I make no apology for returning to my hobby horse, money. What is it? how does it work? It is not difficult but it seems journalists struggle with it, as do bankers and politicians. It is a commodity that is accepted as a store of purchasing power short or long term.
Throughout history various species have been utilised, salt, gold, silver, pelts, in times of dire stress post modern war tinned meat, nylons or cigarettes. Sometimes the medium has a value in its own right, jewellery, food preservation or food and clothing. None of this is actually the point. Historically it has been gold, for thousands of years in fact, until as recently as the collapse of the Bretton Woods agreement in the early 1970s. Countries come off the gold standard by and by, usually to fund wars, occasionally the currency is degraded, ie coinage with low grade alloys added. Famously the dinar of the Roman Empire and coinage of Henry VIII. Lugging gold about historically has been both difficult and dangerous, so ever creative mankind invented the promissory note. You can carry or make over the gold by means of convenient paper, this method has been in use for hundreds of years. Our currency heralded, I am old enough to remember ‘I promise to pay the bearer on demand the sum of x in gold ‘. The dollar bill and pound note was simply a bill of convenience. Sound money, it was sound because politicians and bankers could not destabilise it, was the foundation for the unprecedented growth of pre Great War economies.
Money replaced barter which facilitated trade and importantly give a time weighted deferred purchasing power. In return for interest a depositor could save enough to invest in the future, perhaps in the ways and means of increased production. It provided credit, the life blood of commerce. Suspension of the gold standard was temporary to fund wars often in the form of bonds repayable in degraded currency, there are too many examples to list here. The great advantage of gold backed currency ( or indeed any hard currency) is that it cannot be degraded by politicians and their cronies in the central banks. After the Great War, when the UK had come off the gold standard the then chancellor of the exchequer, Winston Churchill, attempted to reinstate sterling at the pre war rate. This absurdity was to lead to the United States inflating its currency to help and the rest of the 1920s & 30s are history. Ironically what most students forget it was Keynes himself whom advocated a return to the gold standard at a lower more realistic rate.
The U.S. Dollar became the post war world reserve currency, linked to gold. The French request for a return of gold in specie led to the collapse of Bretton Woods and the adoption of pure fiat currency, or soft paper, which has manifested itself in a devaluation to the present day 8 cents on the 1972 dollar.
Quantitive easing or money printing simply goes into an economy and inflates something, usually in modern economies, real estate or bonds. Which is why none of your kids can buy a house in any major city. Artificial suppression of interest helps borrowers but not savers, so the modern economy runs on credit, clearly unsustainable in the long term.
Governments and their crony central banks are in a currency war, a race to the bottom to try to underpin export industries. Yet economies such as the UK are net importers so the very few % of the population in the export markets are subsidised by the vast majority who are not even remotely engaged in it. Notwithstanding, as I never tire of pointing out Germany and Japan’s export markets flourished for 20 years with appreciating currencies. The degradation of money and suppression of interest rates has achieved nothing. How could it? National debt stands at £221,000 per UK household after 70 years of peace in Europe. Other western economies are the same. The debt grows and we lurch towards the abyss with the criminal fractional reserve banking system poised to push us in.
Yet financial journalists are arguing for more of the same, they seem to want to pretend it’s working, the system is dead. To paraphrase Ira Gershwin on the death of his brother, I don’t have to believe it if I don’t want to.