31.1.2022
Whose currency is it anyway? End-of-term essay. Module: „Economic Theories for European Integration“ (WiSe 21/22) Lecturer: Dr. Thilo Zimmermann
“We are not a chip shop, nor a bank, we are a building society.” (Little Britain, British TV Program, NationWide Building Society Sketch) https://youtu.be/x8WVMAazd0I
Thomas N. Schneider Mat. Nr. 7366328 Email: tschne29@smail.uni-koeln.de
UNIVERSITY OF COLOGNE, STUDIUM INTEGRALE
Schneider (2022): Whose currency is it anyway?
Ingham1 opens his essay “Money is a Social Relation” with a reminder that money has a number of properties: “it is a measure of value (or unit of account); a medium of exchange; a standard of deferred payment; and a store of value”. Clearly, “cash” is not the same as “credit”, the difference being “your money” versus (borrowing) “someone else’s money” (usually a bank’s or a state’s, i.e. the taxpayers’).2 According to Schumpeter, “money” is a technical device to facilitate transactions. Like a veil, it “must be drawn aside if we are to see the face behind it”. Essentially, exchange ratios between commodities are the important thing “behind” money prices.3 According to Samuelson, this holds as true for trade between individuals as between nations.4 This universality of money is certainly a strength, making all buyers at any given point in time equal, or at least any unequal treatment of the buyers transparent. Money overcomes the inconveniences of barter which arise from the absence of a “double coincidence of wants”. The functions of money should, however, be separated from its form or appearance as a currency. This article will show that currencies are not equal and have a central societal and political function. Free money, inflation and unsustainable state debts, unsound economics and an energy strategy with Green tinted spectacles are frittering away European wealth. One should imagine different types of money existing in parallel, even when these are nominally denoted in the same currency. On the one hand, individuals use money for their daily necessities – food, clothing, shelter – as well as recreational and social purposes, including betterment through education (though access to education should not be constrained by money but by ability). On the other hand, money can be used to acquire assets – land, a home, luxuries. Whereas commodities can be procured flexibly, with their production adjustable to demand if there is abundancy of labour and energy, land as an asset is scarce. There may simply be nothing worthwhile for sale in a desired location. In ancient times, land was usually conquered, inherited, or bestowed, and there existed an excess of “unallocated”, less desirable “wild” land. With essentially all land on earth today mapped and assigned a legal owner, land and resource purchase by market valuation has become common, gaining international reach, recently also using global online trade platforms. As with other titles of ownership (such as the stock valuation of businesses, or auction pricing of works of art), the valuation of assets relative to the “cost of living” is widening. Nonetheless, the transfer price of an asset remains simply a matter of agreement between the current owner and the prospective buyer. There is no legal requirement to settle at a market price.5 Assets can just as well be gifted or transferred for a nominal sum (e.g., 1 cent). Since market prices today are moving beyond the common man’s means and ability to save from income, inheritance and marriage are increasingly important for family wealth acquisition. Why then do some nations restrict foreign ownership and international transfers of land, property, businesses, “cultural works” and the currency payable to acquire them? The answer, according to Ingham, is that money “is a social relation based upon definite and particular social structural conditions of existence involving, among other things, an institutionalized banking practice and constitutional legitimacy of the political authority in which the promises
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Ingham, Geoffrey (1996): “Money is a Social Relation”. Review of Social Economy, vol. 14, no. 4. https://www.imb.com.au/themoneytree/smart-spending/the-difference-between-cash-and-credit.html 3 Schumpeter, Joseph Alois (1954): “History of Economic Analysis”, Allan & Unwin (Publ.) Ltd, p. 264 4 Samuelson, Paul A. (1948), “Economics: An Introductory Analysis” 5 Government transaction taxes are usually assessed on “book value”, a nominal value determined at point in the past relative to other land/property. It is not an absolute reflection of current price. 2
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Schneider (2022): Whose currency is it anyway?
