Topic: A Brief History of Modern Money - page 3. (Read 3183 times)

If and when the elites decide to lean on a hard money, their money becomes, in one way or another, IOUs convertible to the hard money.  That's how their 'money' gets trusted (say, after it has lost credibility in some way.)  A classic example of this was the gold standard.

As long as they can keep the system stable (if only temporarily,) the elites receive benefits by issuing these IOUs out of thin air.  When viewed in this light, metallic-standard (or indeed Bitcoin-standard) and fiat money are not fundamentally different, even though the outward indications of stability are (ie stability is indicated by gold/silver reserves in one case, and by consumer price stability in the other.)

The elites don't have to offer any benefits to force average people to use their issued 'money.'  The central bank's function is to manipulate inflation and the various rates of return on investments.  For example, under the gold standard, as long as the elites kept their control, holding gold had a return of zero.  Paper currency earned a positive nominal interest when put in a bank.  If you held gold, you lived under the same inflation caused by the constant issuance of paper and debt, but were not (partially) compensated by bank interest.

With most people unaware of how the system works, the criteria for what system to adopt is not what social benefits the system can bring, but how much the elites can benefit from it.

That said, most experts don't believe we'll return to the classical style of pegging against a hard money.   From the elites' point of view, it's more advantageous to make use of today's technology and financial engineering to use 'soft' pegs.  The price of the hard money will be lower, and it will be slightly more flexible than under the classical metallic standards, so there will be less embarrassment when the elites have to devalue their IOUs.  (This may be what the Reserve Bank of India is quietly starting with its 'monetization' program for gold that started in December.)

But all the concepts of metallic standards still basically apply.

Theres different forms of rich obviously.

The ones who do are born from wealth are on another level trust me.

But the view point on your take is slandered by peoples actions as a whole when you talk about "rich people". They see 1 rich persons mistake as it reps most of them to their view. Like how a bank defaults and gets a helping handing and sees that event makes the hate grow.

Who are the elites everybody talks about? Rich people?

Most rich people weren't born rich. That's the part that all these theories about an oligarchy leave out. Some rich people were born rich. But most rich were born non-rich, and are overachievers who became rich.

Overachievers are more likely to be greedy. Overachievers are also more likely to hustle their way into power. That's just human nature. Some people always rise to the top. There isn't some big conspiracy.

So is society supposed to repress overachievers? Is society suppose to limit wealth, or limit the communication overachievers have? How exactly can an elite be prohibited?

The elites can't design a new monetary system without their money enjoying acceptance by the general population. If you look at history, you can note various occasions, when the official money came out of favor (the prime cause being inflation of monetary supply) and the population started using other forms of money they mutually agreed on. So I don't think that there is a compelling reason to believe that "the elites" will stay in control of the monetary system forever.

Especially I find it hard to imagine that the elites will be successful in designing a new monetary system leaned against Bitcoin to stay in charge. The simple reason is that they would have to offer a significant benefit over Bitcoin to persuade the population to use their money instead of Bitcoin. I don't think that they will have something to offer that is more attractive than a non-inflationary, decentralized currency that can float around without restrictions.

ya.ya.yo!

Ultimately, my problem is with the over-reach of state power into money and finance.  We gave the elites a monopoly on violence for the purpose of protecting our lives, our properties, and other universally agreed social values.  They have leveraged that power and expanded into other areas, to further enrich themselves.  The most central of these 'expansions', the one that really enables the others, was into money.

I'm not too familiar with the mechanism for changes to the Bitcoin system.  But Bitcoin's total issuance is capped.  That should take most, if not all, of the power out of the hands of the issuers, whoever they might be.

There's also a fundamental difference between Bitcoin's 'elites' and the conventional elites, who not only control money and debt, but also have power over the rest of social functions.  (In fact, they have each one because they have the other.)

The elites will design their monetary system not based on what is right, but on what will continue to benefit them.  If Bitcoin is perceived as stable enough for their currency to lean against, it is good enough as a candidate for that purpose, if and when they want to do it.

Bitcoin is the new gold, this is why it must remain decentralized. Lightning will be like bills from this gold, but this time they are for real and not paper money derived from a supply that a few control.

I congratulate the original poster for the thoughtful articles. I'm no winner of the Nobel prize in economics. But if I understand correctly, the poster is arguing against fiat money.

But isn't bitcoin fiat money? Doesn't the bitcoin politburo congregate periodically over frapuccinos in Palo Alto, or wherever, and make decrees about how to code the bitcoin blockchain, ie, the supply of bitcoin? Don't those decrees function as fiats?

