I am delighted that my friend, and fellow Scottish nationalist, Hong Kong based Dr Jim Walker has agreed to be my guest blogger. I remember many years ago as a student one of my teachers, Professor Gianfranco Poggi, pointed out that education is a critical activity. It should always make you think and challenge preconceived ideas. That is what Jim always does for me. He always makes me revisit my thinking, even if he doesn't always change my mind.
I asked Jim for permission to post the second part of a three part series he published on his own site at www.drjimwalker.com
I have always had concerns about the rather superficial way many people on all sides of the currency debate in Scotland discuss central banks and money. Indeed, the naivety of assuming central banks are good and take policy actions in the interest of the nations they serve has worried me. Similarly, the currency debate often ignores realities on the ground such as the use of parallel currencies. Even the small business I ran before becoming an MP traded using three currencies, the pound, the US dollar and the Euro. I didn't need to ask anyone's permission to do so. However, until I read Jim's blog I had never thought about the connection between central banks, money and the military-industrial complex.
So over to you Jim, go on, educate me, make me revisit my thinking
Taels from the Crypt
Part 2: Stop laughing at the back!
From what we know about the expansion of central bank balance sheets across the world in the last half-Century it is almost beyond parody that the Bank for International Settlements could make the following two claims on Page 93 of its Annual Economic Report 2018:
“The tried, trusted and resilient way to provide confidence in money in modern times is the independent central bank.”
“Independent central banks have largely achieved the goal of safeguarding society’s economic and political interest in a stable currency.”
If 98-99% devaluations over the course of 50 years (see Taels from the Crypt, Part 1) are an “achievement” we would hate to see its definition of failure. The truth of the matter is that central banks have merely vied with each other in the currency debauchment stakes. That has made the extent of debasements much less easy to see. Had we lived in a commodity-currency world, it would have been obvious which paper currency to have backed or, more likely, to have burnt them all.
The periodic reductions in debt as a percentage of GDP experienced in Western countries since the Second World War have come under the cover of widespread debasement (inflation). For those governments that have stepped too hard on the gas, Zimbabwe and Venezuela spring to mind, the outcome has been catastrophic for their economies and populations (although not for debtors). But that said, it would perhaps have been asking too much for the ‘central bank’ to the world’s central banks to pronounce the experiment with fiat money, an abject failure.
But if it has been a disappointment, why do people keep using this ‘funny’ money? After all, individuals, companies and institutions keep transacting in the paper printed by governments all over the world. Hayek had this to say on the matter:
“From Marco Polo we learn that, in the 13th century, Chinese law made the rejection of imperial paper money punishable by death, and twenty years in chains or, in some cases, death was the penalty provided for the refusal to accept French assignats. Early English Law punished repudiation as lese-majesty(sic). At the time of the American revolution, non-acceptance of Continental notes was treated as an enemy act and sometimes worked a forfeiture of the debt”.
- Friedrich A Hayek, The Denationalisation of Money – The Argument Refined, Hobart Paper Special No 70(2ndEdition), The Institute of Economic Affairs, 1978, p.31
In other words, businesses and households have no choice but to use the government-mandated money in their jurisdiction. This is particularly the case when they are billed for their taxes. That said, there is no need for international trade and payments to be undertaken in any specific currency. The US dollar supplanted the pound sterling over the course of the last 100 years. To that end, is there a ‘New Pretender’ waiting in the wings to supplant the dollar? There is undoubtedly growing speculation that the US currency is losing its lustre. Central bank debasement of the currency – the Fed’s balance sheet now stands at US$7trn, up almost eight-fold since the beginning of the financial crisis in 2008 – is at extreme levels. However, nearly all of its paper competitors are just as bad.
So let us move on to the biggest threat that central banks (and governments) have ever faced – the rise of cryptocurrencies.
The New Pretenders – Cryptocurrency challengers to the dollar
“Even the most radical advocates of free enterprise, such as the philosopher Herbert Spencer or the French economist Joseph Garnier, seem to have advocated only private coinage, while the free banking movement of the mid-nineteenth century agitated merely for the right to issue notes in terms of the standard currency.”
