We need radical new models of international money as well as global banking and finance.
The underlying purposes are to re-connect finance with the real world and to put individual responsibility and risk-bearing capacity back at the centre of the system. There is an important role for governments, which must agree and set standards and should oversee the integrity of markets. But as economic agents governments will submit to the discipline of common rules to which they have mutually agreed.
Private sector: the mega too-big-to-fail banks must be got out of the way. To start with public support of all kinds for them should cease. This is of course would cause enormous disruption and be only the beginning of a task that will take many years to achieve; but it must be faced, as the longer they survive the more they distort the pattern of finance, thwart the growth of alternatives and pollute the waters of finance. The entire model of finance based on fixed nominal-value instruments such as deposits is out of date. Individuals are quite capable of taking their own grown-up financial decisions about the risks and rewards of different investments. As Professor Lawrence Kotlikoff rightly points out, the key features of banking, features that lie behind its continual tendency to blow up and collapse, are opacity and leverage. Regulation will never be able to address these faults. Morality, ethics, conventional rules of prudence and strict boundaries between different types of institution did prevent disaster for a couple of generations, but those days are gone. The good news is that new types of finance are indeed emerging and would grow exuberantly if the mega institutions would please get out of the way.
Public sector: towards the Ikon
Governments have to define the monetary standard, and then let the private sector produce money in competition to that standard. In this governments are continuing their historic role of standardising and agreeing standards in many other fields, such as weights and measures. In the US constitution, this role is reserved for Congress.
We must democratise finance, and make it as immune as feasible from being hijacked by the rich and powerful. Of course, as sociologists such as Geoffrey Ingham and Keith Hart have shown, money is a social institution, and the monetary regime in place at any one time will be largely determined by a social struggle. It is difficult to prevent the rich and powerful from dominating, but history suggests we can prevent them from looting the world. In a globalised world, that means extending the same rights to all the citizens of all countries belonging to the standard.
As outlined in “The Money Trap”, several standards for global money have been proposed: in the book I describe three – gold, a “real SDR” and a modern commodity standard. All would provide “hard” anchors, and give money a real material significance. Any of these standards would be better than what we have now.
I propose a standard that would link the finance sector to the real economy through the global equity market. Equities represent financial claims on real assets – and their market valuation in the long run reflects the growth in the productivity of capital, allied to the ingenuity, entrepeneurship and skills of humanity. Globalisation of equity markets mean that for the first time in history we can tap into a financial measure of humanity’s progress and potential. Thus while gold was a fine standard in its day, and still has claims to make, I reckon financial market innovation mean there are now superior options.
Thus leading governments would agree that one Ikon (an image representing an abstract concept worthy of great respect) would equal one unit of a representative bundle of global equities (i.e. an index). Money would be held constant against that index, just as gold was pegged at a fixed price under the gold standard. Membership would be purely voluntary – it would NOT be an enlarged euro zone or anything like that.
Equities have a “real” value measured by claims to a future revenue stream independent of the money in which they are denominated. This would provide the all-important “anchor” to money. There would be no need for a world central bank.You would need only a world currency board, which would operate like the Hong Kong and other currency boards. There would be no discretion, and no monetary policy as such, no bail outs and no lender of last resort. Money would have a real yield as retail/consumer prices would fall as the underlying value of equities increased.
Thus everybody who held money would have an equal proportional claim on the world’s resources and productive capacity. It is extremely important to hold on to this ethical vision of the function of money while we confront the numerous technical objections that will (quite properly) be raised against this proposal.
If realised, it would represent a further step in the evolution of monetary arrangements following the movement to establish “independent” central banks. In other words, it would continue the attempt to take money so far as possible out of day-to-day politics. It would represent a step from anarchy to order (to use the public choice terminology pioneered by Nobel prize-winner the late James Buchanan) in the field of international monetary relations. This it is essentially a liberal concept, adapted and brought up to date for the modern world – giving the State a key “authoritative” role in setting standards and overseeing markets but using the financial technology now available for the first time to forge a stable monetary order.
3. New models for banking and international money
Concluding this three-part article
We need radical new models of international money as well as global banking and finance.
