on August 15, 1971, President Richard M. Nixon announced that the United States would no longer redeem currency for gold. This was the final step in abandoning the gold standard.[From Gold Standard: The Concise Encyclopedia of Economics | Library of Economics and Liberty]
Now the best and brightest are wondering what to do. The Feds bought the Dollar a sports car but it hasn’t cheered up.
In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities (MBS). By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had started to improve, but resumed in August 2010 when the Fed decided the economy wasn’t growing robustly.[From Quantitative easing – Wikipedia, the free encyclopedia]
The Bank of England spent a couple of hundred billion on anti-depressants too, but the Pound is still sulking. I’ve been reading Detlev Schlicter’s new book Paper Money Collapse. He think fiat currency created by bank credit is finished. He quotes Ludwig von Mises from 1948 saying “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total collapse of the currency system involved”. Gulp.
Maybe it’s time for real change. We’ve been here before. Around four hundred years ago, things were going horribly wrong with the money of Merrie England. By the 1690s there was a full-scale currency crisis.
Before 1696, England was on a silver standard. After the Glorious Revolution in 1688, however, England entered into an expensive war with France that eventually pushed England into a bimetallic monetary regime.[From Untitled]
This worked as badly for England in the 1690s as it did for America in the 1890s.
Unfortunately, since England couldn’t control the price of gold or silver, this wasn’t a particularly stable arrangement and led to a severe lack of silver coinage, which was needed for everyday transactions. England had an industrial revolution, but it didn’t have industrial money.[From Digital Money: The only thing you learn from the study of history]
The smartest person who ever lived, Sir Isaac Newton, was chosen to fix the problem (can you imagine Ben Bernanke calling in Stephen Hawking today?). And fix it he did, putting England on a trajectory of sound money and economic growth. So what did he do?
First, he suggested, the mint should use machines to make coins instead of people. This would vastly reduce the cost of production (and therefore increase mint profits) and would also introduce uniformity and consistency to the coinage. Second, he suggested that the machines “mill” the edge of the coins to prevent further clipping. The King himself agreed to these changes, with his proclamation of 19th December 1695, referring to
…the great mischiefs which this our kingdom lies under, by reason that the coin, which passes in Payment, is generally clipped…
Thus came about the great recoinage of 1696, wonderfully described in Tom Levenson’s Newton and the Counterfeiter. Newton’s conclusions were correct (to match an industrialising economy to industrial production of money) but it still took a generation (30 years, in fact) to replace the old, clipped, hand-made coins with shiny new emblems of the nascent industrial revolution. If these advances in coinage took time, things didn’t accelerate with paper. The earliest UK cheque recognisable in its modern form dates from 1659 but it took more than a century after cheques were invented for cheque clearing to be invented, and then it wasn’t invented by banks but by their clerks. Tired of running round to every bank to clear cheques, they began to meet (unofficially) at a coffee house to clear and settle between themselves.
We’re in the same position as the medieval court or industrialising England with a paradigm mismatch that explains the mid-life crisis. We’re using the mentality of tally sticks and the institutions of paper to try and deliver the money for a new economy. Money is depressed because it no longer recognises the world around it, it feels out of place and incongruous. It’s tired and balding an grey. We’re in a post-industrial revolution but we’re still using the money, and the institutions of money, of the industrial age and this time, the technology with unexpected consequences is not the tally stick or banknote but the mobile phone.
Suppose this thinking is along the right lines. Then, in a generation or so, there will be a new set of monetary arrangements in place. New currency and new institutions. Can we guess what they will be like, any more than an English merchant of 1680 could guess that there would soon be a central bank, banknotes, uniform coins and a gold standard? I don’t believe in the idea of a universal currency, or for that matter a European currency, or for that matter a UK currency. The future, I suspect, will be more diverse.
It is unlikely that there will be a single reserve currency or a single global currency, says [Stan Stalnaker, founding director of Hub Culture]. Instead, a mix of physical and digital currencies will allow people to pick and choose new options for trade.[From The Future of Money | Informilo]
That sounds complicated, but it isn’t, because not only will you be using your mobile phone to pay for things but also to get paid. You won’t have to be in the loop.
An app could let you manage any number of currencies and trade them with your friends – or even do it for you. “I’m not sure you will bother thinking about individual currencies. Just let the phone sort it out,” Birch says.[From Future of money: Crowdsourcing cash – 01 June 2011 – New Scientist]
Now, that doesn’t answer the question of what these currencies will actually be, which is a fascinating topic. There are both left and right, revolutionary and reactionary approaches — the return to the gold standard or the switch to the Brixton Pound — that deserve to be explored. The market is beginning to experiment will fundamentally new kinds of money.
Virtual currencies such as Bitcoin are here to stay and represent an opportunity being overlooked by financial institutions, says Gartner banking analyst David Furlonger.[From On the virtual money? | Banking Review]
Banks are we know them are institutions founded on industrial-age fiat currencies. Hence I suspect that the transition to the next era of money will result in new institutions and new kinds of institutions. If you are going to be in London on 24th November 2011, and you want to come along and explore some of these ideas, then why not…
Join digital money expert Dave Birch at the RSA as he explores the implications of a cashless future.[From RSA – The Future of Money]
It’s free, but space is limited. You’d be mad to miss it, not because of me but because I’ve managed to persuaded a real economist Diane Coyle to come along and chair. By the way, I happen to have a spare copy of Tom Levenson’s brilliant book on my desk as I write, so I will cheerfully dispatch it post haste to the first person to add a (non-spam!) comment to this post.
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