of banks and the states to pay gradually became currency.” In this system, the lines between debt and credit become blurred, since “bank money is debt, which is a social relation”. Whilst national currencies are usually associated with sovereign states, in recent times, a proliferation of “cryptocurrencies” has confused the picture, starting with the appearance of Bitcoin in 2009. Contrary to state currencies, regulated by a central bank authority with the mission of stable inflation and predictable exchange rates, cryptocurrencies are decentralised. There is no legal entity – no natural person, no known group – to hold liable for (mis)valuation. Indeed, there is nothing tangible – no state, no asset, no commodity – to back up even a fraction of the currency issued, though a ledger of all prior transactions is maintained in the form of a blockchain. 6 Being encrypted, anonymity is preserved. The utility of a cryptocurrency as “money” - or as an “investment” - hinges on its tolerance as a means of payment or settlement between individuals, within and amongst jurisdictions. In a democracy, the individual is allowed to trade at own risk in any currency – indeed invest in any legal asset class - of his or her choosing, provided due taxes are paid to the state as required by law in the currency of the land. The Christian maxim “render unto Caesar the things that are Caesar’s […]” is generally accepted7, taxability usually being determined based on residency and/or nationality at time of transaction. Some states prescribe exclusive use of their sovereign currency even for the base value of a transaction and may prohibit or limit individuals from holding foreign assets, be they financial or material. Certainly, tax accounting and enforcement of cryptocurrency investment gains and losses presents a challenge, given market volatility, exterritorial tradability, and private offline storage. We already remarked on the right to enforce universal acceptance of the national currency as the means for payment within a jurisdiction, defined as a sovereign geographic area. This concept clearly cannot apply to private or community currencies with no central institution or territoriality. However, sellers can still advertise a cryptocurrency price for a good or service in parallel with a national currency price since then the tax liability of the buyer can be determined (inclusive any tax-free limits). It makes no difference whether the official exchange rate is set by the market (“floating”), “fixed” between governments, or “pegged” to a foreign currency. Certainly, interchangeability of cryptocurrency to national currency is not officially endorsed by (most) governments. Based on Ingham’s analysis, central banks should protect sole minting rights in the name of a geographic entity for the people - social relations - they represent to fulfil their wealth management duty. They should be suspicious of anonymous intermediaries and can reserve the right not to exchange currency, for example, with “rogue” governments or individuals – as implemented by the USA against Iran and threatened by some Europeans against an expansionist Russia. The national currency is the political weapon of a society. Ideally, the territory should constitute an “optimum currency area”.8 A glance at history shows that not all nations and peoples, or perhaps better: regimes, wanted to always fully trade with other nations on a level playing field. Exchange rates between nations have seldom been perceived as equal. In the 19th century, it was common to fix exchange rates 6
In the case of national (fiat) currency, the totality of the assets of the issuing nation essentially provides security to external creditors – in international law and ultimately as a casus belli. 7 Matthew 22:21 or Thomas 100: http://www.earlychristianwritings.com/thomas/gospelthomas100.html 8 Mundell, Robert A (1961): “A Theory of Optimum Currency Areas” The American Economic Review vol 51 no 4
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Schneider (2022): Whose currency is it anyway?
in gold and silver, giving traders opportunity to exploit price differences between absolute as well as relative valuations of commodities in different places in the world. Ricardo’s “comparative advantage” of nations provides the argument for international trade as benefitting all nations – but on the assumption of a free market and transparency, not rigged prices. In real life, a stronger “more advanced” nation can dictate terms of trade to a weaker nation, with military superiority the ultimate threat: its currency can demand a premium. Ironically, whilst a “strong” currency may initially help to “cheaply” acquire services (labour), goods and commodities (including energy) from other nations, this can work to the detriment of the own industrial base. This is a problem for Western nations: the age of automation requires little labour for food production whilst goods production shifts to the area of highest demand (China for the past few decades, with many an accusation of “dumping”, “intellectual property violation” and “currency manipulation”). Access to “cheap” energy remains a decisive competitive factor. The unemployed US or European citizen with a high fuel and inflation bill is no happy voter! Exchange rate development and its effect on society can be illustrated using the Japanese Yen to US Dollar from 1945 to the present day. Although the Japanese state amassed enormous debts, these were largely financed by its own (mostly hard working) people. The general population endured multiple currency revaluations and energy shocks but, for the main, enjoys only modest living standards due to high rental, energy, and food costs, with limited state welfare benefits. The question is of course: was and is state money well spent? Not every new infrastructure project - highway, high-rise urban development or highspeed train line necessarily adds to the pleasure