The underlying purposes are to re-connect finance with the real world and to put individual responsibility and risk-bearing capacity back at the centre of the system. There is an important role for governments, which must agree and set standards and should oversee the integrity of markets. But as economic agents governments will submit to the discipline of common rules to which they have mutually agreed.
Private sector: the mega too-big-to-fail banks must be got out of the way. To start with public support of all kinds for them should cease. This is of course would cause enormous disruption and be only the beginning of a task that will take many years to achieve; but it must be faced, as the longer they survive the more they distort the pattern of finance, thwart the growth of alternatives and pollute the waters of finance. The entire model of finance based on fixed nominal-value instruments such as deposits is out of date. Individuals are quite capable of taking their own grown-up financial decisions about the risks and rewards of different investments. As Professor Lawrence Kotlikoff rightly points out, the key features of banking, features that lie behind its continual tendency to blow up and collapse, are opacity and leverage. Regulation will never be able to address these faults. Morality, ethics, conventional rules of prudence and strict boundaries between different types of institution did prevent disaster for a couple of generations, but those days are gone. The good news is that new types of finance are indeed emerging and would grow exuberantly if the mega institutions would please get out of the way.
Public sector: towards the Ikon
Governments have to define the monetary standard, and then let the private sector produce money in competition to that standard. In this governments are continuing their historic role of standardising and agreeing standards in many other fields, such as weights and measures. In the US constitution, this role is reserved for Congress.
We must democratise finance, and make it as immune as feasible from being hijacked by the rich and powerful. Of course, as sociologists such as Geoffrey Ingham and Keith Hart have shown, money is a social institution, and the monetary regime in place at any one time will be largely determined by a social struggle. It is difficult to prevent the rich and powerful from dominating, but history suggests we can prevent them from looting the world. In a globalised world, that means extending the same rights to all the citizens of all countries belonging to the standard.
As outlined in “The Money Trap”, several standards for global money have been proposed: in the book I describe three – gold, a “real SDR” and a modern commodity standard. All would provide “hard” anchors, and give money a real material significance. Any of these standards would be better than what we have now.
I propose a standard that would link the finance sector to the real economy through the global equity market. Equities represent financial claims on real assets – and their market valuation in the long run reflects the growth in the productivity of capital, allied to the ingenuity, entrepeneurship and skills of humanity. Globalisation of equity markets mean that for the first time in history we can tap into a financial measure of humanity’s progress and potential. Thus while gold was a fine standard in its day, and still has claims to make, I reckon financial market innovation mean there are now superior options.
Thus leading governments would agree that one Ikon (an image representing an abstract concept worthy of great respect) would equal one unit of a representative bundle of global equities (i.e. an index). Money would be held constant against that index, just as gold was pegged at a fixed price under the gold standard. Membership would be purely voluntary – it would NOT be an enlarged euro zone or anything like that.
Equities have a “real” value measured by claims to a future revenue stream independent of the money in which they are denominated. This would provide the all-important “anchor” to money. There would be no need for a world central bank.You would need only a world currency board, which would operate like the Hong Kong and other currency boards. There would be no discretion, and no monetary policy as such, no bail outs and no lender of last resort. Money would have a real yield as retail/consumer prices would fall as the underlying value of equities increased.
Thus everybody who held money would have an equal proportional claim on the world’s resources and productive capacity. It is extremely important to hold on to this ethical vision of the function of money while we confront the numerous technical objections that will (quite properly) be raised against this proposal.
If realised, it would represent a further step in the evolution of monetary arrangements following the movement to establish “independent” central banks. In other words, it would continue the attempt to take money so far as possible out of day-to-day politics. It would represent a step from anarchy to order (to use the public choice terminology pioneered by Nobel prize-winner the late James Buchanan) in the field of international monetary relations. This it is essentially a liberal concept, adapted and brought up to date for the modern world – giving the State a key “authoritative” role in setting standards and overseeing markets but using the financial technology now available for the first time to forge a stable monetary order.
Written on April 3, 2014 at 9:12 am, by robert
Categories: Banking, Homepage, Official Money, RP's Diary, The Ikon