In my
previous post I had mentioned how every 40-50 years we have a change in our
currency architecture. This period is quite chaotic not just economically but
also politically and has coincided with wars or geopolitical disturbances.
Broadly there
are 2 currency systems that we have followed over the last century. 1)
Commodity Based and 2) Debt Based. I am of the view that it is impossible to
run a communist monetary system that we have today and then poses as if there
is any semblance of free markets. Why I call the current monetary setup as such
is because the price is set by the government and distribution is controlled
through few private institutions "Banks".
In this
post I would broadly point out the advantages and disadvantages of the two
systems and a possible way forward. Although this topic needs detail
explanation but the idea in this blog is to give a glance of things.
Gold
Standard: The
biggest disadvantage of this system is that the credit supply here is
restricted to the amount of gold in the system. It is tantamount to restricting
opportunities for young bright kids.
There are
two advantages of this system:
- Even though
the credit becomes restricted but the system is still somewhat (atleast
partially) free market as a government is bound by this system cannot interfere
during downturns.
In this
system it is the savings that drive credit so the risk reward distribution is
more just/correct.
Fiat
Monetary System:
The biggest advantage of this system is that the supply of credit is pretty
much unrestricted and infact the demand for credit drives the supply. It is no
question that it is a powerful system that can drive remarkable growth as we
have seen since 1960s in many countries (Bretton Woods agreement was not
completely fiat based as dollar was still linked to gold but was still more
flexible).
During
this period many regions of the world saw growth rates at levels never seen in
human history. However there are two big problems with this system:
- It is at
the end a government monopolised system so the government/Central Banks
intervene during every small downturn thus preventing the unwinding of credit due
to the misallocation of capital which has led us to the point where now the
demand for credit has dried up and any small unwinding/deflation of credit
would cause a catastrophe
- The risk
rewards are skewed away from labour to equity holders and banks causing the
income disparity to grow remarkably (Refer: (Link))
So
obviously the current setup is not sustainable and neither is the solution to
go back to the gold standard. The system that would work is which takes good features
from both these systems i.e. a free market based monetary system.
In this
system, money like any other commodity could be produced/printed by anyone,
well maybe subject to some basic norms/conditions like we have in many
industries. The free market would then decide whose money is worth its salt
i.e. people would hold the money that would have stable purchasing power over
time or slightly increasing purchasing power.
However
more importantly such a type of architecture would not only take into
cognizance the good features of both of the standards but also eliminate their
negatives. Before I point them out let me clarify one thing: There would always
be a phenomena of wealth transfer via one asset class to another. This is the
nature of capitalism and its beauty defined mathematically as “stochasticity or
randomness”. This very feature enables man to grow and achieve things from nowhere
and hence this phenomenon is not what we want to control but instead give
people a choice. Please note that the key here is randomness i.e. not because
of planned intervention of the government.
So a
market based monetary system wherein different currencies are allowed can be accomplished
by:
-
Removing
the bondage that tax has to be paid in the government printed notes
-
Eliminating
any capital gains on various assets (I don’t include real estate in this though
which in my opinion should be taxed)
-
Removing
a government monopoly on the tax currency would also force the government to
reduce its size
This
system would combine all the advantages of other two systems:
-
This
system would not be a government monopoly so:
o
as
mentioned before thus the price of the money would be determined by the market
o
The
government would not be able to avoid the downturn caused by the unwinding of
the malinvestments
-
The
competition would ensure credit supply would not be a constrained (just like in
any other product) so it is going to be a demand based credit system
-
The
risk/reward would be justifiably distributed as unlike previously now the
labour could choose to be paid in a currency where if for some reason the
business doesn’t do well the loss would be shared between the creditor and the entrepreneur.
This was not possible earlier because there was a government/bank monopoly on
the currency and any such setup in this new system would be rejected by the
labour. This is because as explained in my post before (Link)
the reason why labour settles for less compared to the entrepreneur is because
he/she doesn’t take risk of the success of the business.
Next
post on this topic would be about the currency myths.
No comments:
Post a Comment