I don't see that bitcoin is backed by gold or silver. Bitcoin hasn't been an adequate store of value for people who bought when the price was worth $800, $900, or $1,000. It would appear also that the bitcoin money supply is expansionary.

It doesn't take a fancy macro model for one to reckon that bitcoin is another monetary construct that enriches the elite that manipulates it most effectively. Therefore, I have to disagree with the thesis that global elites might embrace bitcoin as a monetary equivalent to the gold standard.

Thank you.  In my view, the issuance of money is one of the commanding heights of the economy and society (maybe the highest of all.)  As long as the populace is not enlightened enough, this power will fall to the elites who will use it primarily to further their wealth and power.

The difference between the Middle Ages, when money consisted only of physical gold and silver, and modern times is that the modern economy creates enough real economic progress to help prop up the money and debt issued by the elites.

It's possible that modern money swings, as you mention, like a pendulum between hard and soft money.  When too many financial assets have been issued (as is the case today,) the system becomes unstable, and eventually the elites tend to be tired of using various tricks to prop up the assets, and devalue their money against gold or silver.  This stabilizes the system and money has become a lot harder.  But the incentives for the elites are to maximize the issuance of money and debt at this point, so the cycle continues.

For me, it's pretty clear from my original post that the government is far from a morally legitimate issuer of currency.  "Legal" legitimacy is really a circular argument, so I won't write the War and Peace on that.

The behavior of money has been extremely diverse in the history of civilization.  When China finally disavowed state issued money, for centuries, money in circulation consisted solely of unmarked silver ingots that could be weighed and cut on the street.  During 15th century Europe "money" besides physical gold and silver coins consisted of accounting entries of the powerful private banks, an early form of credit money, if you will.

If the history of money shows anything, it is that any "theory of money" is highly suspect, and is usually the intellectual propaganda of the powers that be (who enjoy the privilege of issuing money) through their mouthpiece, the economics profession.  The latter has multiple incentives to work with the elites rather than point out their use of money to receive unearned wealth and power.  The proof in the pudding is that, through the centuries, the elites themselves have changed the "nature of money" several times.

Nice piece of history in one post. I think the modern economy basically swings like a pendulum between good money and bad money. good money being decentralized money, like gold, silver, even shells at one stage. Bad money, is simply fiat.

And bitcoin is an example of a good money, I'd expect it to be adopted in a mass scale in future.

n saying that government is the sole issuer of its money, both “government” and “money” are being referred to in specific ways.
Government, in the present context, refers to the ‘consolidated government sector’, which includes the fiscal and monetary authorities. In the US, for instance, the federal government includes the President and Congress at the top of the hierarchy. Congress authorizes taxing and spending measures. Below this level are the Treasury and Federal Reserve (central banking system). These serve, respectively, as the fiscal and monetary agents of Congress.

When the government spends or lends, the monetary authority issues new money. The money issued is of two particular kinds, referred to as ‘currency’ and ‘reserves’.

Currency includes notes and coins. It is the physical money we carry around with us and sometimes use for making purchases. (The term currency is also used to refer more broadly to a particular unit of account, such as the dollar, the yen, the pound and so on. The intended usage is normally made clear by the context.) If the government sends somebody a check, the recipient might take the money to a bank to cash it in. The bank will need currency on hand — notes and coins — to satisfy the customer. Since the only legitimate issuer of currency is the government, the banking system ultimately must obtain it from that source.Government, in the present context, refers to the ‘consolidated government sector’, which includes the fiscal and monetary authorities. In the US, for instance, the federal government includes the President and Congress at the top of the hierarchy. Congress authorizes taxing and spending measures. Below this level are the Treasury and Federal Reserve (central banking system). These serve, respectively, as the fiscal and monetary agents of Congress.

When the government spends or lends, the monetary authority issues new money. The money issued is of two particular kinds, referred to as ‘currency’ and ‘reserves’.

Currency includes notes and coins. It is the physical money we carry around with us and sometimes use for making purchases. (The term currency is also used to refer more broadly to a particular unit of account, such as the dollar, the yen, the pound and so on. The intended usage is normally made clear by the context.) If the government sends somebody a check, the recipient might take the money to a bank to cash it in. The bank will need currency on hand — notes and coins — to satisfy the customer. Since the only legitimate issuer of currency is the government, the banking system ultimately must obtain it from that source.

I agree with you, its easier to pay with bitcoin than paying with credit card or paypal, that makes it easier to buy something online. I hope that in the future many more merchants will accept bitcoin as their payment. 

Bitcoin is great if you need to send money overseas or want to buy something online. There are hundreds of thousands of merchants that accept Bitcoin around the world, and because the fees are so low, you can often get great discounts when you choose to pay with Bitcoin instead of your credit card.

