Editorial – The end of national currencies

Lawrence Solomon
The Next City
December 21, 1997

Everyone can mint money in the electronic global village







IN A REFLECTIVE MOMENT before a gathering of former world leaders almost two years ago, Prime Minister Jean Chrétien described governance in our new lean, mean era of global free trade. "International finance knows no borders," he told the aging heads of state, who had had the luxury of presiding over closed-shop countries with a free hand to finance lavish pet schemes. "Tidal waves of money wash effortlessly backwards and forwards, buffeting interest rates and exchange rates [and destroying] the best-laid plans of government." The best that a nation state can hope to do, a sombre Chrétien concluded, is "influence these flows even if it cannot control them. . . . We cannot stop globalization."


In this the citizens of the world can rejoice. When globalization hit the Western countries, the casualties were economically and environmentally unsustainable megaprojects such as nuclear reactors, arctic pipelines, and hydrodams such as Quebec’s Great Whale project — state vanity projects that could be built only if insulated from economic reality. When globalization hit Asia last summer in the form of a currency crisis, among the first casualties was Malaysia’s Bakun dam, a $7-billion pariah that local communities and international environmental groups had long fought. If globalization comes to China soon, it will halt the $100-billion Three Gorges dam, the mother of all megaprojects, and end the forcible relocation of almost two million people from the Yangtze River Valley, the country’s most productive agricultural region. Without globalization, this worst nightmare of the citizenry — and shining dream of every Chinese leader since the 1920s — cannot be stopped.


Government leaders have good reason to fear globalization — worldwide deregulation represents the greatest transfer of power in the history of the world, from ruling national elites to the world’s citizenry, complete with the loss of the trappings of power. National airlines, national petroleum companies, and many other once proud symbols of national sovereignty already lie in ruins. Soon, the greatest sovereignty symbols of all — national currencies — will disappear.


THE DISAPPEARANCE HAS ALREADY BEGUN in Europe, where the euro, under the control of one European central bank, will replace the national currencies and central banks of 11 nations next year and, by the year 2002, may encompass all of Western Europe. In Asia and Latin America, countries such as Hong Kong and Argentina abolished their central banks and made their domestic currencies U.S.-dollar equivalents. Some financial analysts predict that in five years the nations of the world will divide themselves into three zones, each with a central bank and its own currency — the euro, for countries that predominantly trade with Europe, the yen for Asia, and the dollar for the countries of the Americas.


The logic in abandoning national currencies — local monopolies that serve no productive purpose — becomes clearer as international trade and world travel increase. According to the European Commission, someone travelling to each member state, exchanging his money into the local currency at each border, would lose up to half his funds without making a single purchase. While business, too, welcomes losing the expense and hassle of exchanging currency, it especially values eliminating the risk of exchange rate fluctuations. Because a national currency can nosedive 10, 20, or even 30 per cent in a matter of days, exporters and importers can’t trade their wares with any confidence that the payment will have its expected worth when it comes due. As a result, many large companies now hedge their activities through various financial instruments that — for a price — eliminate the risk of the transaction and bring some stability to the chaotic world of national monopoly currencies.


As the world moves toward three regional currencies, with three regional central banks, and as nationalists get over the disappearance of their local currencies, there will be moves to unify all currencies under a single institution run jointly by the three central banks or by the International Monetary Fund, conceived by John Maynard Keynes as a world central bank issuing an international currency. But one currency and one central bank would not be an unmitigated blessing but an unmitigated curse. This one unelected global monopoly would be responsible for issuing the right amount of money needed to lubricate the world economy — an impossible task since different countries, and different regions within counties, necessarily have different rates of economic growth and different rates of inflation. Too much liquidity could lead to runaway world inflation; too little, to deflation and even depression.


Because the central bank would invariably be wrong, the global economy would be more vulnerable than ever to discipline from currency traders. If a world currency were forced to devalue, the entire globe could suffer convulsions far more severe than those of the Great Depression. Trying to spare themselves from the turmoil, some countries would defect from the world currency. Anarchy would ensue.


Fortunately, this scenario is unlikely, not because government leaders will balk at the seductive logic of merging central banks but because our cumbersome, inefficient, outdated central banking system will soon be overtaken. In the post-central bank era, the people will be sovereign, their domain will encompass the Internet, and their currencies of choice will be electronic but rooted in reality.


