Welcome to Finance and Fury.

Today’s episode – look at the potential kinds of money what are the best kinds of money are the best for the population

In the modern economy – The unprecedented expansion of money supply – created some economic and political consequences is only possible with certain kinds of money

 

Different forms of money –

  1. One world currency – digital backed, Fiat currency, Different gold standards

Then rate these – Look at their stability, degree of central control and how open they are to abuse –

 

Types of currency –

  1. One world digital currency – still technically hypothetical in its implementation
    1. Nothing new here – the concept has been around for a while – John Maynard Keynes proposed this – back in 1944 at the Bretton Woods conference – this single world currency was named the “Bancor”
      1. At the same time this conference created the International Monetary Fund (IMF)
      2. The IMF already has a super-national currency called “Special Drawing Rights” (SDR) made up of a composite of fiat currencies – covered this in past episodes along with the potential for what is being proposed in some circles as the solution to current financial situation – reset of currencies in a digital form
  • If the SDR is the backing – could be a global currency would be digital and controlled by a group like the IMF
  1. This would be a cashless society – money would be represented by digits on a screen – more so than what it already is
  1. Fiat – money control by government decree
    1. Under fiat money – most are on a floating exchange rate – since the peg to gold was removed in 1971 – monetary policy removed a lot of the limits that were imposed on central banks and government spending
      1. No longer had to adjust the supply of money in order to maintain the currency’s peg to the value of gold
      2. money could be printed in order to meet any number of social goods – through Government deficits
        1. such as full employment, stimulation of the economy and government spendingBottom of Form
      3. Result has been for fiat currencies to be inflated – so in real terms they are worth a fraction of their purchasing power in 1971  
        1. Since 1971 was also the year workers’ wages in real terms have been growing slowly – especially in countries like the US and EU
        2. GDP growth has been sluggish compared to the prosperity enjoyed during the 19thand early 20th century classical gold standard era
  • Result has been for hard asset prices like property to also be inflated
  1. A lot of this came from the inflation targets – where there has been a justifiable reason – especially currently need for central banks to inject new money supply
    1. ever increasing amounts simply to prevent default on unsustainable debt levels can be seen as the logical outcome of the fiat money experiment. 
    2. Historically governments have seldom been able to resist the temptation to print more fiat money

 

Types of gold standards – Historically it was used as a means of exchange – in form of coinage for several thousand years – but physical gold as money had two major downsides –

  1. it is heavy and hard to carry around – also have to try and store it and puts you at risk of having it robbed
  2. also – the demand for money through most of history was many times greater than the amount of gold available
    1. Using physical gold would cap capacity for economies if it were the sole means of exchange – Hence the invention of money backed by gold –

 

