Jock's Place - MPC - a monetary alternative? - Comments

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Jock Coats — Tue, 31 Oct 2006 13:28:35 +0000

I tend to agree with the sentiments behind both of these points and, as I say, I kind of offered the idea of complete privatisation as an alternative to, if you like, the
ationalisation" of the creation of purchasing power.

However, I think anonymous, what you describe, in a globalized world, does not need the individual central banks acting in their own little corner of the global market. Perhaps the role for central banks would be simply as subsidiaries, along the lines of the Federal Reserve network in the US, of the IMF or World Bank or as custodians of the SDR system.

And to Martin, I'm sorry, I think you maybe misunderstand the circumstances I am talking about this sort of development being achievable. It is precisely because of the globalization of communications and trading technologies that such things would be able to happen more automatically and need fewer people dedicated to them as they would be networks in which we would all truly be involved not merely as users of those currencies but as participants in the networks that create them.

If I put more faith in voluntary co-operation between individuals, as presumably Hayek did, than in state institutions, why sould having a state institution offer me any comfort at all?

I'm talking about the real democratization of currency.

Mervyn King, as I say, speculated about the demise of the central banking system (which we did very well without for most of the most economically liberals periods in our history globally), a long time ago now. It hasn't happened yet, but the technology is getting there for the circumstances he outlined to occur.

Hayek as I understand it assumed the competition amongst currency "suppliers" would actually reduce costs, tending towards nil."

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Martin Young — Tue, 31 Oct 2006 11:59:20 +0000

A plethora of independent private money suppliers" would result in a vastly expanded industry of middle-men and speculators as these currencies are traded and continually revalued. Without a goverment behind them there would be almost no visibility into them, no meaningful regulation and no stability.

One only has to look at the history of the money markets, to see that they are capable of bankrupting countries, destroying real businesses and, to all intents and purposes, gambling away individuals' hard earned savings. And on what basis do they operate? On the whim of a herd of traders and analysts.

Surely we have economic leeches as it is? If there are going to be seismic changes in banking we should be working towards making it better for individuals and businesses who produce real services and goods of value, not grubby little money men."

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Anonymous — Tue, 31 Oct 2006 09:12:27 +0000

Economic sovereignty was handed over on the abolition of exchange controls and credit control. The notion that any government has any control whatsoever over the supply of money and credit in the current global economy is a pipedream.

Nevertheless, the fiction that national banks do have some control has a vital role in maintaining confidence in the system, and crucially it is an instrument that allows the government to step in at times of economic crisis, when confidence in a totally private banking system could potentially vanish into thin air.

Therefore the current muddle does actually have a purpose. While it could be refined and brought more into line with global reality, we still need national banks and currencies as an ultimate backstop.

MPC - a monetary alternative?

Jock — Tue, 31 Oct 2006 07:53:00 +0000

For balance, and because I am personally quite ambivalent about which direction monetary policy takes, there is an alternative to having a state run money supply. One that I believe Hayek speculated, and which in any case is steadily coming to pass.

Completely privatize money supply.

If just 3% of our money is actually created as base money, what's the point? After all, national currencies are irrelevant in the modern world aren't they? A defining attribute of a national currency is that it circulates in one territory mainly. It therefore acts as a restriction on globalization because it encourages us to trade with counterparties that share that common currency. And if controlling it is already quite a dificult balancing act for central banks, why bother at all?

Mervyn King himself recognizes this. At a conference of Central Bankers at Jackson Hole in the US in 1999 he speculated that the rise of the internet and the globalization of communications and information could render national currencies obsolete. Already 25% of global trade does not involve national currencies at all, but various forms of barter - France built power stations in Brazil I think it was in return for oil for example.

Anduntil now, such barter was really only worth doing on a grand scale like that or on a tiny scale between people you trusted because you knew them. But interpersonal communications, facilitated by the internet, and the ability of people to form their own communities separate from the geographical location they happen to reside in means that we could easily be entering a world in which all the information was there at our fingertips to be able to decide what we will pay whom for what and in what type of currency.

Already we do it to an extent without thinking. If we have more than one credit card we make a quick almost subconscious calculation of how much we will have to pay for something and when if we use one card rather than another. If we take it one step further, we join an internet community like Second Life, the fastest growing economy inn the world I am told, with its own, convertible, currency. Participants in Second Life already decide amongst themselves when they put something up for sale whether they want paid in US dollars or the local Linden dollars, or whether they will be open to negotiation as to what they get paid in.

Hayek merely saw banks competing to create their own currencies - you would choose which one to use depending on various factors - well managed backs would have a stable backing for their currency and minimize the risk of a collapse by prudent management. If there was too much of one bank's currency in circulation it would become devalued and markets would make sure it levelled out in time through people choosing to use other banks' currencies.

But now, potentially, we can deal in all sorts of "currencies" - even of our own making. And the more we get around the global arena the more people will trust our bona fides as creditworthy.

There is a catch. For all that this should appeal to those economic liberals that championed monetarism under Thatcher, they reject it because, as goes the argument over the Euro, if the state doesn't have control of its own money supply, it loses all economic sovereignty. Well, yes. it would. But that's the point, if we want a global economy with a level playing field, the protectionist nature of national currencies does in fact have to disappear.

So, if you want some control, any control, as a nation state, then we have to take more control of our money supply as mentioned in my previous opus. If we want truly free global trade that would truly lift the fortunes of the worst off on the planet, we have to abandon that pretense and go for privately created currencies appropriate for each transaction and the central bank is redundant. The technology nearly exists now to enable us to manage multiple currencies every day of our lives. Some people effectively already do - there was a fad if you remember for choosing Euro denominated mortgages. Well soon that flexibility could be available for the purchase of your morning paper.

But if we carry on with the buggers muddle of state sponsored but commercially created monetary systems, we will end up blindly handing all our economic sovereignty over without having a say in the matter. I give it five years, a decade at the most. We need to think about it now.