Commodities as Currencies in Banking? What does this mean?
Background.
The fundamental principles of currency are to function as a store of value and to act as a medium of exchange
Fiat money is backed by a country's government instead of a physical commodity or financial instrument. ... Rather, the value of the money is determined by the government. It retains its value through government stability and that of the nation's economy.
Fiat money does not have intrinsic value and does not have use-value. It has value only because the people who use it as a medium of the exchange agree on its value. They trust that it will be accepted by merchants and other people.
We have 40Trillion dollars approximately in Circulation. About 1.50 Quadrillion in Derivatives. Holders of fiat currency find its value eroding because of various factors- chiefly inflation. The last century was a test for this ability and we find fiat currencies are lacking in their function as a store of value. This has opened a pandora box in recent days in the form of cryptocurrencies. Cryptocurrencies are intangibles, opaque and in private hands. We have enough inference from History that the medium of exchange cannot be left in private hands. A solution needs to be found out inclusive of the present fiat currency system. A Neo barter system will be a credible alternative. The fundamental contention is any medium of exchange should be able to preserve its value to act as a permanent medium of exchange. Independently fiat currency has failed post-1972. Time to revisit and work on a balance. A hybrid model with fiat currency as a medium of exchange and commodities to enter the banking system by becoming a transaction product and a medium of exchange.
To start with Gold can become the first commodity in transaction banking. The banking system needs a system to preserve its value to enable it in transaction banking. Presently its value is determined in the OTC market viz., London Bullion Market and in futures exchanges across the world in which CME acts as a major exchange. Now what we need is a method to preserve the value when the fiat currency is converted to Gold by the investors. Gold has a dual property. One it acts as a medium of exchange and an investment product because of its fungibility and acceptance across all countries and Two as a Commodity used by a commercial for industrial and jewellery purposes. Commercials have a window from the gold ecosystem wherein Gold is availed on lease say for a period of one year and returned in gold. The value risk is borne by the commercial for upside price move and downside price move by the gold investor. This ecosystem can be beneficially worked out for retaining the value of gold and benefit everyone in the system. The same ecosystem permits to preservation of the value of gold at any given value and time by the investor and enables it in transaction banking. This method can be taken to other commodities from Oil to Industrial Metals and to Agricultural Commodities by replicating the ecosystem of gold in pricing and quality standards, bringing stability to commodity prices and also supporting business risk within the present ecosystem.
A paradigm shift in banking with commodities entering banking system for transaction banking complimenting fiat currency