The true nature of money has, through the centuries, been an inexhaustible source of puzzlement. This has abated somewhat in the Greenspan era when currency management sort of limped along by being conducted according to business as usual. Post Greenspan, the avalanche of crises triggered by the subprime debacle should have come as a wake-up call that business as usual is a recipe for disaster. But you wouldn’t guess so from The Economist’s Special Report on International Banking (May 17, 2008), which foresees return to “normal” after a “salutary dose of reality”. This underlines what many readers have noticed, namely that The Economist is not what its title suggests, but rather is The Voice of the Industry.
One of the ways in which The Economist affirms its orthodoxy is to state or suggest that only cranks entertain ideas like the gold standard or social credit. The Web is more rewarding in this respect. For example, the Wikipedia article (version of 080530) on the gold standard tells that Alan Greenspan, this pillar of orthodoxy, was once a proponent of its return.
Though the gold standard is a lousy system, it has the advantage of being a fruitful starting point in the search for something better. Business as usual does not have this property. The problem with the gold standard is that the money supply is rigidly equated to the amount of gold that circulates as coins or serves as back-up to paper certificates. In the 16th century, when the gold of the New World was imported into Europe, this gave rise to a large amount of inflation. In the 1930s the US economy required a larger supply of money than was available under the then reigning gold standard, thus aggravating the depression.
These problems suggested a monetary system in which economists determine the money supply needed by the state of the economy and in which governments have various means at their disposal to ensure that the actual money supply closely approximates this ideal. Both economists and governments like this idea: they are flattered by the power it ascribes to them.
This may have worked for a while, but since asset-backed securities, credit derivatives, and hedge funds neither governments, nor anybody else, has any idea what the money supply is. So there we are: equating the money supply to a gold reserve at a fixed price doesn’t work. Alternative ways of controlling the money supply, such as the M1 and M2 of yore don’t work. Isn’t there anything else?
There is a lot one can do nowadays with digital authentication techniques. It is time to investigate whether it is possible to implement digitally a collection of monetary certificates that is the equivalent of the Federal Reserve’s gold supply in the days of the gold standard. These digital techniques have been used for message authentication and digital signatures. It is worth investigating whether they can be used to create a digital one million dollar version of the hundred-dollar bill signed by the Secretary of the Treasury.