The Future Of Currencies

In an earlier post I wrote about the likelihood of continued market volatility as asset prices veered back and forth between the effects of monetary stimulus and the deflationary forces unleashed by a generational deleveraging event. In this tug-of-war between the forces of inflation (money printing) and deflation (deleveraging) the dollar is the medium through which stress is felt from either side and checking the value of the dollar is the way to see whether inflation or deflation is winning the tug-of-war. Currently, with virtually every country in the world cranking up the printing press to devalue their currency and grab a larger share of a diminishing pool of world trade, we are on the verge of what James Rickards calls a ‘currency war’. As Rickards points out in his book on the subject, currency wars are nothing new, and he quotes numerous examples including the Great Depression, when nations engaged in competitive currency devaluations and imposed tariffs which ended up collapsing world trade. “Whether prolonged or acute, these and other currency crises are associated with stagnation, inflation, austerity, financial panic and other painful economic outcomes. Nothing positive ever comes from a currency war.”

It doesn’t have to be this way. It has been almost 100 years since the founding of the Federal Reserve System with the mandate of containing financial disruptions and promoting the goals of maximum employment, stable prices and moderate long term interest rates. Since then the dollar has lost over 90 percent of its value and 100 year bonds, a commonplace at the end of the 19th century when corporations felt confident they knew what the price level was going to be over the next 100 years, have completely dried up.

While no monetary system is perfect, most observers of the classical gold standard (1879-1914) have noted that, with all its anomalies and exceptions, it basically worked. It was automatic, self-correcting, and over the long run achieved exceptional price stability without any monetization of government debt. The key to understanding why the gold standard worked was that governments had to redeem the money they issued in gold, a discipline which forced them to control the amount of money in circulation. It has become increasingly clear to economists and lay people alike, that governments can never impose this discipline on themselves, it has to be imposed on them from the outside.

I am not proposing a return to the gold standard, although gold does have a strong and justified claim on the affections of those who desire their money to hold its value over long periods of time. Rather, we should let the market decide the best form of money just like it is currently deciding the fate of web standards, or just like it decided the fate of Blu-ray Disks and HD DVD discs in the optical disc format war (old timers will also remember the VHS and Betamax videotape format war of the late 1970’s and early 1980’s). This discovery process is what markets do best because nobody can accurately forecast the outcome of these struggles, least of all a government committee.

In addition to precious metals and baskets of commodities there are other potential currencies of the future that look promising. For example, cryptography expert Satoshi Nakamoto has created the first completely decentralized, anonymous, electronic currency, called Bitcoins, a real-world currency with no government control, no central bank supervision and no rules. Bitcoins are digital coins that can be sent over the internet or stored on disk and transactions are private,  anonymous, and safe. Bitcoins have all the features that meet the definition of money. They are a medium of exchange (anonymous and across great distances), a unit of account (private), divisible (up to eight decimal places), scarce (21 million), portable (transferred electronically), and a store of value (current exchange rate as of October 12 is 1 Bitcoin equal to $12.00).

However the emergence of a currency not controlled by a nation state has potentially widespread disruptive effects. Think for a moment about the effect on payment firms such as VISA, Mastercard and PayPal. Or what about new asset protection vehicles using Bitcoins, that transfer inter-generational wealth without the need for trusts or trust administrators? Whatever the potential disruptive effects, most of which are currently unknowable, the increasing disenchantment with central banks should ensure that the idea of private currencies continues to gain traction in the years ahead.


“…there is no justification in history for the existing position of a government monopoly of issuing money. It has never been proposed on the ground that government will give us better money than anybody else could. It has always, since the privilege of issuing money was first explicitly represented as a Royal prerogative, been advocated because the power to issue money was essential for the finance of the government – not in order to give us good money, but in order to give to government access to the tap where it can draw the money it needs by manufacturing it.”  Friedrich Hayek

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill


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16 Comments on “The Future Of Currencies”

  1. The Sicilian Housewife Says:

    I’d never heard of bitcoins. I must do some more research. Very interesting post – thanks for this.


