A case for monetary reform

2021.08.03 by The Last Hawk

Since the financial crisis in 2007-2008 reckless monetary policy has become the new normal globally. The result has been a massive asset price inflation that has eroded the purchasing power of peoples salaries and savings. Many people oppose this theft and are craving a monetary reform.

Successful money systems share three key properties. First of all they should be a medium of exchange to faciliate the sale, purchase, or trade of goods between parties. Secondly they should function as a unit of account so that it becomes possible to put a price on goods and services, as well as keeping a balance of money gained or lost in transactions. Finally they must be a store of value.

Many different money systems have been in use throughout history. One of the oldest ones is commodity money. Gold has been used as money by a large number of civilizations since ancient times, and it has a great track record as a store of value. The reason it works so well for this purpose is because it exists in limited supply, doesn't decay and has a high percieved intrinsic value. In todays digital world it is however not convenient to use commodity money as a medium of exchange, and a purely gold based system will probably never become mainstream again.

A more viable alternative is representative money where the currency can be converted to a commodity at a fixed rate. For much of the 20th century many currencies were linked to gold in this way. Representative money puts a restriction on the money supply as there cannot be more money than the amount of commodities backing it up. This limits the monetary toolbox, but it also ensures true price stability in the long run. For workers and savers this is good news as the system protects the purchasing power of their salaries and savings.

The United States abandoned representative money in 1971 when president Nixon announced that dollars could no longer be converted to gold. At the time the market had started doubting if the US owned enough gold to cover its deficit spending, and Nixon wanted to prevent a gold run on the reserves. Since many currencies were pegged to the dollar through the Bretton Woods system this change in effect also turned those currencies into fiat money. Fiat money is a type of currency that has no intrinsic value. Instead its value is purely based on what the people using that currency think it is worth. All fiat currencies ultimately return to zero value, but the pace of how fast it loses all of its value will depend on how well that currency is being managed.

In 2009 Bitcoin was launched and soon after many other cryptocurrencies followed. These new currencies can be viewed as a response to a monetary policy that has accelerated fiat money on the path to zero value. Most cryptocurrencies don't however work well as a store of value either, and many face regulatory or technical challenges that prevent them from becoming an efficient medium of exchange.

An interesting idea is to combine some of the technological innovations of cryptocurrencies with the principles of a representative money system linked to gold. This could lead to a currency that is great for doing transactions and for storing value.

While it is impossible to say for sure what the money system of the future will look like, it seems likely that the world is moving closer to a much needed monetary reform.