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What is happening to our money?

By Alexander Maune

The world’s central banks and the IMF still have vaults full of bullion, even though currencies are no longer backed by gold. Governments hold on to it as a kind of magic symbol, a way of reassuring people that their money is real. — James Surowiecki.

As the whole world is focusing on climate change and its impact on humanity, let us not get destructed from seeing the global monetary climate change before our eyes as given by Ronal-Peter Stoeferle and Mark J. Valek in their 2021 In Gold We Trust Report.

Though money has been in existence since time immemorial, very few people seem to appreciate the commodity.

For much of human history, money was made of valuable commodities such as gold or silver coins or pieces of paper (bills) that represented these commodities. For many economies, gold served as the foundation of the money supply.

The United States used a gold-based money supply but cut some of its ties to gold during the Great Depression and then severed its last official monetary link to gold in 1971.

Money has become controversial the world over. What constitutes money and its role in economic stability and growth has attracted a lot of attention from central banks, politicians, and scholars among others.

Disagreements from different schools of thought have ensued regarding the control, supply, and role of government in money. For decades there has not been consensus regarding the gold standard, fiat money, and denationalisation of money.

This paper is part of a series that looks at some of the above issues from an Austrian perspective.

What is money?

The Sages of the Jews state that for one to understand the meaning of a word, one must go to the original meaning or source, that is when the word was first used. It is interesting how the meaning of the word money has changed over the years.

According to my old Collins dictionary (1978), money is defined as; pieces of gold, silver, copper, etc., stamped by government authority and used as a medium of exchange; coin or coins: also called hard money.

That is the first and important definition. My recent Oxford dictionary (2010, 7th Ed.) defines money as; what you earn by working or selling things. This is quite interesting. Something does not look right here. Biblically, gold and silver were used as a medium of exchange.

The reason why gold is called God’s money by others. So why are we not allowed to keep gold and where is our gold going? Why are we exchanging real money for fake (fiat) currency?

Why are other countries buying/holding (see 2020-central-bank-gold-reserve-survey) gold while we are selling ours? What is backing our currencies, since our notes are written, “I PROMISE TO PAY THE BEARER ON DEMAND”?

Can someone explain to me the meaning of this statement? In simple terms, the statement means that each unit of currency (for example, a dollar) is tied to a specific amount of gold and is redeemable for that specific amount of gold.

Any holder of that note can thus approach the central bank to redeem the note for gold. Unfortunately, this is impossible since owning gold is illegal in Zimbabwe. So why are we wasting ink writing the statement?

Professor Stephanie Kelton, author of the best-seller The Deficit Myth, and other modern monetary theorists take great pains to tell you that the government has a monopoly on currency.

Quite so!

But the world economy is not fuelled by currency, it is fuelled by money.

Modern money is better understood as credit — credit to one’s deposit account, working capital financing, a bank loan, debt issuance. But one should not be seduced by the simplicity of these examples.

“Credit” is actually far more loosely defined and creatively employed.

It is, especially, applied mathematics and computer science; it is statistics, economic theory, and expected volatility, argue Stoeferle and Valek (2021).

What “money” and “credit” really are is imagination: the imagination to develop a financial format that another party will accept as payment. In the monetary realm it is not the central bank that is the dominant, creative force.

The Bank of England says as much: “Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base, or broad money. Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.”

James Rickards in his book entitled, The New Case for Gold, argues that a classic definition of money has three parts: medium of exchange, store of value, and unit of account. If all three of those criteria are met, you have money of some sort.

Rickards states that gold is money, and money has no yield because it has no risk. He further argues that a bank deposit is not money; it is a bank’s unsecured liability.

Money should be nothing more than it was at its origin: a market-created good that emerged out of a trade. The most valuable commodity in society, the one good that could be traded for all other goods and thereby help facilitate complex exchange, emerges as money.

This could be in the form of beads or animal skins or jewels or precious metals. Gold became money because it had all the properties people look for in good money.

