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No to Vollgeld, Yes to Ikon!

How to reform the production of money

There was a basic flaw in the Vollgeld “sovereign money” proposal rejected by the Swiss in a referendum last Sunday. An arrangement that gives the state or its agencies exclusive power to create money,  oversee bank accounts and direct lending to the economy  is hostile to capitalism. It cannot produce the assurance needed to allow the process of rational monetary calculation that is the essence of capitalism. This was pointed out by the sociologist Max Weber in 1922. Geoffrey Ingham of Christ’s College Cambridge sums up Weber’s conclusion as follows:

Bureaucratic administration could never produce the ‘”right” volume or the “right” type of money’ because state bureaucracies are primarily oriented to the creation of purchasing power for certain interest groups, including the state itself.

See “The Nature of Money”, G. Ingham, 2004, page 68.


Good money, good spec

Good money is a joint venture between public and private sectors. The state or other “authoritative”  body defines the monetary standard and private sector produces money to that specification. The authoritative  body is usually a unitary state but might be a regional grouping of states or sub-state bodies or an association of investors, traders and merchants.  Creation of money under the standard is best carried out by competitive private bodies (banks etc) that extend credit to borrowers using their judgment of the borrowers’ promises to repay, based in turn on an independent assessment of factors such as the debtors’ capacity and determination.

Given competitive conditions, the supply of money will then exactly respond to society’s demand for it and resources will be allocated to their most productive uses. (Critics are right to point out that the banking system we have now is nothing like this ideal version, that it engenders instability, makes appallingly bad lending decisions, is dependent on the state etc but these facts are not immediately relevant to my present argument).


Scanning the horizon

Floating exchange rates are not compatible with a monetary standard.  Capitalism is about precise calculation. As Ingham clearly sets out, its distinctive feature is the constant scanning of horizons by entrepreneurs to estimate prospective rates of return on an investment compared with the costs of borrowing money.  To do that, people must have an agreed measure  of value.

Following an idea of the late Wolfram Engels, in The Money Trap I endorse a unit that I call the Ikon as the optimal monetary unit or standard.  The standard is defined as a fixed quantity of a diversified bundle of traded equities and other assets representing the market portfolio. (Or simply an index of the prices of all material assets; or all property claims). This standard would avoid the distributional risk of an unexpected movement in the money value of the market portfolio – i.e. the general price level in money of equities and other assets – during the term of the investment. At present, investors and borrowers know that interest rates are manipulated, making rational calculation of rates of return from an investment (especially of longer-term investments)  very difficult.

The risk of an unexpected movement in the entire market valuation of equities/assets has to be factored into capital investment and financing decisions.  It is as if an investor invested a certain sum in dollars and found out later that the proceeds would be paid in Venezuelan  bolivars. Current money regimes introduces the uncertainty of floating rates into every investment/ and borrowing or lending decision – making the whole business speculative. This rules out any chance of resources being allocated to efficient uses.  Either creditors or borrowers will receive an unanticipated bonus, at the expense of the other side of the bargain. This is what has happened under inflation targeting, taken to extremes of absurdity under QE.

Eliminate systematic risk

Ikon money removes the risk – so called systematic risk – from investment decisions.

Suppose that investors/lenders on the one hand and borrowers/entrepreneurs on the other were asked which of several possible standards they would select for a money standard. They could choose between a money governed by a gold standard, or by an inflation targeting regime, or by the Ikon. Assuming general risk-aversion, they would choose the Ikon! This is the only standard of value in which the distributional risks from the choice of the unit become zero. Thus investment would rise and go to produce things people want.

NB The reasoning behind the proposal is outlined in Engels’ booklet The Optimal Monetary Unit: Real-asset Currency, State Monetary Sovereignty and the Private Issue of Bank Notes“, Campus Verlag, 1981.

See Max Weber’s Wirtschaft und Geselleschaft,

Translated as Economy and Society