the foregoing hypotheses.  Credit could be analogized to a form of plasma rather than blood which if permanently supplanting blood in the circulatory system proves detrimental and even fatal.

The absence of an adequate monetary supply is akin to anemia which is cured through an influx of blood, either through stimulation of a body’s blood production mechanisms or by direct transfusion.

[1] © Guillermo Calvo Mahé; Manizales, 2011; all rights reserved