GUEST BLOG: Ross Meurant – WHAT IS MONEY? WHERE DOES IT COME FROM? DO CRISES PRODUCE SOLUTIONS?

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Coronavirus is a Crisis.

“Leaders in the United States Senate raced to unravel last-minute snags Wednesday and win passage of an unparalleled $2 trillion economic rescue package steering aid to businesses, workers and healthcare systems engulfed by the coronavirus pandemic.”

 

Question is; Where is the money coming from?

They are going to create the money with the click of a computer mouse somewhere in the bowels of the US Federal Reserve Building in New York. The 2 trillion will in fact be a lot more because the principals of fractional reserve banking will be applied to that figure, giving the potential of somewhere around 20 trillion dollars. Pure alchemy.   [A well-known cynic]

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To criticisms, that the Keynesian policy of stimulating “aggregate demand” via budget deficits, may have positive effects in the short term but must necessarily have nefarious long-term results, Keynes, famously answered his critics; “In the long term we are all dead.”

 

So! What, is money?

Ancient societies started using gold as a means of economic exchange in lieu of barter. Gradually more countries adopted gold, usually in the form of coins or bullion, and this international monetary system became known as the gold standard.

The gold standard, created a fixed exchange rate system (i.e. the price of one currency in terms of a second currency).  In the gold standard system, each country sets the price of its currency to an ounce of gold. A fixed exchange rate stabilizes the value of one currency vis-à-vis another and makes trade and investment easier. 

 

CRISIS INTERVENES. 

The gold standard eventually collapsed from the impact of a Crisis:  World War I.  

During the war, nations on both sides had to finance their huge military expenses and did so by printing more paper currency. As the currency in circulation exceeded each country’s gold reserves, many countries were forced to abandon the gold standard.

In the 1920s, most countries, returned to the gold standard at the same price level, despite the political instability, high unemployment, and inflation that were spread throughout Europe. United Kingdom, the United States, Russia, and France, participated.

However, the revival of the gold standard was short-lived due to another Crisis: The Great Depression, a world wife phenomenon which began in the late 1920s. 

Under the gold standard, countries could not expand their money supply beyond what was allowed by the gold reserves held in their vaults. By 1931, the United Kingdom had to officially abandon its commitment to maintain the value of the British pound. The currency was allowed to float, which meant that its value would increase or decrease based on demand and supply. Other nations followed and by 1939, the gold standard was dead; it was no longer an accurate indicator of a currency’s real value.

Another Crisis arrived!  World War 2 and with it, Another Solution: Bretton Woods.

In 1944, embracing representatives from forty-four countries, John Maynard Keynes, a highly influential British economic thinker, paved the way to create a new monetary system. The resulting Bretton Woods Agreement (BWA) created a new dollar-based monetary system, which incorporated some of the disciplinary advantages of the gold system while giving countries the flexibility they needed to manage temporary economic setbacks, which had led to the fall of the gold standard. 

To enable countries to manage temporary but serious downturns, the BWA provided for a devaluation of a currency—more than 10 percent if needed. Countries could not use this tool to competitively manipulate imports and exports. Yet, despite a fixed exchange rate based on the US dollar and more national flexibility, the BWA ran into challenges in the early 1970s. 

The US trade balance had turned to a deficit as Americans were importing more than they were exporting. Throughout the 1950s and 1960s, countries had substantially increased their holdings of US dollars, which was the only currency pegged to gold. By the late 1960s, many of these countries expressed concern that the US did not have enough gold reserves to exchange all of the US dollars in global circulation.

Banks, like countries do not keep enough gold or cash on hand to honour all of their liabilities. They maintain a percentage, called a reserve. Bank reserve ratios are usually 10 percent or less. (The low reserve ratio has been blamed by many as a cause of the 2008 financial crisis.) 

As a consequence of the expense of a war America was losing in Vietnam War and increased domestic spending, the US government began to run huge budget deficits, further weakening global confidence in the US dollar. When nations began demanding gold in exchange for their dollars, there was a huge global sell-off of the US dollar, resulting in the Nixon Shock in 1971.

The Nixon Shock?  Another Crisis!   

A series of economic decisions made by US President Richard Nixon in 1971 led to the demise of the BWA. Without consulting the other member countries, in August 1971, Nixon ended the free convertibility of the US dollar into gold.

Before moving on, recall that the major significance of the BWA was that it was the first formal institution that governed international monetary systems. By having a formal set of rules, regulations, and guidelines for decision making, the BWA established a higher level of economic stability.  Nothing has fully replaced Bretton Woods to this day, despite extensive efforts.

The did US dollar emerge as the” reserve currency” i.e. is a currency that many countries and institutions hold as part of their foreign exchange reserves.  The extent to which this de facto arrangement of floating exchange rates, may have provided some temporary stability and flexibility to adjust to oil prices, is debatable. 