THROUGHOUT HISTORY, PEOPLE USED ALMOST ANY COMMODITY as money — early currencies included salt, tea, and grain — but none proved as convenient as precious metals, especially gold and silver, which best met the chief requirements of currency — inherently valuable yet easily divisible, allowing for large and small transactions alike; consistent and predictable in quality, avoiding the need to assess the currency’s value as well as the value of the goods traded. Commodity-based currencies coexisted and exchanged one for the other at known ratios, just as we exchange paper currencies.


But unlike these naturally occurring currencies, today’s government-created paper currencies have no underlying value — their worth depends entirely on the confidence citizens have in their politicians. Pretend as we might that politicians will protect their value, that pretence can vanish — and all-too-often does — overnight, sending paper currencies into a tailspin.


Money was originally produced independently of government. The dollar began as a one-ounce silver coin produced by a 16th-century Bohemian count named Schlick, who lived in Joachim’s Valley, or Joachimsthal. Because of his coins’ reputation for uniformity and fineness, they became known as Joachim’s "thalers," from which "dollar" emerged. Unlike today’s holders of dollars, holders of thalers did not expect their money to devalue year after year through one form or another of debasement.


When governments first monopolized coinage, the royal coins often bore the guarantees of private bankers, to overcome public distrust of the government. Over time, governments shelved these private guarantees, leading to widespread inflation — no commodity in the history of the world has been more debased than government-issued money. Even in today’s era of relative fiscal prudence, the Bank of Canada only aims to limit the debasement of our currency to three per cent a year.


Because cumbersome central bank currencies can’t keep up with modern money needs, CyberCash, DigiCash, and an explosion of other alternatives, backed by the likes of Microsoft, Hewlett-Packard, EDS, and many of the world’s leading banks, are already available on the Internet, while international smart card currency Mondex — now being tested in Canada and elsewhere — expects within 15 years to replace 60 per cent of paper and coin currencies with electronic money created beyond central bank control. Count on the central bankers to try to cripple these competitors with regulations, but don’t count on them to succeed. Faced with a choice between a central bank currency, that’s as trustworthy as the politicians that ultimately control them, and a currency from a Microsoft or a Deutsche Bank, who will fully back them with gold or some other commodity, consumers will steadily switch — eventually stampede — to the security and flexibility of private currencies, leading to a run on central banks that eventually will force them to close their doors.



BECAUSE DEREGULATION, PRIVATIZATION, FREE TRADE, and other components of globalization have barely begun, most commodities remain very thinly traded, making them illiquid and inappropriate as currencies. But with the Internet bringing six billion people into one global village marketplace, where even microtransactions worth fractions of pennies can be profitably transacted, an enormous proliferation of commodities will qualify as currencies, ushering in a wealth of new consumer services. None will be more important than giving individuals and small businesses the same ability to hedge their finances that big businesses enjoy.


In saving to purchase a house, a young couple today may fear that real estate prices three years hence — when they expect they’ll have enough for their down payment — will outstrip their savings. Some panic and buy a house before they’re ready. With the availability of hedging services, couples would be able to save relevant currencies — say a real estate currency or commodity index tied to the types of neighborhoods they’re considering. Other consumers might save currencies such as frequent flyer points to pay for their annual vacations, or currencies that reflect their gasoline purchases or other routine expenditures. But for most routine, day-to-day transactions — and for savings untied to any particular purchase — the currency is likely to be gold, the historic currency of choice of the world’s populace. Barter, once an aspect of primitive societies, becomes efficient and largely indistinct from currency exchange in the electronic global village; national currencies, meanwhile, become primitive mediums of exchange.


THOUGH NATIONAL CURRENCIES have served no useful purpose, they created much misery for the poor and other vulnerable members of society, and not just through the unsustainable megaprojects they allowed. Through inflation, the pensions and other savings that people relied on in their latter years became devalued, sometimes reducing their lifestyles to subsistence. Inflation also burdened people who did not rely on fixed incomes: Mortgages became unnecessarily high, everyone thought more in the short term, since inflation made long-term investments that much more speculative.


Great as the economic costs of national currency monopolies have been — nothing short of war approaches the destruction left in their wake — national currencies also exacted great social and moral costs. Chief among these has been the devaluation of government itself. Raising taxes is often necessary but rarely popular, a combination that leads weak leaders to hide their taxing activities from the populace through their monopoly over currency. Inflation pushes people who haven’t seen a real wage increase into a higher tax bracket, giving them an effective pay cut, and it allows the government to repudiate its debts to its own people while requiring them to pay the government’s foreign lenders in full. National monopoly currencies make governments sovereigns over us, instead of servants to us; they divorce government from the citizenry, breeding a destructive mutual cynicism.


