THE RISE AND FALL OF MONEY

A versatile, intelligent and social species naturally evolves commerce in response to a challenging environment; some form of money is implicit in that. Precious metal coins came to provide confidence that payment held value equivalent to that of exchanged property. The inconvenience of coins for large or distant transactions added enforceable, standardized promises, i.e. contracts and paper money. Government monopolized coinage and enforced the promises as commerce expanded.

The government involvement underpinned a vast expansion of commerce by broadening the ready acceptance of money. It also produced emperors who reduced the precious metal content of coins while maintaining their face value, creating inflation. Their successors printed paper money in excess of the value of the gold and silver promised to be exchangeable for it, putting inflation on steroids. History’s regular financial collapses have been enough to restrain most governments most of the time, thus enabling commerce, but insufficient to prevent the systemic failure being accelerated by the measures taken in response to the COVID – 19 pandemic. As is so often the case, the impending financial failure is rooted in measures taken for a predicessor.

Early Great Depression measures removed the exchangeability of U.S. currency with gold, outlawed most gold possession by the public and inflated the currency from $20 to $35 per oz. of gold, maintaining that price until the link to gold was fully severed in 1971. Without the leash to gold in mid-April, 2021, the spot price of gold is $1776. Governments like to inflate spending when they can repay their borrowings with less value than they borrowed. Current U.S. Federal debt is about $225,000 per taxpayer.  The government repays that debt with new borrowing as it comes due, protected, courtesy of the Federal Reserve, by low interest rates. That protection reduces savings and encourages further borrowing.  It seems a very human irony that the money that must rely upon government for its widespread acceptance so often see its ultimate destruction at those same hands….

The arrival of credit card/internet technology has redefined money, eclipsing cash as paper money previously eclipsed coins. Money was no longer a “store of value” after it was disconnected from gold; it is no longer a medium of exchange when nothing physical changes hands. Money has been reduced to no more than an accounting entry representing a claim on wealth. Cash money still in use is becoming almost vestigial.

“Almost” is the key: While most people use payment cards and services and governments are salivating for the control available with payments limited to regulated, recorded channels, there are still too many people outside that system and dependent upon cash. A substantial number of those probably prefer that the government remains ignorant of their affairs and not all of these are necessarily criminals. The next step in this progression appears to be central bank or governmental issuance of digital money similar to Bitcoin.     

Summing up: Valuable precious metal money and resulting government monopoly expanded the growth of commerce. The perceived value of commerce and the presence of government enabled the use of devalued money, replacing precious metal with formal promises. Now, excepting a few marginal users, U.S. money has descended to the status of an electronic accounting valuation system. Responding to this, the Federal Reserve is apparently mulling a digital dollar currently called Fedcoin. Wall Street and some economists are worried about the ramifications, particularly since the Fedcoin plan appears to include the abandonment of cash.

First, if citizens’ connections to the financial system is limited to electronic identification, all financial activity can be instantly terminated by authorized order, by technological or human failure or accident and by criminal actions. Those are not small risks. Second, the temptation toward ruinous, politicized, inflationary governmental manipulation of such “money” seems overwhelming. Finally, with the mechanism of exchanges reduced to the status of a government tool, the economic advantages of a market economy seem unlikely to remain available at even the present nominal extent.

The current discussion has brought forward a few who would return to valuable money, probably some form of a gold standard or an equivalent that would reinforce market valuation rather than government policy  for setting the purchasing power of the digital dollar. The protracted economic depression in front of us may increase their number but the increasingly authoritarian government seems likely to make that difficult; a full return to widespread economic success in a necessarily free market seems distant at best. Money has dwindled from precious metal to a tool of government policy, the antithesis of a free market. That is a very long fall, bringing down capitalism – and prosperity – with it.   

About Jack Curtis

Suspicious of government, doubtful of economics, fond of figure skating (but the off-ice part, not so much) Couple of degrees in government, a few medals in figure skating; just reading and suspicion for economics ...
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s