Temporary?  Remember also, about this time when Nixon dropped the gold standard, the Petro dollar was born where Saudi agreed to sell their oil in US$. This increased both demand and the value of the dollar.  Many would argue that his monopoly over price control, precipitated another World Crisis: In 1973, Oil Prices, elevated rapidly.   

In 1976, countries met to formalize a floating exchange rate system as the new international monetary system.  The Jamaica Agreement established a system of exchange rates, in which currencies float against one another with governments intervening only to stabilize their currencies at set target exchange rates.  Another Solution?  

Additionally, the purpose of the IMF was expanded to include lending money as a last resort to countries with balance-of-payment challenges.  Another solution? Ask Greece.

The G5, later expanded in 1997 to G7 and later to include G20, which all becomes very confusing, nevertheless, survives as a grouping of nations consisting of finance ministers and governors of central banks, meeting to discuss matters related to cooperating on an international monetary system and key issues in the global economy.   The Final Solution?

 

WHERE DOES THIS GET US?

What is money?  Well, today it is not gold backed currency.  Today it is, fiat money! 

Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro and other major global currencies.

Which may validate the opinion expressed by “A well-known cynic” at paragraph 2. 

Or to resort to a less mystical analogy than alchemy; ‘Based on the above assessments of fiat money or alchemy, perhaps the notes could also be used for that highly sought-after commodity, toilet paper’

In his book, “The Great Deformation”, David Stockman laments the impossibility of rational economic allocation within the framework of fiat paper money, deprived of any anchor in gold and where the interest rate is discretionally determined by the Central Bank.  This, he says, is “characteristic of the war economy”.

 

CONCLUSION

So, as America declares war on a, Virus Crisis they insist they did not hatch in Fort Detrick according Stockman’s theory,  their, New Solution for the virus may amount to a declaring war on the economy?

 

 

Ross Meurant; a former high-ranking police officer, former Member of Parliament, formerly with commercial interests in Syria and Iran and  currently Honorary Consul for an African state.

13 COMMENTS

    • Helena,
      There’s the rub.
      I seek not to applaud or condemn our government’s initiatives.
      Any debt the government runs up to ‘help’ people now in need, will ultimately be paid back by the taxpayer.

      Our government, irrespective of which party is in power; is captured by the ‘international system’ which is controlled beyond our shores.
      This ‘system’ creates money out of nothing, lending it to countries like Greece (a classic example) which got itself into debt and then borrowed fiat money from the IMF and dived deeper into debt to be more beholden to ‘the system’ which produces money out of thin air.

      The QE or quantitative easing which our government is about to embark on, is another variation of this bullshit.

    • Helena The various comments like yours show a lack of understanding of what money is. Money is a token that is allocated to income earners to enable them to get access to the goods and services they have created. The ‘wealth’ of a nation is not money, which is virtually an IOU, it is the goods themselves. The various comments suggest that all this money appearing fortuitously has been created by the Government. Not so. The Reserve Bank buys the visible currency (notes and coinage) at production cost, so they may pay 50c to buy a $50 note and that money is then on-sold to the private banks AT FACE (i.e banks pay $50 for a $50 note), mostly to fill ATMs. This is a nice little earner for the Reserve Bank (the process is called siegnorage and is a standard process) so I cant see what you are worried about, Helena..
      However notes and coin amount to only about 2% on money in the economy. The other 98% in the economy is invisible money – invisible because it consists purely of computer entries and can only be ‘seen’ on your Bank statements. How does this electronic money come into being? The private Banks create if from absolutely nothing whenever they create a loan, mostly for mortgages. Obviously this is very good for the banks but not good for us because they charge interest on it.
      Where then does the Government get the money it is “splashing around”? From international Bankers, who will have created it from nothing and will charge NZ interest on it. Now, Helena, you should be very worried

  1. Hi Ross

    Although your blog contains some useful history in terms of recent gold standards it leaves a lot to be desired, episodes such as the (Eric) Volcker Shock or price controls. Also an end to a fixed gold standard doesn’t mean and end to gold as a representation of value, Isn’t it possible to have a floating gold standard? Is it coincidence that as the Fed has continued to issue fiat notes the value of gold in those notes has continued to climb? Criminals as I’m sure your aware often use gold as a medium to launder money.

    But more importantly you fail to answer your original premise, “What is money?”. You correctly point out that the origins of money lie in exchange, to quote Marx, “gold is not naturally money, but money is naturally gold”. But why is money gold, and what is being exchanged? or further, why is a universal form necessary to exchange different goods, what is common between them? Is this not the origins of value which money represents as a social medium?

    I think there is another distinction you miss, gold bullion as a product of private capital versus cash and fiat money (not to be confused) issued by the state.

    Anyway if you find any of these questions intriguing I would suggest this blog, I have found it very helpful.
    https://critiqueofcrisistheory.wordpress.com/money-as-the-universal-equivalent/

    Thanks for your attention, and time.

