By Newman Banks
The direction and speed of growth in innovation in recent years has been characterized by a massive shift in how traditional services are viewed and understood, especially in envisioning new and inventive ways of delivering traditional services. Think about what Uber has done to the taxi business, how Airbnb changed the hotel business or even how the education sector has been able to expand and extend reach via Massive Open Online Courses through providers such as Stanford and Princeton supported Coursera. The common aim that all these innovations share is to improve on existing, well established services using new technologies.
There has not, however, been any meaningful adoption of such new innovations or breakthroughs on the most basic of services we use every day. We engage in this service completely and naturally without giving any thought to the process. It is the daily process of making transactions, that is, the purchasing of goods and services. We are virtually mindless in our participation in the exchange of value (money for goods and services) and the complex system of transacting, sometimes through multiple “middlemen” (e.g. credit card companies and banks), and the multiple silos money must pass through before completing the transaction journey from one storage location (the buyers bank) to another storage location (the sellers bank). We use money every day, but hardly question its inner value, where it comes from, what truly gives money its buying power and why is it general accepted. That raises the question, if we have an opportunity to reinvent money using today’s technologies, what would it look like? Would we not like to grow the use of more seamless forms of value exchange using mobile devices without a physical exchange of paper or plastic mechanisms? Moreover, would we not like an instant payment settlement, including redemption of points, application of discounts, as well as the purchase of goods and services with the currency we own, even when the offering is based on a different currency? In light of general concerns of inflation, particularly as impacted by policy and politics, wouldn’t it also be great to have greater confidence in the enduring value of our stored currency, that is, our savings?
There are some problems with the current and long-established structure of the monetary system which have played an important part in the past and present instabilities of the world’s economies. Frankly speaking, governments’ behaviors and monetary policies are subject to political influence with central banks, sometimes including occasions when banks step in to bail out governments by extending time to adapt policies to economic conditions, or engaging in currency battles to devalue the domestic currency to foster exports. Think of how QE (Qualitative Easing) policies in both Europe and the United States in the last few years impacted and manipulated inflation rates, or more recently think of the impact ‘Brexit’ had on the world currency market! These are just two examples, however, they highlight how purposeful manipulation and political action can create instabilities in the economy. Over the long-term, these kinds of actions can build up unpredictable inflationary impact that can undermine the most precious asset that central banks possess: their credibility. Loosing this credibility exposes a major flaw in the current monetary structure that a large part of the population is not aware of. Acceptance of fiat currency is actually embedded in our very culture, but that acceptance has limits. The money that we base all our economic activity on, is itself, not based on any value other than the credibility of the central bank and the fiat money monopoly of the “state”, which is expressed in the Dollar, Euro, Yen, Yuan, etc.
Historically, only a few attempts have been made to solve the dilemma presented by our well-established monopolistic monetary system. It is indeed a very difficult matter to find alternate, trusted substitutes for the valued asset that we associate with “our money”. In fact, when thinking about the properties Good Money (in the sense of the abstract concept) should have, general reactions and responses include:
- Good Money should derive its value from a balanced and relative worth perspective of real goods and services, not just from the confidence, or lack of confidence, that people may have in elaborately designed and colorful paper.
- Good Money must allow for the rapid exchange for goods and services with close to zero transaction costs to the buyer or seller.
- Good Money should be reasonably stable related to real goods and services, as well as other currencies.
- Money should be flexible enough to handle all the tasks expected to be performed by such an asset instrument in an economy.
- Good Money should clearly reflect and represent the value of goods and services without the need for further investigation and examination of the price of goods and services relative to other values.
- Good Money exchanged in a transaction should be transparent and represent relatively equal values of goods and services, for that currency. Neither side of a transaction should have an unfair advantage over the other.
- Good Money should also be global, in the sense that it should be possible to obtain a similar quantity of goods or services for a similar amount of money (in relative terms) anywhere; Good Money should represent a certain “standard of value”.
Defined in the context of a question, what standard can be used as the basis for the value of money? A currency with unpredicted volatility discourages use by the consumer as well as the seller. There can, however, be a predefined path for currency management. In a free market, i.e., commercial, context, Good Money should be expected to fluctuate, increase or decrease in its value, but such fluctuation should be guided by monetary policy that has been communicated to and understood by its “currency owners”, and should not deviate from stated expectations without clear and proper advance communication from the currency issuer. For example, as prospective Good Money issuers, consumer products-oriented companies might prefer their money to have a higher inflation rate, to encourage more rapid spending by its consumers/customers before the currency value is reduced. On the other hand, wealth management and insurance companies might insist on a monetary policy that maintains value overtime with a much lower inflation rate, perhaps even lower than the general inflation rate, thereby actually increasing the relative and real value of its currency over time.
Despite their academic origination, monetary policies for any currency have decisive implications on how people handle such currency. Firstly, on one hand, the absence of any transparent monetary policy discourages people from using such currency at all. Such currency cannot be trusted, and it can become too difficult to understand its current value, nor is its potential value in the future easily understood. And when a currency stops accurately reflecting the value of goods and services, it requires people to stop and contemplate the value of such currency for any individual transaction. Once currency becomes unpredictable, at some point people will begin to look for alternatives. From a global perspective, and depending on cultures, currency alternatives can include anything from precious metals to even cigarettes. In some areas of the world, where currencies have lost all credibility, the barter system is alive and well. Secondly and conversely, Good Money, currency that has well stated and understood monetary policies, earns trust, increases credibility and motivates “currency owners” to engage in transactions with confidence based on an understanding of the real value of goods and services in the context of the value of Good Money.
The bulleted list above, which outlines expectations for Good Money, can be difficult to meet for any concept of money. As a matter of fact, the fiat money that is currently issued by governments today does not comply with even the first condition for Good Money, as it derives its value, maybe better described “acceptance”, merely from the cultural or historical confidence the people have it. Therefore, when the confidence of people in the central bank of a country drops, then a decline in its value is almost a direct consequence. In some developing areas of the world a country’s currency can lose its value virtually overnight based not on the value of goods or services, but on unrelated actions – politics, policy or otherwise.
This article is the beginning of an occasional series in which we discuss money, its history, its forms and its future. Naturally, this is only a subjective point of view, but we would be very interested in your opinions as well. We invite you to contribute more ideas and perspectives on the properties that Good Money should have. Also if you have an opinion about any of the statements we have made, let us know. Sharing and discussing ideas will always improve the original thought. In the next article, we will present some approaches that were made in the past which have evolved into the concept of Good Money.