of life and can be a sign of “irrational exuberance” (money not knowing where to go). Moreover, an ageing population – with depleted private savings – demands increasing sacrifices in the form of rising taxes from the productive, working population, as well as their loss of inheritances, used to cancel state debts and service the markets, not enrich the children. This brings us to the so-called “paradox of thrift”:9 should individuals be deterred from private saving to maximize consumption? This certainly appears to be the vision of the European Central Bank (ECB) whose zero-interest rate policy in conjunction with a generous European welfare state has destroyed the notion that individuals should save privately with banks for retirement, misfortune, or major future investments. Europe’s once plentiful local mutual banks (farmers unions and building societies) have been bankrupted. They used to manage the savings of members to enable fellow members to make investments (such as buy farm machinery or build a home), increasing the wealth of the total member community, supporting a small dividend for the savers at reasonable lending rates. With mergers and conversion of many societies to public limited companies traded on the stock market, they now pay dividends to shareholders and compete against the ECB’s negative interest rate policy. Essentially, the community banking model has been destroyed. Even more perversely, “Green” activists who until recently demanded higher energy and food costs to reduce CO2 emissions are now wanting the state (other and future taxpayers) to subsidize the cost of energy and living whilst funding an energy transition whose real costs are vastly misunderstood. This is to be done with further “cheap” sovereign debt (at negative interest), offloaded onto the ECB, in no way reflecting risks and investment returns. Meanwhile, 9
https://en.wikipedia.org/wiki/Paradox_of_thrift
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Schneider (2022): Whose currency is it anyway?
the greater part of the world’s population is waiting to, e.g., drive cheap 2nd hand conventional cars, buses, and trucks - minus expensive catalysts – air-condition, fly, cruise the world and adopt the “Western” throw-away lifestyle in the old-fashioned way - as soon as Corona allows. What does this mean for the “terms of trade” of the European Union? It is not feasible for parts of Europe to unilaterally drive an “energy transition” whilst global availability and accessibility of conventional energy resources is not limiting - or even increasing (thawing of the polar ice) – with abundant international capital and the greater part of the world eager to enjoy modern creature comforts. Enthusiasm for an “electric and hydrogen revolution” is confined to parts of Europe that either cheaply produce hydropower or can also rely on gas and nuclear power imports. Rather than reducing overall energy use and limiting individual mobility, the net effect of the “Green” measures will be a reduction in European industry competitiveness, increased dependency on imports, and lower European living standards due to higher cost of supplies. The fundamental problem being overlooked is that all energy projects are funded by consumption of energy (the project’s financial return) by the end customer (consumer). Without changes to fundamentals – scarcity of a resource, efficiency innovation, or lower capital costs to develop one fuel or energy source relative to another – the scope to change the energy mix without paying disproportionately higher prices is limited. Increasing the wind and solar contribution raises the costs of electricity storage and distribution due to intermittency, the latter becoming especially expensive due to high inefficiencies the closer 100% regenerative power is aspired. Rather than increasing security of supply by internal diversification and international trade, a sustainable energy mix for the EU might only be maintainable at the cost of energy import dependency on either Russia or the USA, who have no ambitions for a “Green revolution”. At the same time, imports of goods would increase from those parts of the world where conventional energy (and labour) remains cheap and economic growth potential strong, whilst marginal European production is shut down. Raising import tariffs only provides temporary relief at the cost of higher inflation, doing little to improve long term competitiveness. To return to the subject of international trade and exchange: the system only functions on the basis that countries have something desirable to exchange and barter, which includes natural resources as well as foodstuffs. Europe’s progressive loss of competitiveness relative to the rest of the world, combined with a fervour to ban foreign European investments in conventional fuels even as domestic resources (e.g., North Sea) are dwindling (though global reserves of hydrocarbons remain plentiful), is the path to increasing isolation. On the world stage, it means the loss of both economic and political leverage relative to the USA, China, and Russia. The pursual of expensive renewable energy born of a misplaced faith in the “miracle of the energy revolution” coupled with the delusion that consumption can simultaneously grow unrestrained, without regard for frugality or economy, may spell the end of Europe as a global player, and the possible ultimate breakup of the Union. To quote Boulding (1948): “Many economists are increasingly wondering whether the theory of maximization has not reached the limit of its usefulness, and whether further development toward a more realistic theory of economic and social organism does not lie along other lines.”10 Save, reuse, recycle – and export. 10
Boulding, Kenneth E.: “Samuelson’s Foundations: The Role of Mathematics in Economics”. The Journal of Political Economy, vol. 16, no. 3, June 1948. p. 194.
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