«In these times of economic – and theoretical – crisis, many have jumped on the bandwagon of an electronic monetary system. In particular, theorists from the Marxist school, who, having realised that a system without prices leads to the impossibility of economic calculation, that is to say, to the impossibility of entrepreneurs or planning bureaucrats estimating future prices, have realised that the creation of public, electronic money is the solution to the ‘top-hatted bankers’. Once again, they demonstrate the flaws in their theory and, above all, their fatal arrogance. These social engineers, with master’s degrees from some university hardly worthy of the proletariat, intend to control people’s daily lives through methods they claim are scientific. All in the name of the common good. They fail to realise that their policies will be determined on the basis of their value judgements—that is to say, on their individual and personal interests. There is no such thing as this supposed collective good in any of their actions.
Following this introduction, I invite you to delve into the wonderful world of money. Money fulfils two fundamental functions in the economy: preserving value and serving as a medium of exchange; therefore, the object intended to serve this purpose will be the one that possesses the quality of being the most liquid asset in the economy. It is worth clarifying that money does not arise from any social contract, nor is it created by the state, as some seem to think; rather, it is society that determines which assets are the most liquid through subjective judgements in a process that knows no end. With regard to liquidity I’ve already spoken about this here for anyone who would like a broader overview of it.
The idea of legal tender, whether under the current monetary system or a fully electronic one, undermines the concept of money. This system forces the acceptance of money as a means of payment at its face value. This triggers Gresham’s Law, which states that bad money drives out good.
An electronic monetary system replicates the weaknesses of the current system and, worse still, encourages further fraudulent behaviour. Indeed, a public electronic system with legal tender status would displace sound currency and impose unsound currency, just as the current monetary system does. Economic agents would not be able to choose which asset is more liquid; instead, this would be imposed by decree. Furthermore, the fundamental problem is ignored: the current system, based on fractional reserve banking, is designed to increase the power of politicians and bankers, whilst the population suffers from inflation; and the process of credit expansion, unsupported by real savings, leads economic agents to make disastrous investment errors, thereby jeopardising the system’s solvency.
None of this would be possible were it not for a central bank acting as a lender of last resort and backed by the state through deposit guarantee schemes, which “utopically” underpin this fraudulent activity. As history has shown, all such measures ultimately fall short, leaving no alternative but to recapitalise through debt and higher taxes.
If such public institutions did not exist, the very nature of banking would lead to the principle of prudence. No one here is suggesting that banking fraud would be eradicated, but let us not forget that a banker is nothing more than a businessman who wishes to make money and thrive in the market for as long as possible. Under such a system, the only option is to serve their customers’ needs faithfully. No one prospers by bankrupting their creditors or failing to meet their obligations, as happens in the current system or would happen in a public electronic system.
We can surmise that under a private system, policies and liquidity ratios will be much more conservative and, most importantly, bankers will once again be held accountable for their debts and contractual obligations – something they are not at present and would not be under a public electronic system either.
In a private currency system, banks that expand the money supply beyond their available funds are running the risk of going bankrupt due to insolvency. The proposed electronic system means that the only incentive is to expand the money supply, thereby jeopardising the entire system with the risk of insolvency. Furthermore, it prevents individuals from leaving the system by withdrawing their deposits.
We must be clear that the state has not developed any technology or theory for issuing optimal money; what is optimal is determined by economic agents. The liquidity of an asset is not determined by the state, but by economic agents through their personal assessments and judgements. The state has merely systematically eroded our purchasing power through laws on legal tender, both as a means of raising revenue and as a way of enriching the political and banking elite.
As we have seen, the electronic system would lead to more abuses being committed than is currently the case, as it encourages the infinite expansion of the money supply, which would undermine all arguments regarding stability, distort prices, create massive bubbles, prevent individuals from escaping this trap, and institutionalise crime by stripping people of their money’s purchasing power.
»The solution, therefore, is not public money with legal tender status; the solution is the free market and private money subject to the forces of supply and demand among consumers.’
Thank you very much, ManuelMad; as always, a fascinating insight.