  2. Malcolm Greenhill Says:

    Thank you. Bitcoins have to pass the test of time but if governments don’t find a way to shut them down I am cautiously optimistic about their prospects.


  3. Dapper Dan Says:

    Like the above comment, I’ve never heard of Bitcoins either. More research is needed on my part but at first glance it just looks like another form of printing money out of thin air. Only this is digital which is even easier. (Maybe I’m just not understanding what it’s all about.)


  4. Jonathan Sharp Says:

    You omitted to point out that anyone can print bitcoins but are first required to solve complex mathematical problems which simply serves to transfer power over the printing press from the government to people who are very good at mathematics and that the principal users of bitcoins thus far are reportedly criminals and pornographers 😉 That said it is certainly an interesting experiment.

    On the subject of the gold standard, I still fail to see in what way it was successful? Use of the gold standard (as well as other pegged systems, the EMS and other similar experiments) ended in failure because at some point the pain inflicted on ordinary working (or not-working) people as governments raised interest rates to defend an arbitrary peg between their currency and gold became too much to bear. Floating exchange rates provides a safety valve between economies that exhibit different rates of productivity gains and general profligacy. The euro is a gold standard in all but name and clearly that is proving to be a disaster for all involved.

    The issue comes down to how serious governments are about encouraging productivity growth and how careful they are about avoiding a structural deficit. This requires politicians and central banks to be honest with the electorate about what needs to be done to improve the economy instead of treating voters like children. And it requires voters to take some responsibility to inform themselves about the issues – perhaps by examining countries that have done a perfectly good job at managing productivity and deficit spending within a fiat currency system. Fixed exchange rates, whether to the gold standard, the dollar, the Euro or the European Monetary System, have never been the answer.


    • Malcolm Greenhill Says:

      Thank you for this thoughtful reply. However, the average person is not going to concern themselves with mining Bitcoins. This is simply a clever idea to ensure a gradual and decentralized issue of coins until the hard limit of 21 million Bitcoins is reached.

      Anonymity is certainly a big plus for Bitcoins so it is no surprise that they are being used by drug dealers, pornographers and others who want to conceal their activities. Forgive the pun, but there are two sides to this coin. Bitcoins can also be used by political activists on the run from an intrusive government. Julian Assange’s WikiLeaks only continues in operation because donations can be made in Bitcoins. Finally, U.S. dollars are also used by criminal elements so I don’t think criminal usage proves anything.

      The classic gold standard was successful because the banks were solvent and there was no monetization of government debt. This translated into long-term price stability. Average annual inflation between 1880 and 1914 was 0.1%. Price stability led to an increase of private foreign investment on a scale that the world had never seen before. Even the New York Fed’s own Arthur Bloomfield gave his grudgingly admiration to the classic gold standard in his 1959 monograph on “Monetary Policy Under the Gold Standard”.


      • Argus Says:

        Hah! So was mine …

        I was taking it a step further (you may not take me literally all the time yourself but so many do—I live in NZ’s Southland province and the people down here take as their role models the sheep they farm. Literal? Ye gods … but no sense of humour aside, they are good people.


  5. Argus Says:

    We’ll get nowhere until we have a money with intrinsic value. Money that either cannot be counterfeited or costs more to counterfeit than its recognised worth. Money that people choose for themselves rather than have imposed on them by ‘legal tender’ laws.

    I leave it to better minds than mine to come up with that money … in the meantime, yes, I’d be happy to mow your lawns, wash your car, walk your dog, whatever; for a wee gold coin or two.


  6. Argus Says:

    “Hah! So was mine …

    I was taking it a step further (you may not take me literally all the time yourself but so many do—I live in NZ’s Southland province and the people down here take as their role models the sheep they farm. Literal? Ye gods … but no sense of humour aside, they are good people.
    =============== ”

    (How do you get those wee smiley things? I like ’em~!)


  7. bellmk Says:

    I’ve had to bookmark this post so that I can give it the attention it deserves on a non-weekday….and thanks for the advice! I will certainly be picking up that book!


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