The missing element – The ideal monetary system, part 13

Printing money is a monopoly of the government. And it is one of its most precious monopolies, which is why the State wants to keep it under any circumstances, adjusting even the regulation of the monetary system to that aim. It will not have the private sector poking its nose into the way the system is arranged. And since the government is one of the least innovative operators in the market, we should not be surprised that the structure of the monetary system is far from ideal (I discussed about this in detail in previous parts), while it is in the field of financial services where, given the opportunities, we are the most underdeveloped.

E-mail messages arrived immediately from one address to the other already 20 years ago, whereas transfers between HUF accounts have only been executed in Hungary only since 2012—not immediately, but at least on the same day. This is despite the fact that there are not many differences in the essence of the two: in both cases, computers hooked to a network execute some kind of program code. A cross-border dollar transfer could take up to 2 or 3 days, and could be subject to horribly high charges.

Phone numbers have been portable between mobile carriers for 10 years, but account numbers are still not portable between banks. These are only a few obvious examples of the interminably slow application of new technologies in the field of finance. Apart from the above, we cannot even imagine the useful services that would appear in a real competitive environment.

Of course, inflexible government regulation is to blame for everything. Until it is aligned to new opportunities, no meaningful development can take place. At the same time, banks in an oligopolistic position are not in a hurry to innovate either; they can sit away comfortably in their lukewarm pond. As long as they can make money without making an effort in the innovative competition, they are interested in maintaining the status quo.

At the same time, strong government control also has its benefits. Namely, essentially we trust the money issued by the government, which is a necessary condition for a well-functioning economy. And we trust it despite the absence of any coverage to back it; although it is only a worthless piece of paper, we attribute value to it. It is difficult to imagine that the same trust could be earned by any operator of the private sector, which would otherwise be glad to employ the latest technologies, possibly in a more intelligently arranged monetary system.

In their paper Has government any role in money? published in 1986, Milton Friedman and Anna Schwartz address similar dilemmas. They find that over the course of history, there have been a number of successful examples of redeemable paper moneys backed by the promise of convertibility to some dominant tender (such as gold or silver). Whether they were issued by the government or the private sector (typically a bank), these moneys could be used successfully for a long time. Trust in them was guaranteed by the gold deposit stored in the vaults.

Irredeemable money which is not convertible to gold and is exclusively based on trust can also be used successfully if it is issued by the government. The money we are using is exactly of that type. At the same time, Friedman and Schwartz find that “We do not know, however, of any example of the private production of purely inconvertible fiduciary moneys.” That is, the private sector has never issued irredeemable money based exclusively on trust so far. Of course not. No one would believe the issuer that it would not print an infinite quantity of the money on grounds of seigniorage, causing it to become worthless.

How good that would be still! Friedman and Schwartz write: “Our own conclusion … is that leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement.” In all probability, the private sector could create for itself a better and more efficient monetary system with a higher development potential if the government were not needed for that spunky trust.

Using the above grouping, we can draw up the periodic system of moneys. It will not be very difficult: moneys are grouped against two criteria, and there are two cases for each criterion. Money can be issued by the government or the private sector, as well as redeemable (e.g. convertible to gold) or fiat (based solely on trust). The box of money issued by the private sector and based solely on trust was claimed to be empty by Friedman and Schwartz, who stated they were not aware of money of that kind. Just like Mendeleev, who in his periodic table established in the 19th century, reserved empty boxes for elements not yet discovered.

This time around, it is our turn to experience the excitement of the discoverers of new elements. Friedman did not live to see that with the help of the internet and through the application of a new technology, it was demonstrated in 2009 that the empty box can be filled. The missing element exists! The private sector has created money that is based solely on trust. A solution was found to ensure that no one could issue unlimited quantities of it at their will. The first and to date the most successful example of such money is bitcoin. Which, obviously, was not invented by banks sitting away gawking in their lukewarm ponds.





Gold standard

Today’s money


US age of free banks


It is difficult to overestimate the significance of this. Today the road is open for the private sector to invent a complete monetary system that is more rational than the one currently in place, using cutting-edge technology in its solutions. Do not get me wrong, this would not be bitcoin—it has too many flaws. A well-functioning monetary system could rather be constructed using the bitcoin technology.

The government will not be crazy about the idea, but it has nothing to worry about in the short term: the paradigm shift is not about to occur any time soon. The question is rather whether there will be such a shift at all. Maybe not. At the same time, there are several possible scenarios which result in a more active participation of the private sector in shaping the monetary system. This will be discussed in the last part.

Next in the series: Olympic champion money

Previous part of the series: Progressive VAT

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Bitcoin is not the work of the devil

What gives Bitcoins value?

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