- ibid, P.28
Governments – mostly in the form of rulers, princes, monarchs, elites and, in the last 100 years, democracies – have been the traditional issuers of currency. By and large this was because they were the only people rich enough to own mints, where coinage was cast in metal. But while we might criticise the debasement of fiat money, governments have been at the same trick for centuries. Jean Bodin, writing in 1606, described the
“…thousands of minor princelings and cities who, during the later (sic) part of the Middle Ages, had acquired the minting privilege…”.
In the Thirty Years War (1618-48) the Holy Roman Empire was home to what became known as the Kipper and Wipperzeit (1619-1623) – the clipping and culling times – where hyperinflation became commonplace as various principalities and dukedoms debased coinage in order to finance the ongoing war:
“The initial effect of the enormous monetary expansion was an economic boom. However, eventually prices started to increase rapidly, and the initial boom turned into hyperinflation and crisis. By this stage, many of the new coins were made almost entirely of copper…Tax revenues also ran dry, as taxes were paid in copper money.”
- Isabel Schnabel and Hyun Song Shin, Money and trust: lessons from the 1620s for money in the digital age, BIS Working Papers No. 698, February 2018, p.8
Coins accepted as money were merely the product of social convention and custom. And one other fundamental condition: the legal threat to imprison people who did not pay their taxes in a specific currency. This example of state coercion, that was originally designed to finance rulers’ lifestyles and their military ambitions, is now considered the source of fiat money legitimacy. Throughout history the inability of governments to print money at will was one of the main reasons for short military campaigns and localised wars. Sadly, the rise of paper money has coincided with the increase in standing armies, the expansion of overseas military adventures and growing stockpiles of weapons by all sorts of dubious regimes. The modern-day, military-industrial complex is the bastard child of fiat money and, increasingly, modern-day central banking. (My emphasis)
But for the first time ever the fiat-paper behemoths are seriously under threat. Unfortunately, along with the genuine threat, there is an untold amount of hyperbole to wade through. Take this selection of headlines from online newsletters in the last few months:
“Top Facts on China’s Crypto Yuan and Related Blockchain Projects”, CoinTelegraph, 7 May 2020
“China’s Digital Currency Could Challenge Bitcoin and Even the Dollar”, Bloomberg Businessweek, 2 June 2020
“China takes battle for cryptocurrency hegemony to new stage”, Nikkei Online, 14 June 2020
There is one problem with these stories and that is that they are by-and-large not about true cryptocurrencies. Rather, they are about the digitalisation of existing fiat monies. Yes, the Chinese DCEP and FedCoincould both potentially make use of blockchain technology to allow peer-to-peer payments through a centralised (i.e., controlled by the central bank) accounting ledger but this is merely an electronic substitute – and a more controllable one at that – for cash (which is an existing peer-to-peer payments system that can guarantee anonymity between the parties to any transaction using money produced by the state). If one considers that central banks have been the source of hitherto unimaginable amounts of debauchment, digital currencies hold the potential for being much worse. Unlimited ‘money’ creation is one prospect while another is negative interest rates, currently still a step too far for most central banks, which could be applied to citizen’s money with the flick of a switch thus forcing economic actors to become coerced consumers rather than considered savers. As Bech and Garratt point out:
“FedCoin has the potential to relieve the zero lower bound constraint on monetary policy…If a retail CBCC (central bank cryptocurrency) were to completely replace cash, it would no longer be possible for depositors to avoid negative interest rates and still hold central bank money.”
- Morten Bech and Rodney Garratt, Central bank cryptocurrencies, BIS Quarterly Review, September 2017, p.63
As long-time readers of our writing at Asianomics Group and Aletheia Capital will know, we have referred to the repression of interest rates since 2008 as ‘institutionalised theft’. The development of digital currencies where the authorities could apply negative interest rates at the touch of a button could be thought of as ‘institutionalised theft squared’. The damage done to the underlying economy, never mind the political fallout that favouring one part of society over the rest i.e., those with access to banks and the means to borrow and invest at will, is likely to take us in directions that we will all regret, if that has not already happened.
Hayek, in The Denationalisation of Money, articulated the case for private issuance of currency and even went so far as to describe how various currencies could be produced, monitored and judged. At the heart of his thesis was a simple contention: “Though we are apt to take it for granted, it is by no means of the essence of money that within a given territory there should exist only one kind, and it is usually true only because governments have prevented the use of other kinds.” P.73 Blockchain, a distributed ledger technology, is the cornerstone of cryptographic currencies.