    • David

      I slashed the word count above – as you identify – the subject is vast – too vast to address all angles in this blog.
      The essence of my article is on the efficacy of printing money to provide relief.
      At the end of the day, the tax payer must pay.
      Or what? Forgive the debt? And ….
      My qualifications in this field are to masters level degree in the economics of public policy- and a BA in politics. 9 years as an MP! Not as valuable as post parliament operating my own commercial activities in foreign fields- where I got it right or I went broke.
      Which is never a worry for bureaucrats – be they MPs or police – in times of financial hardship which now hangs like a guillotine over non bureaucrats.
      So, government financial support emerges as the salvation?
      And —where does the money come from?
      cheers
      Ross

      • Hi Ross

        “And —where does the money come from?” This is precisely my point without a theory of values “what is money?”. How can we not answer this question when it is a central premise from which all else flows?

        I’ll give two polar examples maybe they’ll help

        Modern Monetary Theory (MMT) believes money has its origins in state power, money is guaranteed by the state. MMT’ers believe that there is no limit to the quantity of money that can be printed, problems with debt well just print some more to pay it down/off, etcettera.

        Austrian economists believe that money should be left exclusively to the market. Government has no place (if it even has one) manipulating cash, issuing bonds etc. the best banks and notes will inevitably through free trade float to the top outperforming their competition.

        Both of these tendencies would disagree with you for the opposite reasons. One would say don’t stop the music, the other abandon central banking. But they both have something in common, neither believes the taxpayer would/should pay.

        You flaunt your boigoise qualifications as bonafides of your membership of the reigning economic orthodoxy, the very same which has led us into the current situation. Indeed I see they have come in most useful in deflecting my original question on the nature of value, without which we can confront neither MMT nor Austrian economics. But must instead join them in the swamp.

        I partially agree with you that taxpayers will be asked to pay for the crisis but in taxpayer I mean specifically working class taxpayers. While i suspect you mean all taxpayers. conflating capitalist who historically did well in the wake of the 2008 financial crisis with workers who saw continuing attacks on wages and conditions. many of whom were pushed to their current precariousness and now must work through a pandemic without relief.

        You again confuse them in your reply “Which is never a worry for bureaucrats – be they MPs or police – in times of financial hardship which now hangs like a guillotine over non bureaucrats.” To think that public employees never felt the sting of austerity as members of the working class. Many who are from working class families and who even now must struggle with a health, education and welfare system crippled by years of under-investment. putting in horrific overtime and potentially exposing their families. So the MP’s responsible may maintain a fig leaf over the dire conditions while enjoying pay and perks a police constable can only dream of! Yet you conflate them as if they are all in on the racket.

        I for one feel a great deal of solidarity with my fellow workers, and in this I do not look to the capitalist government, of which you were a member, which manages the economy in the interests of capital, for my salvation. Only in the mass organisation of workers against the capitalist and their government is there a possibility to make them pay for their crisis and win the conditions of which we have been robbed.

  2. David

    Ah now I get it.

    You are hard core left.

    But I really don’t get what the hell you are on about.

    Best way to present any opinion is to take out the passion.

    In your fury you miss the point of my blog completely: a history of how money evolved and moving on to how it continues to evolve.

    Once it had a base point of gold bullion and now it is on a promise to pay a endless spiralling debt of treasury bonds issued by banks owned by who?

    At the end of the day however someone has to pay the debt.

    My article is not judging whether this is good or bad : it’s merely explained what we have.

    As to my qualifications. The are what I have and they are for you to subjectively condemn by once again allowing passion to cloud your judgement.

    And you pedigree?

    Perhaps you should write a book. Because your presentation completely evades me.

    Meanwhile go back my blog because it’s seems to me you missed the point.

    Cheers

    • Hi Ross

      No I don’t think you get, it as you say “But I really don’t get what the hell you are on about.” But I will take the time to ask you again as I have reiterated three times. Your latest deflection being, I am from the “hardcore left” does not invalidate my arguments, it simply shows the limits of yours.

      What is Money? You still can offer no theory of value to back up your conclusion that “tax payers” will inevitably pay for the crisis. why not just print more? Hence both MMT and Austrian conclusions are equally valid.

      Indeed this is the new pattern that has emerged, we are printing money to save the economy from bad debt accumulated by the last crisis, which printed money to save companies from bad debt which caused a crisis. Why not just continue in this obviously circular logic forever?

      I have a theory of value (theory of surplus value), and not my opinions in which to back up my analysis. but historical examples where governments went on printing sprees which I gave as examples. while you insist we must simply take you at your subjective word.

      My pedigree? and some say class is dead! Should I scrape and call you my Lord? wow that’s Freudian, lol.
      My current job is a groundsman, but what relevance does it have to the conversation, unless you wish to virtue signal once more? third times a charm.

      The book is being worked on I referred you to it before. You could go read the articles, genuine criticism is always appreciated.

      Why do you think I’m angry? I enjoy a good debate. Perhaps you’re just projecting?

      Thanks Ross

Comments are closed.