Sunday, January 11, 2009

Money: does anyone really know what it is any more?

Of all the novel elements in the new world of enterprise and exchange, none caused more headaches than money. A lot of diverse meanings crowded into that word. Money had always been a store of wealth, but it became the lubricator of a new economic order. It was now possible to buy and sell over longer distances and to preserve value farther into the future than had ever before been the case. Money had also become cash—the means of instant gratification. And money was—well—money, that is gold and silver minted to use as legal tender with the imprimatur of a monarch’s guarantee of amount and purity.


Money: does anyone really know what it is any more?
About 12cm long and 5cm deep, with a plain engraving of a white-haired man in a fancy cravat (George Washington) and bearing the signature of Anna Escobedo Cabral, the Treasurer of the United States, and Henry Paulson, the 74th Treasury Secretary, the dollar is the most widely held and recognised currency in the world. It carries the following explanation in small type: “This note is legal tender for all debts, public and private.”
On the reverse side there is a curious picture of a pyramid with the head lopped off and raised slightly, with an eye in the middle. It is hard to know what exactly this image signifies, a question that some people are beginning to ask about the currency itself. What exactly is a dollar worth these days – or indeed any other currency ?
It was clear enough in the Beatles’ days. It was all they wanted:
The best things in life are free
But you can keep ’em for the birds and bees
Now give me money (that’s what I want).

Money was simpler in those days. The Beatles earned most of their royalties in pounds sterling or dollars. The dollar was the major currency of the world by then, taking over from sterling. It was backed by gold. If you wanted to in the 1960s, you could take your dollar bill into a bank and exchange it for a measure of gold.
This exchange of paper for metal maintained a link from the very origins of currency. In the days of the Fertile Crescent in Mesopotamia (modern Iraq) silver ingots were used to represent stored grain. The Romans also used silver coins, the Chinese bronze, the Indians gold. Then some bright spark realised that you could use something other than the metal to represent it.

Paper was lighter, and if it were destroyed you still had the metal in the safe. There is one problem with this, which is true as much today as ever: do you trust the person who is issuing the money? In other words, is the currency worth the paper it is written on?

In various times of turmoil the answer has been an unequivocal no. In the early 1900s, four or five German marks would buy one dollar. When war broke out in 1914 Germany abandoned its link to gold and began printing money instead. After the German defeat and the ruinous terms of the Treaty of Versailles, inflation began.

There is the tale of a student in Freiburg who ordered a cup of coffee in a cafe. By the time he paid for a second cup, 5,000 marks a cup had risen to 15,000 for two.

“You should have paid when you ordered,” said the cafe owner. You needed more than a wheelbarrow of money to buy a loaf of bread. When the billion-mark note was issued, few bothered to collect the change when they used them. By November 1923, one trillion marks was needed to buy one US dollar. It is hardly surprising that the Germans are still terrified of inflation.

Hyperinflation is running rampant in Zimbabwe today, with beggars holding up placards saying: “Please help. Starving billionaire.”

America was the last country to abandon its link to gold, in 1971. All countries now expect their citizens – and outside investors – to trust their currencies. Often the decline of a currency will be an indication that people think the country’s economy is in trouble. When the pound began to sink this summer, it was followed shortly afterwards by the grim realisation that the economy was in trouble.

The British finance minister, Alistair Darling, is reported to be considering increasing the money supply by printing money in an effort to stave off deflation.

“Printing money is the last resort of desperate governments when all other policies have failed,” said George Osborne of the opposition Conservative party.

The fear is that even the world’s finest central bankers no longer have a clear grip on money. In the 1980s money supply was a tool used to keep a grip on a country’s economy. Money supply is the total amount of money available in an economy at a given time. Economists figured that if you could keep a track and even a brake on how much money was in the system, then you could control spending and therefore inflation.

There is M1 (coins in circulation); M2 (savings deposits); and M3 (large deposits, such as institutional funds). Most of these measures have been abandoned, mainly because nobody can be bothered to work them out any more. Central bankers now use interest rates to control the economy. But now that the US Federal Reserve has cut rates to almost zero, what tools does it have left?

Cynics might argue that it still has the printing press. It is perhaps an unfortunate coincidence that the designer of the US dollar chose to put a pyramid on the currency. Despite the all-seeing eye above it, pyramid schemes are very much in vogue and able to elude the most rigorous regulator. Once people no longer believe in money, it loses its value.

Or as Pink Floyd sang:
Money so they say
Is the root of all evil today
But if you ask for a rise it’s no
surprise
That they’re giving none away.

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