Money’s mid-life crisis.
We live in the world of “fiat currency”. It’s not that old. It began only 50 years ago when on 15th August 1971, President Richard M. Nixon announced that the United States would no longer redeem dollars for gold. But it’s not really happy any more. Money is depressed because it no longer recognises the world around it, it feels out of place and incongruous. It’s tired and balding an grey. It needs a change.
We’ve been here before. Around four hundred years ago, things were going horribly wrong with the money of Merrie England. England had silver coins in circulation, but there were of poor quality. After the Glorious Revolution in 1688, England entered into an expensive war with France and by the 1690s there was a full-scale currency crisis. England couldn’t control the price of gold or silver, this wasn’t a particularly stable arrangement and led to a severe lack of silver coinage, which was needed for everyday transactions. England had an industrial revolution, but it didn’t have industrial money.
Towards the end of the 17th century money the government gave up passing pointless laws (such as the 1660 act forbidding the export of bullion) and instead of asking investment bankers or celebrities for advice in the modern fashion, they decided to ask someone clever instead. Thus was the smartest man that ever lived, Sir Isaac Newton, then the
Lucasian Professor or Mathematics at the University of Cambridge, appointed the Master of the Mint.
That’s right. You know him as the smartest person who ever lived and the man who first realised that there are universal physical laws. But he was also the man chosen to fix the problem of money. And fix it he did, putting England on a trajectory of sound money and economic growth.
So what did he do?
He began by changing the mint to use machines to make coins instead of people. This vastly reduced the cost of production (and therefore increase mint profits) and introduced uniformity and consistency to the coinage. He also suggested that the machines “mill” the edge of the coins to prevent further clipping. The King himself agreed to these changes, with his proclamation of 19th December 1695, referring to
…the great mischiefs which this our kingdom lies under, by reason that the coin, which passes in Payment, is generally clipped…
Thus came about the great recoinage of 1696, wonderfully described in Tom Levenson’s
Newton and the Counterfeiter . Newton’s conclusions were correct (to match an industrialising economy to industrial production of money) but it still took a generation (30 years, in fact) to replace the old, clipped, hand-made coins with shiny new emblems of the nascent industrial revolution. If these advances in coinage took time, things didn’t accelerate with paper. The earliest UK cheque recognisable in its modern form dates from 1659 but it took more than a century after cheques were invented for cheque clearing to be invented, and then it wasn’t invented by banks but by their clerks. Tired of running round to every bank to clear cheques, they began to meet (unofficially) at a coffee house to clear and settle between themselves.
Newton also advised that silver should be dropped and fixed a price for gold, to which the value of all other coins was to be related. His advice was taken and “trade and society flourished as never before“.
Suppose this thinking is along the right lines. Then, in a generation or so, there will be a new set of monetary arrangements in place. New currency and new institutions. Can we guess what they will be like, any more than an English merchant of 1680 could guess that there would soon be a central bank, banknotes, uniform coins and a gold standard?
We’re in the same position as the medieval court or industrialising England with a paradigm mismatch that explains the mid-life crisis. We’re using the mentality of tally sticks and the institutions of paper to try and deliver the money for a new economy. We’re in a post-industrial revolution but we’re still using the money, and the institutions of money, of the industrial age and this time, the technology with unexpected consequences is not the tally stick or banknote but the mobile phone.
I don’t believe in the idea of a universal currency, or for that matter a European currency, or for that matter a UK currency. The future, I suspect, will be more diverse.
Now, that doesn’t answer the question of what these currencies will actually be, which is a fascinating topic. There are both left and right, revolutionary and reactionary approaches — the return to the gold standard or the switch to the Brixton Pound — that deserve to be explored. The market is beginning to experiment will fundamentally new kinds of money.
Virtual currencies such as Bitcoin are here to stay and represent an opportunity being overlooked by financial institutions, says Gartner banking analyst David Furlonger.
Banks are we know them are institutions founded on industrial-age fiat currencies. Hence I suspect that the transition to the next era of money will result in new institutions and new kinds of institutions.
Snippings 