  1. Government gold standard
    1. During the classical gold standard eras – depending on the nation it did differ – but through most of the 18th, 19thand early 20th centuries the way governments pegged their currencies to gold was through the control of supply – if your currency was in demand – can produce more of it – and if not – cease creating new money until the amount of money came back to be in line with the gold reserves of the nation
      1. This stability is not perfect but it is better than any other option that humans have come up with to date – due to the fact that gold can keeps a stable value (due to limited supply and it doesn’t rot away)
      2. So money pegged to the value of gold also takes on this stability – This is what is meant by a gold standard – money whose value is pegged to the value of gold.
    2. It also had a built-in way for a currency to maintain the peg to the price of gold – through the conversion of gold to money and money to gold
      1. Say that a nations currency was weakening relative to the official peg to gold – for example in the US the peg was first set at $20.67 up until 1934 at $35 an ounce – people would go to the bank to buy gold with their dollars as they would make a small profit.  The bank would sell the gold and retire the dollars from circulation.  This reduction in supply would continue until the demand for dollars would again raise their value to the official peg with gold.
      2. If the opposite was the case and the dollar became overvalued relative to gold then people would take their gold to the bank and exchange it for dollars in order to make the small profit.  The bank would buy the gold with newly created dollars.  This would increase the supply of dollars until the value of the dollar fell back to its official peg price with gold.  At this point people would no longer come to the bank to exchange gold for dollars because the profit on the trade had disappeared.
    3. Before 1971 maintaining this peg to gold through the control of money supply was the primary function of a country’s central bank.
    4. Apart from the stability that the peg with gold provided, the other great advantage of the gold standard is that is provided monetary discipline.  Governments could not print as much money as they wanted.  The supply of money could only be used to maintain the peg with gold.  When governments wanted to print more money, for example to finance a war, they would abandon the gold standard as this is the only way they could do it.
  2. Distributed Gold Standard – prior to the previously mentioned government gold standard – this type was at the individual bank level rather than at the Central bank level
    1. In countries that didn’t have a Government run peg – individual banks issued their own notes
      1. In the US for example – back before 1913 – seven thousand US banks issued their own notes on average
      2. This type of system had its peak between the period of 1837 – 1864 – seen as the “Free Banking” era when banks had practically no federal regulation but were instead managed at the state level
    2. Each of these banks maintained the peg of its notes to the value of gold through the control of supply – but at the individual bank level
      1. This system demonstrated that a gold-pegged currency does not need government mandate to operate
      2. It does have relevance for today as it is some proof that that non-government organisations could initiate their own gold-pegged currency – however – would need government approval to do so 
    3. Another benefit of the free banking model over central bank gold-pegged currencies is the inherent competition it creates
      1. In an economy – competition is good – this can extend to a currency as well – as this can be good for the customer
      2. A secondary market for the notes of various banks during the free banking era meant that banks had every incentive to minimize risk in the loans they made
        1. Any fall in the traded value of their notes would be bad for business and could lead to a run on the bank
        2. Banks with poor risk management would lose out to those firms that where better able to maintain their currency’s peg with gold.
        3. There was little moral hazard due to the banks not being too big to fail
      3. This free banking era did have some downsides due to this – and has been criticised for the number of bank defaults that occurred in some states – was used as an argument in favour of currency issue by central banks – making it centralised
        1. However research has shown that the cause of a spate of bank closures, especially in Indiana in January 1855 was not due to the size of the bank or the banks fault at all – was likely to be due to the failure from the state governments ability to manage their own finances
        2. Back with this system – For a bank to operate it was required to purchase state bonds as these bonds were collateral for the issue of notes
          1. Looking at 1854 Indiana state bond prices fell about 26% – this loss of collateral value meant banks could no longer repurchase their notes from customers for gold as they no longer had sufficient collateral to do so.
          2. It is interesting to wonder how much longer the free banking era would have continued without the state government obligation to buy their bonds.  What if the banks could simply keep physical gold (specie) as collateral?

Rating the forms of money –

  1. A way of rating the forms of currency comes down to individual self-responsibility
    1. With a One World digital currency every aspect of the money is done for the individual. 
    2. Government gold-pegged money imposes monetary discipline on the government. 
    3. Competition between currencies during a free banking scenario enables people to maintain the integrity of money by choosing which currency to use. 
  2. Because monetary value is ultimately created by confidence – this can either come from people from use due to it being the best or from the state control leaving no other choice –
    1. Centralised control diminishes and general prosperity increases proportionally
    2. Friedrich Hayek put in his paper Choice in Currency – A Way to Stop Inflation.  Hayek suggested that if people were given a choice in the currency they used they would naturally choose those that held their value.
    3. The use of stable money owned by people is also the best form of money for the real economy. 
  3. Comes back to the core of the Cantillon Effect
    1. states that when there is new money those closest to the issue of it benefit most.  This is one reason way the current monetary expansion by the Federal Reserve increases government debt and valuations in the share and property market but does not stimulate the real economy.  Banks, large corporates and government are all closer to the Federal Reserve than people. 
  4. Rating the each types of money
    1. Stability – Can it inflate – Digital currency and Fiat – yes – Forms of gold standard – no
    2. degree of central control – Competition in the price and return of money – Digital currency and Fiat – none – even Government gold standard has none – Distributed gold standard – yes – between banks across state lines and nations
  5. how open they are to abuse by governments – through control and Supply – Digital currency and Fiat – technically unlimited – Forms of gold standard – dependent on demand – which depends on the productivity of a nation

 

Digital currency would probably be the worst – then the current system – with a form of gold backed system being better – but still has problems

  1. It all comes back to control – The one-world currency option increases the centralisation of authority seen with fiat money. Rather than being a solution to current financial issues it is likely to increase them with the consequent social and economic effects – Look at another interesting concept of a people gold standard

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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