Should we resign ourselves to the depreciation of our paper currencies? Can we reasonably create a virtual currency ex nihilo?
Should we resign ourselves to the depreciation of our paper currencies? Can we reasonably create a virtual currency ex nihilo ? Or is a return to the gold standard desirable? Are there other possibilities? Could a basket of title deeds act as money?
The depreciation of our paper currencies, the soaring gold price, or the appearance of virtual currencies invite us to study the questions of the origin and functions of money. Economic theory teaches us that there probably is no such thing as a perfect monetary system. It is however possible to indulge in imagining a new form of currency, backed by title deeds.
THE ORIGIN AND QUALITIES OF MONEY
In the economic literature, few authors, like the Austrian economist Carl Menger , have been able to develop a realistic monetary theory, logical and without superfluous mathematical model.
Money, explains Menger ( Principles of Economics , 1871), no doubt appeared spontaneously, as an attribute attached to a pre-existing commodity, in order to overcome the limits of barter and to authorize indirect exchanges.
But what are the qualities that give an asset a monetary character? Since the essential function of money is to facilitate trade, according to Menger, this commodity must be easily negotiable, without significant loss on resale, and displaying a price that is not very sensitive to the quantities traded.
It is therefore necessary that there is a liquid market for this asset and ideally a regular listing. In addition, it is essential that there is a sustained and constant demand, in the face of a relatively scarce supply .
These latter qualities are essential to explain, historically, the natural selection of particularly valuable commodities to play the role of money. Thus, in the early stages of economic development, livestock, the main element of any individual's wealth, probably served as money.
According to Menger, other monetary qualities such as ease of transport, low cost of storage, homogeneity, divisibility and durability, make it possible to explain, at a more advanced stage of civilization, the emergence of currencies. in the form of precious metals.
The fact that precious goods impose themselves as money is ultimately logical, insofar as they tend to be naturally accumulated for their direct use value and in order to constitute some savings.
THE WEAKNESSES OF FIAT CURRENCIES
If for centuries people have exchanged these commodity currencies, how can we explain that our contemporary currencies, such as the euro or the dollar, which are no longer convertible into gold, have any value in our eyes?
Even imposed by an authority, a currency at a forced price always originates from a commodity previously selected by the market. Contemporary coins are thus remnants of certificates pledged on a certain weight of precious metals. Since the abandonment of the gold standard in the 1970s, money has always as its counterpart a certain amount of assets held by banks. It thus no longer represents a title deed but a claim on the banking system.
However, this so-called fiduciary currency suffers from major flaws. In the first place, the demand is reduced to exchange functions. In comparison, for a commodity currency such as gold, demand is supported not only by monetary uses but also by direct uses in jewelry and industry.
Second, when fiat money is associated with a centralized fractional-reserve banking system, that is to say, the issuance of credit can exceed the savings available, there is virtually no limit to the monetary creation . The European and American central banks have recently recognized, and rightly so, their capacity to print money "without limit".
In view of fragile demand and unlimited supply, the currency depreciates and thus loses its role as a store of value in favor of other assets, such as real estate, precious metals or shares.
Depreciation acts like a tax: wages must be constantly renegotiated and prices continually adjusted, unless the quality of the products is sacrificed. Remember that before 1933, a dollar was convertible against 1 / 20th of an ounce of gold, or one ounce of gold at 20 dollars. Today, an ounce of gold is trading at around $ 2000, i.e. a dollar is trading for 100 times less gold than in 1933.
THE DEFECTS OF VIRTUAL CURRENCIES
It was in reaction to the weaknesses of fiat currencies that bitcoin , the most emblematic of cryptocurrencies, made its appearance during the financial crisis of the years 2008. In a clever way, bitcoin provides, in its computer code, a maximum number of monetary units and integrates a payment system without intermediary.
It thus offers a perfectly stable money supply and the possibility of concluding transactions anonymously, a property for which there is a certain market.
However, virtual currencies suffer from the same fragility as fiat currencies: they have no other use than payment, and demand is therefore not supported by direct use. Note that fiat currencies have at least the privilege of the forced price, always ensuring a minimum demand for the payment of taxes.
In addition, the technical qualities of bitcoin remain fragile since they are based on a technology that can be competed with at any time .
A product available in limited series is not always the guarantee of a good deal on resale.
THE RETURN TO A COMMODITY CURRENCY
Faced with the faults of fiat currencies and virtual currencies, is there an alternative?
As we have seen, money appears spontaneously after a process of selecting a commodity previously accumulated by part of the population. No one invents a currency “from scratch”. In a prison, no warden enforces the circulation of money in the form of cigarettes or marijuana.
However, it is not forbidden to indulge in imagining what asset might emerge in the future to act as money. Let us observe for this the main contemporary attributes of wealth, as well as their monetary qualities .
Precious metals, of course, are still prized, in the form of jewelry or bullion, and the return to a 100% gold-based currency continues to be discussed in the economic literature. However, it must be recognized that the history of this currency is marked by all kinds of manipulations, such as the decrease in the quantity of gold in the coins, the issuance of certificates exceeding the reserves, or even confiscation.
Milton Friedman, for his part, argued that it was absurd to extract gold from mines and immediately immobilize it in coffers ( Capitalism and Freedom , 1962). An argument without regard for individual freedom but worth mentioning. A free market could certainly select a return to gold, but note that there is no such thing as a commodity with perfect monetary qualities.
TITLE DEEDS
Let us now look at stocks, those title deeds to a share of companies, listed on a market. In the United States more than in Europe, stocks represent an important part of savings.
The innovations of the last decades have also made it possible to invest directly in very diversified baskets of shares, associated with indices such as the S & P500 or the CAC40. These increasingly popular index funds are listed in highly liquid markets.
They are constituted by definition of a fixed quantity of securities, selected according to criteria of profitability and capitalization. Demand is supported by entrepreneurs and savers. Liquidity of the market, scarcity of supply and intensity of demand: all essential monetary qualities.
The creation of currencies guaranteed by financial assets has already been mentioned by Pascal Salin in the last chapters of his book Monetary Systems (Odile Jacob, 2016). Note also that payment in shares is already practiced, particularly in the context of mergers and acquisitions.
The equity markets are admittedly very volatile, but it must be admitted that this is partly due to the volatility of the quoted currencies, that is to say to the fiat currencies themselves. On the other hand, if a basket of shares were to become the currency, all prices would probably be expressed in this new currency.
Note also that over long periods and by reinvesting dividends, the performance of large diversified indices often far exceeds that of precious metals. The purchasing power of such a currency would therefore tend to appreciate over time. And current accounts would naturally be remunerated by the payment of dividends.
This return to a commodity currency backed by securities would allow the abandonment of the contemporary centralized monetary system, to make way for new competition between financial intermediaries.
In the near future, it is likely that large tech companies, which are interested in the financial sector, will offer the purchase and exchange of equity funds directly on their platforms. This competition with the banking system could strengthen the integrity of a new currency based on 100% reserves.
Regarding manipulation and counterparty risks, in comparison with precious metals, note that it is probably easier to control a basket of intangible securities than to take an inventory of a stock of gold immobilized in a safe.
After cattle, one of the first historical currencies, then inert materials, metals and paper, it is thus possible that a new currency will emerge in the future, again based on living assets, such as title deeds on companies. human.