Who should we trust to create and run the digital currency or currencies that will define the world’s financial and economic landscapes for decades to come? Bernard Hickey takes a closer look at who might create the ‘one virtual money ring’ to rule us all: the world’s digital means of exchange and store of value of choice.
Money is an ethereal thing these days. It’s more of a shared notion and an act of trust or faith than a tangible “thing”. For most transactions by volume and almost all by value, money feels like a bunch of ones and zeros passing in the night.
A transaction now is more of a nightly netting off exercise between banks than an actual transfer of “something”. We know how much we have in our accounts because we’re regularly checking on our banking apps, sometimes hourly, but we wouldn’t know where to go to “get it back” or turn it into something else useful that could carry out the same purpose as our New Zealand dollars.
Even turning those ones and zeros into physical cash seems a remote and quaint thing done from days-gone-by. Covid-19, contactless debit and credit cards, and originally Eftpos, have turned money into an electronic scoring system, rather than a collection of piles of cash or coins. The idea of Scrooge McDuck rolling around in his piles of gold seems both antiquated and totally modern, but only in a sense that the richest 1% now seem to have so much they couldn’t store it all in a room, let alone spend or invest it in something real.
The explosion in the value of fine art in the last decade hints at the problems in the world of monetary values and how to store enormous sums in a small space. Less than five years ago, Saudi Arabia’s Mohammed bin Salman bought Leonardo da Vinci’s Salvator Mundi for US$450.3m. Walter White’s drums of cash buried in the desert explains just as much about how our money system works as a stable and trusted means of exchange and store of value. Or doesn’t.
What even is money?
Currencies have long since lost their tether to anything real or inherently useful. They were once tied to gold or silver, or at least another currency or commodity. Savers could expect to get back their dollar or pound’s worth of gold if they visited a bank to “get their money”. If they all turned up at once to collect their gold, this would create a bank panic. There were regularly bank panics and collapses in the late 1800s and early 1900s. Bank panics in New York in 1884, 1890, 1899, 1901, and 1908 eventually led to the creation of the US Federal Reserve in 1913, which was given the power to be a lender of last resort to banks, and to control the money supply via short term interest rates and bank capital requirements.
Not for a long time have we been able to swap our “money” for something real. The New Zealand pound was tied to the British pound from 1840 to 1967, and then to the US dollar until 1985, when the “Kiwi” dollar floated. The British pound was tied to gold until 1914, when Britain came off gold to finance the first world war, and then briefly went back on to gold from 1925 to 1931 (also Churchill’s fault).
America detached from gold partially in 1934 under FDR, and then completely in 1971 when Nixon suspended the US dollar’s convertibility with gold and effectively launched the era of “fiat” money. Between 1944 and 1971, the world’s currencies were effectively harnessed to the US dollar and through America’s currency to gold, in a post-war settlement under the initial guidance of British economist John Maynard Keynes (who, by the way, is the credited originator of the words “When the facts change, I change my mind. What do you do, Sir?”). The IMF and World Bank were the arbiters of the Bretton Woods system and…