The major ill of the modern world system is the extraction of wealth by the political and financial elites from everyone else, along with financial instability and economic misery flowing in the opposite direction.  The core mechanism that enables this activity is the manipulation of money.  Most Westerners think they live under basically free markets.  On the contrary, all markets are fundamentally driven by the capital markets, which are, at their core, openly manipulated by the elites.

This is also an imperial system that co-opts the population of the current imperial power by giving them a share of the spoils.  As we'll see, each financially inflated imperial power also suffers inevitable decline as the incentives are for its elites to issue too many claims to wealth.  This gradually erodes the confidence in the country's financial assets, and also its strength in all areas.  Eventually, this elite addiction to financial inflation "abandons country" and moves on to the next country that is capable of heading an imperial system.

The Italian Renaissance

This was the one modern period when money was honest and economic progress was great (serving as a counter-example of the argument by modern mainstream economists that money must be 'elastic' and centrally planned to drive economic progress.)  Money was gold and silver coins and credit was judiciously issued (and thus hard to come by, by today's standards.)  The small city-state elites were forced to keep this system stable, because they couldn't possibly hope to contain any capital flight as a result of inflationary policies.  (This latter power of financial repression became possible under the British and American global empires.)

This period must also have opened the eyes of the world to the human potential at real economic progress.  In later periods, it was this progress that frequently "bailed out" the financial inflation of the elites by giving real value to the financial claims they issued.

The Spanish Empire

The 16th century was characterized by Spanish discovery of large quantities of silver and gold in South and Central America.  This flow of money into Europe caused prices to rise considerably, with the Spanish elites being the primary beneficiaries, since they received the free gold and silver first-hand.

Most ominously, the elites still incurred unpayable debt and the country eventually went into decline, even though both empire and economy looked very good for a while.  This suggests that unearned monetary power eventually weakens a country in more ways than one.  You would think the opposite should be true, that free wealth and power should strengthen a country, at least while they last, and shouldn't make a negative impact when they disappear.

The Dutch Golden Age

The Dutch started the use of paper money in the West, but this money was so tightly pegged to precious metals that its stability was never in question.  (In fact, it probably couldn't afford to be anything but totally stable, since a capital flight out of this money, which would have been disasterous to the Dutch elites, was probably still impossible to suppress.)

The main agent of financial inflation was public debt.  This drove the economic growth and imperial success of the "golden age."  When, inevitably, too much debt had been issued, the entire system and country went into decline.  A new friendly relationship with a rising Britain enabled this debt, more or less, to retain its value.  Dutch living standards muddled through until, more than a hundred years after the golden age, the French occupation authorities finally cleaned house by defaulting on this debt. 

Pax Britannia

Britain was the world's first empire of global scale.  The agent of financial inflation, this time, was paper currency.  This time, paper money enjoyed the support from both the colonial system and the 'international gold standard.'  (See note *)  Colonies just happened to perfer holding paper sterling as a store of value for the accumulated wealth due to the labor of their peoples (i.e. central bank reserves.)  Also, after suffering a major financial panic and bout of misery roughly every decade during the first half of the 19th century, Britain was able to convince major countries to move to the gold standard from the silver or bimetallic standard (Germany, France, US.)

This 'international gold standard' served to pool the gold reserves of the core countries of the world system for the purpose of rescuing a country that has issued too much paper to sustain confidence.  Britain itself was found in physical (rather than just psychologicial) need of this rescue facility in 1890.

But the incentives for the elites were, again, to maximize the issue of paper assets.  On the eve of World War I, Britain's gold reserves could only redeem 3% of its total paper issue, at the official price.  And the price was vehemently defended.  Any hint that Britain couldn't or wouldn't redeem at that price would invite indignation from British officials at the moral insult.

After the establishment of the US Federal Reserve in 1913, which enabled the US to take over global money, Britain fought a bloody World War I from 1914 to make sure Germany wouldn't win in Europe.  Let's just say that, objectively, this war took an unfriendly Germany out of the running for global monetary hegemony, and put a friendly US squarely in that position.  Even with a friendly US easing Britain's decline, the pound lost over half of its value against the dollar over the 20th century, and the British economy suffered stagflation over much of that century.

