All that glisters…
All that glisters is not gold… [The merchant of Venice — Act 2 Scene 7]
Finding an article that included a simple link to cryptocurrency in support of my linking sixteenth century Spanish bullion to modern mercantilism and the desire of a sovereign power to maintain authority over what is now its fiat money was difficult. I eventually concluded that I had write my own. Debasement of the currency is the inevitable result of abandoning a monetary standard¹ that limits the money supply (or commodity money), giving credence to Keynesian economics and Modern Monetary Theory (MMT)².
Both Keynesian economics and MMT believe that sovereign currency-issuing countries should only be constrained by the reality of their economic growth, and that that the supply of money should be subject to the fiscal policy and not constrained by the purely financial limits of money supply (fiat money being — in theory — limitless). Keynesian and MMT economists claim that it is the misapplication of their theories that leads to increasing debt and the debasement of fiat money. Also, misrepresenting their theories by claiming that they assume economic growth automatically follows increases in the money supply (regardless of its application). Nevertheless, fiat money in any form gives governments worldwide a monopoly over it that allows them to manipulate fiscal policy³ in support of political ideology.
The sixteenth century Spanish real4 dominated the international financial markets from the sixteenth to the eighteenth centuries becoming the effective reserve currency of Europe. It was China’s thirst for silver, particularly in the form of the Spanish real and China’s wealth of coveted goods that maintained the international ubiquity of the real, this, in spite of Spain’s supposed inability to support an international currency. Spain’s failure to tax its wealthy bourgeoisie enriched with bullion from the Americas, and those that became rich from their exploitation of Spain’s new found wealth in the Americas, led to a national economic downturn. Between 1500 and 1600 prices in Spain rose by 300 percent with King Philipp of Spain declaring national bankruptcy three times (1557, 1575, and 1596). Becoming a mere channel for the silver real to flow into the enterprising trading nations of Europe5 resulted in Spain’s economic and political decline.
In the modern world taxation by the government is understood very well but monetary policy did not mean the same thing in sixteenth century Spain as it does today. There are nevertheless many similarities, particularly the effects of being a reserve currency and military spending, but today’s taxation also has to account for a seemingly never ending increase in government services (particularly social welfare). Historically previous economies never had to account for such services and they would have been difficult if not impossible to maintain when the currency was tied to a monetary standard like the silver standard of the Spanish real. Unlike fiat money the global reserve currency of the Spanish real being tied to a monetary standard prevented, or at least limited, the ability of sixteenth century Spain to adopt a fiscal policy of real specie debasement.
Today for example, the fiat money of the US dollar reserve currency, compounded by other global fiscal policies only bound by fiat, has created the rise of cryptocurrency. All governments in a fiat money world now use deficit financing in much the same way as the bullion that flowed into Spain during sixteenth century, with mercantilism leading a global scramble for economic growth that governments aspire to achieve through increased indebtedness. Like sixteenth century Spain the mismanagement of fiscal policy, without a commensurate rise in economic growth, has resulted in increased government debt. The outcome of this debt being increased, taxation, inflation, perhaps even hyperinflation, a possible default and austerity.
The rising value of a cryptocurrency may reflect more than that of a transferable form of wealth not controlled by a government’s authoritarian monetary policy, it may also reflect the response of the financial markets to the ineptness of a government’s fiscal policies with fiat money. Certainly cryptocurrency seems to be moving towards a monetary standard, probably based on gold, but this is no return to Bretton Woods and a fixed exchange rate. The initial success of an economically authoritarian Bretton Woods Agreement and its eventual failure were both examples of an existing mercantilist policy and economic authoritarianism6. The acceptance of cryptocurrency by a sovereign power in their move towards the introduction of a digital currency, in addition to legitimising fiat money, is the means of a government retaining authority over it.
¹Monetary Standards — An Introduction: A monetary standard is a set of institutions and rules governing the supply of money in an economy. These rules and institutions collectively constrain the production of money. Through its constraints on money creation, the standard indirectly acts on prices. A monetary standard may also affect the rate of growth of real economic output, but that depends on expectations.²
²Modern Monetary Theory (MMT): Modern Monetary Theory is a way of doing economics that incorporates a clear understanding of the way our present-day monetary system actually works — it emphasises the frequently misunderstood dynamics of our so-called “fiat-money” economy.
³The Fallacy of the Money Supply: Today, government owns all money, and while the “funny money” created by the state serves as a medium of exchange, fiat money is not the same as real money. Private, market money is chosen by individuals who seek to make themselves better off. When money becomes a government function, however, it always will be pressed into political service.
4The Rise of the Spanish Silver Real (pdf): Looking back on history, one can easily identify particular currencies that rose to prominence and became the preferred global currency
5The impact of silver from the New World: Turned Spain into the most powerful country of the entire world. The American silver helped the Spanish king to finance his wars that were to assure the hegemony of Catholicism. In terms of economy, this expensive policy didn’t make a sense.
6Government Monopoly Money vs. Personal Choice in Currency: For more than two hundred years, practically all of even the most free market advocates have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation
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