The post-central bank era will bring people and their leaders together, encouraging them to share the same dreams for the future. The currency of our much discredited institution of government will then soar.


Lawrence Solomon



Robert Anderson, Sheridan, Wyoming, responds: January 18, 1998

A good friend sent me your essay because I have been interested in this subject for many years. As a retired professor of money and banking, however, I still can’t resist "lecturing" on this topic to informed individuals such as yourself!

I fully concur with you that the world expansion of the market economy is, fortunately, undermining statist nationalism, especially our monopolistic central banking systems. However, in describing this evolution it is important to distinguish between money and money substitutes. The monetization of private credit in the form of an electronic medium of exchange, with it’s incredible acceleration in the "velocity" of money, should not be confused with money proper. While fiduciary credit expansion and its velocity are major determinants of the exchange value of money, final settlement of these credit claims must ultimately be paid in either fiat money (if central banks possess a monopoly over money issue) or gold (if a free market in money prevails).

Your observation, "an enormous proliferation of commodities will qualify as currencies," needs some qualification and clarification. Money serves the function of economic calculation as a medium of exchange and, as such, its objective exchange value is partially determined by the quantity of goods and services bidding for money. For a more extensive discussion on this subject, the best analysis is still Ludwig von Mises’s, The Theory of Money and Credit, especially the section dealing with the determinants of the objective exchange value of money.

A final and profound point on monetary theory which few economists grasp today! Money, unlike any other economic good, does not enhance its utility by an increase in its total supply. Any change in the total supply of money, upward or downward, is a disutility to its function as a medium of exchange. Many years ago, Murray Rothbard wrote a short booklet entitled, What Has Government Done To Our Money, which succinctly explains this point. I commend it to you as one of the most insightful essays on money ever written!

Your essay is excellent and I hope you will continue to develop this theme in your future writings. I hope I haven’t offended you by injecting more Austrian economic theory into your analysis.

J.C. Stefan Spicer, Vice-President, Central Fund of Canada Limited, Anacaster, Ontario, responds: January 20, 1998


Your article was a very insightful piece of work. The debasing of what was once money into today’s currencies has been abhorrent.


Tom Kennedy, Ottawa, responds: February 20, 1998


You predict the demise of national government "monopoly" currencies, and a proliferation of Internet currencies co-existing with three continental currencies. I am pleased that you recognize that while barter is perceived as an aspect of primitive societies, it is becoming more efficient and may in fact become largely indistinct from currency exchange in the developing electronic global village.

It is true that anyone can mint "interest-free" money in the electronic global village and many are already doing just that in local communities all around the world by trading skills, services, and products using the popular LETS (Local Employment Trading System) software created by Michael Linton from Courtenay, British Columbia, in 1983. The initial development of the LETS software was financed by John C. Turmel from Ottawa. Now there are well over 3,000 local communities using the LETS software which is really delivering its participants a local interest-free banking system. The long-term plan for the expansion of the LETS model as an interest-free banking system is to use the Internet to eventually link thousands of these local communities using the LETS software, so that trading can occur globally as well as locally and nationally.

You did not mention whether your vision of a global economy will have an "interest-bearing" or an "interest-free" currency. There is a critical difference and I invite you to continue your research and include the study of an "interest-free" Internet currency and how it would compare to our current "interest-bearing" federal money. I draw your attention to these URL’s where you can explore more about what other great thinkers are writing about money in the 21st century.

Lawrence Solomon replies

Without central bank monopolies, there will be room for currencies of all types, including interest-free currencies such as LETS, a system that allows participants to perform work for one another. But because interest-free currencies must sustain themselves through various other costs (sometimes hidden), which a competitive currency regime would ferret out, they will not prove popular. Most consumers, given a choice, will prefer to pay interest.

Professor Anderson will be pleased to learn that the commodity-backed currencies I described do not depend on fiat money. The regulatory regime governing Mondex, today’s leading electronic currency, permits Mondex to issue currency units that can be exchanged for gold or silver, as well as for paper currency. Free market currencies will be entering the marketplace far sooner than most people realize.


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