(It's too tempting to omit a supreme irony here: before 1913 the Americans had resolutely resisted having a national central bank, due to their mistrust of bankers and central banks.  It was this very mistrust that ultimately put them in position to be the world's money manager.  The reason was that, lacking a national central bank, the state-bank alliance could only form at the individual-state level.  Individual states lacked the resources to bail out failing banks, so 19th-century US banking was characterized by frequent crises and economic shocks.  This also kept low the public's trust in any part of the financial system, and thus the proportion of precious metals in the circulating money was much higher than in European countries.  When the Fed was formed in 1913, this low level of financial inflation put the country in an enviable position to attract global investments looking for safety.  Gold flowed into the US after World War I, and the country's leading position became indisputable.)

Pax Americana

The American hegemony was characterized by the gradual loss of the formal gold standard as the core mechanism for enriching the elites (see note *), and its replacement by a host of others.  The goal of all these was to support the value of the dollar and US debt.

More than one major factors made it impossible for the elites to hold on to the formal gold standard.  As American elites and Americans continue to benefit from issuing money and debt, what has been holding up confidence in these financial assets?

The answer roughly comes in two broad categories.  Almost without exception, countries enjoying good postwar economic development have been co-opted into supporting the dollar by suppressing the values of their currencies via buying dollars and Treasuries.  At first there was Western Europe and Japan, and lately there are China and others.  The reasons are many and varied, but this mechanism has been so powerful that, often, the US only had to threaten to cheapen the dollar (by indulging in something) to whip other countries into line.  The world is addicted to American consumption, so that it can't get free of it, even if it wants to.

Wars provide another leverage for American elites to strengthen the US financial position.  World War I left the US as the obvious leader in financial strength.  World War II gave the US so much leverage that it was able to further dilute the gold standard into even more of a dollar standard at the center of the world system.  The Cold War made West Germany, an economic powerhouse, an enthusiastic supporter of the dollar during the 70s and 80s, in exchange for US military protection.

Taken together, these support systems make for a more troubled world than the British-led system.  Effective (if not conscious) support for dictatorships in the Middle East, China, and elsewhere can't be good for global harmony and equality.  And various forms of financial repression around the world can hardly be relied on to be enduring.

The Future?

The US has made it clear that China won't inherit the world.  With India possibly decades from being able to take over global money, and the perverse incentives at the core of the system constantly weakening faith in US-issued financial assets, how will the political and financial elites stabilize confidence in the meantime?

As mentioned above, the support systems for dollar-related assets must compare poorly against the elegance of the formal gold standard, from the point of view of the elites.  With these systems in place, the price of gold still went through two major moves upward in the 40-odd years since the collapse of the last formally fixed gold price.  For this reason, it's conceivable that the elites will, as a last resort, go back to a formal gold standard, but at a much higher price of gold to provide stability against the total volume of paper assets issued so far.  (Or, possibly use Bitcoin.)

Or, terrorism could become so horrific that it can be used as an excuse to make the next major move in financial repression.  The elites have already made noises that the current holy grail of repression is the banning of cash and non-state-issued monies, and making all money electronic.  The stated goal will be to stop terrorist financing, but the real goal will be to pave the way for negative interest rates.  With negative interest, your bank account will lose money automatically, so there is a powerful incentive to spend or invest your money to stimulate the economy.  Plus, and even better, there won't be overt inflation (since people are losing money, money will remain valuable) and the new money issued by the elites will be powerful.  If there's a public outcry, the elites will open the eyes of the public by explaining what I wrote above, that this has really been happening for centuries, so nothing is new.

They will be correct: nothing will really be new.  Negative rates will be another means of financial repression, that will stabilize the system and prolong the elites' world system a bit more.

Events over the last few years suggest that, of the two possibilities above, we are moving closer to the latter.  The elites have been able to do what it takes to protect the value of the dollar, i.e. acting in the direction of tightening the supply of dollars but without yet provoking an 'unacceptable' level of protest in the Western polity.  Objectively, this will lessen the likelihood of another financial bubble and bust in the near future, but will increase economic and social pressure on the most vulnerable populations of the world.  Similar to the Great Depression-World War II period, the resulting misery might bring some truly evil characters to power, and with them, conflict of a much more sinister nature.

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Note * We note here that the true nature of metallic standards was a very efficient means of financial repression.  The state's commitment to buy paper money with gold or silver at a fixed price made it unattractive for savers to hold precious metals, as opposed to interest-earning bank deposits and other assets based on paper money.  From the elites' point of view, this must have been so far superior to the disjointed ad hoc schemes constructed today to support fiat money that, despite being overwhelmingly disapproved of by today's mainstream economists, historically, gold standards were abandoned only when the authorities were about to run out of gold due to a crisis of confidence.  (It should also be noted that during the gold standard era, mainstream economists were overwhelmingly in favor of that system on economic grounds.  That voice also happened to be what the elites wanted to hear, at that time.)