Gold, credit and the Ikon: Three kinds of money

What are the differences between a commodity money, credit money and the Ikon – currency of the future ?

Using the gold standard as an example of the first, where the price of gold was fixed and money was convertible into it on demand at that price, gold and sure claims on gold were money. The monetary base was supplemented by credit, as it had been for centuries by trade credit, and from the 16th century onwards by development of banking. This credit structure gave elasticity to the supply of money.

Commodity money

Metallic monies sometimes developed as market phenomena, but usually the precious metals were stamped with the insignia of sovereignty and constituted symbols and instruments of state power. The coins were typically overvalued – i.e. the face value exceeded the bullion value, but the coins had a “fall-back value”, a value often described as “intrinsic” in the market for their bullion content. These features made it attractive to hold wealth in monetary form, guaranteeing a demand for the monetary metal beyond that needed for immediate transactions and for payment of taxes. Empires needed coins to pay standing armies and encouraged growth of the tax base through the promotion of commerce.

Under commodity-based monies the price level showed wide swings over sustained periods. Sovereigns were not concerned with stabilising the purchasing power of money but , at best, with maximising long-term seigniorage income. Rulers of secure dynastic kingdoms such as that of the UK could take a longer-term view and had an interest in maintaining the reputation of the coinage. However, with the political pressure for increased state spending following the industrial revolution, and the advent of modern warfare, governments felt constrained by the convertibility obligation. In the US, President Roosevelt brought money down from the constitutional level, where it belongs, to the level of day-to-day politics, where it has stayed ever since, despite efforts to make central bank independence part of the constitution.

Credit money

With the adoption of credit systems, the value of money became wholly dependent on the State. No matter what the wealth and riches of a society might be, State action could render its money worthless. Public revulsion against inflation in the 1970s led to attempts to place money in a “constitutional” realm at arm’s length from political power. Governments told central banks to debase the currency more slowly and call it “price stability”. But the central banks remained answerable to the government rather than directly to the public.

Credit money maximises the function of money as an exchange medium at the expense of its other, more important, functions as a long-term unit of account and store of value.

Modern credit money accurately reflects modern society, where commercial and political leaders have short-term horizons – quarterly profits, the next election. It is malleable. It suits hedonistic, sheltered societies where people look to their own states for protection and succour. But it has proved difficult to reconcile with demands for financial or price stability. It sets one generation against another. It privileges the powerful over the weak. Financial elites produce and exploit asset price cycles to extend their influence over the source of the money supply. The globally systemic banks have a commanding influence over official policy – hence the subtitle of my book, “Escaping the Grip of Global Finance”. Large banks can count on state support no matter what.

Meanwhile, central bankers line up to promise politicians they know how to depreciate the value of their currencies more quickly.

Moreover, on the evidence to date credit money under inflation targeting regimes does not offer a framework able to cope with a globalised economy or financial markets (to have any hope of doing so it would need wholesale reform of the kind outlined by Warren Coats, here).

It is linked to an asset price cycle that causes massive periodic wealth destruction and the disappointment of income expectations; for example, on some estimates the income of the median US household has not increased for more than 40 years

Dissatisfaction with the performance of credit money is leading to a popular revolt – just as inflation did 40 years ago. In the US, discussion of the pros and cons of the gold standard has entered mainstream debate, as Ralph Benko points out here.

…and the Ikon

But there is a 3rd kind of money, as described in my book. This represents the ultimate democratisation of finance, by giving everybody literally a share in the future. Through globalised financial markets, money itself can now be tied to the productive potential of the world economy and anybody who holds money would share equally in that democratic right and in the results of the collective endeavours of humanity through the ages. These fruits would no longer be reaped by a small elite.

It does this by defining the monetary unit as a function of a diversified basket of global equities – claims on the world’s productive potential.

This money confronts and solves the problem of capitalism as identified by Karl Marx – social alienation – by a solution that would have intrigued and horrified him.

It uses markets, not political revolution, to conquer elitism. Markets can empower the people. I feel that it accords with the vision of a “human economy” described by Keith Hart, and held also by David Graeber.The Ikon concept responds to demands for greater participation and builds bridges between the local, familiar “village” of our everyday lives and the universal, impersonal institutions of a financially sophisticated world.

It addresses the challenges of globalised markets without resorting to crippling burdens of regulation. If implemented, it would join the peoples of the world together in a magic chain, instead of shackling them with insular ties as present monies do. It would automatically correct the short-term bias of capital investment and markets. It would lead to the replacement of debt by equity throughout the system. it would make cash the most desired asset of all. It would go far to stabilise the general level of asset prices (while of course leaving room for changes in relative asset prices).

It would eliminate the boom and bust asset price cycle – as well as the business cycle. Prices would fall over the longer term while being subject to volatility – as prices always were under all historic monetary standards – as productivity increased.

Yet it demands much of both Left and Right. The Left has to overcome its morbid horror of money and markets to embrace the right kind of money – the people’s money. The Right has to abandon the claims that cutting taxes and excessive regulation will solve our problems. National politicians have to embrace a new order where they lose the power to print money – but that weapon has already been proved to be blunt indeed. It is used mainly to feather the nests of politicians and their friends.

Consumers would accept greater fluctuations in their shopping bills as the price to pay for greater stability in asset prices and the priceless prize possession of a money gradually rising in real value.

The Ikon – an investment currency indexed to the market portfolio – is a new money for a new world order.