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Private Money is a Route Out of Financial Repression

by on March 29, 2012

When the Spanish found silver in South America they thought they were rich beyond all imaginations. In reality all the silver of the New World could not bring the rebellious Dutch Republic to its knees, nor could it save the Spanish from an economic and imperial decline. When your hairdresser exchanges her labour for your pounds, she is essentially trusting that the Central Bank does not repeat Spain’s error of creating so much money that her pounds end up being worthless. Competition would give us the opportunity to choose the issuer (and) the money that we believe is most likely to honour out monetary agreement. Glencore, Amazon and Facebook should be allowed to issue their own currencies, which society could use as media of exchange.

As I  have stated before I believe the time has come for a currency debate. I was happy to hear that BBC Radio 4 program Analysis, recently dedicated an episode to the topic. Money is simple. Yet many fail to understand its true purpose. BBC’s analysis for most part completely misses the point on money. It makes money seem some mythical item. In a past posts “Why Your Hairdresser want a Single Mandate” I define the 4 important properties of money to facilitate trade. Money must be:

  1. durable
  2. fungible (liquid)
  3. portable
  4. a store of value

Technological progress has created digital money which is durable and portable, one digital switch and the option of holding multiple currencies is not technologically impossible.

Issuers will be left to compete on liquidity and value. Twe must not only believe that money holds value but also believe that we can use it for trade without excessive transaction costs when converting it to goods (thus liquidity is important).

The Gold Standard

It is not the gold in the vaults of the Central Bank that give money linked to gold its value. It is the constraint of the gold-standard which does. With a gold standard the central bank ties its hands and sends a signal that it can not increase the quantity of money freely to decrease the value of money.

Theoretically there are many assets which could serve this purpose, one could even have money backed by assets of big companies.  In this case the quantity of money could only increase with an increase in the assets of that company.

Competition is Superior to Gold

Admittedly gold sends a powerful signal.  We must however remember that both appreciation and depreciation are not desired. Depreciation will mean that lenders will want a higher interest rate and appreciation may constrain borrowers. Shocks to gold prices could have adverse effects on the economy. There may , therefore, be a far better way for monetary institutions to signal that they will keep the value of a currency stable. I do not pretend to know the signal, yet do believe that competition is the best way to find the correct monetary policy. If we allow private institutions to compete then the money used for exchange will be the money that society feels is most liquid and stable. This will create a race to the top.

Pressed on private issuers of money, Paul Fisher of the Bank of England, stated that the state monopoly of money is in place to protect us against Charlatans. Who, however, is protecting us  from the Bank of England printing so much money that my wage becomes worthless?

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