The government had nothing to do with it.

In 2013 in an interview with BBC’s Justin Rowlatt, Andrea Sella, a Professor of Chemistry at University College London provided an interesting and detailed analysis of why gold makes a good currency among the 118 elements in the periodic table.

He discounted each element one by one until he was left with gold as the only element that can make a good currency.

The process of elemental elimination tells us the following about what makes gold a good currency according to Professor Andrea Sella;

  • It does not have an intrinsic value
  • A currency only has value because society decides that it does
  • Gold is unbelievably beautiful
  • It is stable, portable and non-toxic
  • It is fairly rare
  • Gold has one other quality that makes it the stand-out contender for currency in the periodic table. Gold is golden. That makes gold very distinctive.
  • Gold’s relative inertness means you can create an elaborate golden jaguar and be confident that 1,000 years later it can be found in a museum display case, still in its pristine condition.

Our ancestors did not use gold just because it was shiny or beautiful as modern critics suggest, argues James Rickards, gold is the only element that has all the requisite physical characteristics — scarcity, malleability, inertness, durability, and uniformity — to serve as a reliable and practical physical store of value.

Robert Kiyosaki, in his book entitled, FAKE, fake money, fake teachers, fake assets: How lies are making the poor and middle class poorer, state that today there are three types of modern money and these are:

  • God’s money: gold and silver
  • Government’s money: dollars, Euros, Bonds, RTGS, Central bank digital currencies (CBDC) etc.
  • People’s money: Bitcoin, Ethereum, ZipCoin, decentralised cryptocurrencies etc.

The question remains, which monies are real and fake?

Choice of currency

Professor F. A. Hayek made the following important points regarding the choice of currency. Choice of money is critical for financial and economic stability as well as the economic growth of a country.

  • The chief root of monetary troubles is the scientific authority the Keynesians gave the superstition that increasing the quantity of money can ensure prosperity and full employment.
  • The superstition was fought successfully by economists for two centuries of stable prices during the age of modern industrialism and the gold standard.
  • Before then inflation largely dominated history.
  • Keynes’s (macro-economic) error was to suppose that labour demand and supply can be equated (and unemployment avoided) by managing total demand. Employment depends on demand in each sector of the economy. Managing total demand by expanding the money supply creates only temporary and therefore unstable employment.
  • A ‘lost generation’ of economists who have learned nothing else continues to offer the quack ‘full employment’ remedy and to win short-term popularity for it.
  • No government, national or international, that wants to remain in the office can be expected to limit the quantity of money better than a gold standard or any other (semi-) automatic system because in practice it succumbs to sectional pressures for additional cheap money and expenditure.
  • The gold standard, balanced budgets, fixed exchanges, enabled governments to resist sectional importunities. The removal of these ‘shackles’ has enabled governments to act more irresponsibly.
  • The only hope for stable money and resistance to inflation is to protect money from politics by removing the power of government to require its citizens to use its money as the only legal tender.
  • The government would then not inflate its supply, because it would be forsaken for other currencies.
  • Inflation can therefore be stopped by introducing competition in currency. The notion that it is a proper function of government to issue the national currency is false. Citizens should be free to use and refuse any currencies they wish: politicians would then have to limit their quantities. Then inflation would be avoided.

It is also interesting to note how the definition of inflation like money has changed over time. This is a result of governments running away from responsibility and accountability.

The Collins dictionary (1978) defines inflation as, “an inflating or being inflated. An increase in the amount of money in circulation, resulting in a fall in its value and a rise in prices.” To the Oxford dictionary (2010) inflation is, “a general rise in the prices of services and goods in a particular country, resulting in a fall in the value of money.”

Who is fooling who here? Can someone explain this sudden change of meaning of the word? This calls for an interrogation of ownership and control of central banks.

  • Maune is a Talmudic scholar, researcher and consultant as well as a member of IoDZ. — alexandermaune6@gmail.com

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