There are two critical related characteristics of the medium of exchange and store of value, or “money.” First is the adequacy of its supply, and who controls it. Second is the issue of the safety and stability of its value as an asset to hold.
How well any possible choice for “money” solves or addresses these two basic concerns says much about its desirabiilty to us as users and holders.
What are the possible candidates for money? Broadly speaking they fall into three main types.
- Historically, gold and other commodity monies have been employed, including paper notes backed by commodities.
- Fiat monies controlled by governments and central banks are now the norm, because they serve the desires of governments—not necessarily the needs of their citizens.
- Alternative monies consist of our proposed productive capital as money as well as various schemes for pseudo-commodities, cyber-monies, and/or privately managed fiat currencies.
Let’s start with the worst choice and work toward the best. Worst, we would say, is fiat money issued by governments. Its scarcely disguised intention is to operate as a financing tool for government, monetizing government debt and saddling the populace with an inflation tax. In either case it pulls real output away from the private sector and toward the government. When it is combined with an opportunistic fractional-reserve banking system, its actual supply becomes dependent upon the whims of private bank lending behavior. Moreover, how and to whom banks loan out your deposits is dictated by government regulations or political lending agendas applied to them as well as upon central bank issuing behavior. Not surprisingly, this has historically caused excessive volatility for fiat money economies and the cost of severe fluctuations in employment, prosperity, and growth. Thus, from the citizen’s point of view, supply control is poor. Over time, fiat money has also proven a poor store of value. The burger that cost $0.15 in 1945, would now cost over $3.00.
Somewhat better choices are commodity monies or possibly pseudo-commodity cyber-monies such as “bitcoin.” The world, of course, has had a much longer experience with commodity money than with fiat money. While sustained inflation is only possible with fiat money, fluctuating supply and demand in commodities, such as gold and silver can and has resulted in sharp, historical price volatility in commodity-money economies. Since many scarce commodities have no underlying, stable productive value, their actual monetary value can be highly speculative and volatile. This same characteristic would apply to cyber-monies with artificial scarcity which must be “mined” by breaking a puzzle or cryptographic code. While, in theory, the supply of hypothetical cyber-commodity money could be more stable than that of natural commodities, there would always be concern that such a money was backed by nothing “real” and that there would be a strong temptation for it to be gamed by its originators for their own advantage. After all, governments have been doing this for centuries. Finally, if commodity monies are combined with a fractional-reserve banking system the potential for money, lending, and economic instability unfortunately multiply—witness the nineteenth and early twentieth centuries’ monetary history for the U.S.(see, for example, The Monetary History of the United States by Friedman and Schwartz).
Now consider broad productive capital. Think for a moment of those exchange traded funds (ETFs) that you are likely accumulating in your retirement or investment accounts. Why are you accumulating them? Perhaps because you believe that they will generate a long-term return for risk better than anything else. What if they became the asset in which all other goods and services were priced? What if they became what was accepted for exchange in return for all other goods and services. In short, what if they were used as money? That would be a “capital-as-money” world.
What’s so great about that?
- Money would be backed by the ownership of real productive capital not a mirage, faith, or an imaginary commodity.
- To those who accumulated and saved it, its value would actually be increasing over sustained periods of time—something fiat and commodity moneys cannot match.
- The use and accumulation of capital as money could deepen the economy’s stock of productive capital—raising output, consumption, wealth and prosperity and creating a “golden age” for the average citizen (read Capital as Money).
- A private free-market monetary system would replace our current institutional money, banking and credit mess.
- Frivolous bank lending, government spending, and government borrowing would become disciplined and more transparent.
- The value of capital would become less volatile when it was not viewed through the veil of fiat money and central-bank manipulated interest rates.
With the possibility of instantaneous transfer of ownership of broad capital ETFs, capital best solves the two problems any money must face. It has real increasing value in terms of consumption goods and services, which is to say it has an increasing value over time. As a valuable real good itself, the amount of it used in trading (the “money” supply) would be simply market-determined by the desires and needs of its users, not by a government, central bank, or the lending whims of a private banking system.