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Money, Gold and Barter

04 June 2020

Written by Ralph Hazell

Economics

“The coincidence of wants” is an expression used to describe why barter isn’t a very scalable form of economic activity. In a world of barter it would be quite rare for two independent producers to always have the need for each other's product at exactly the right time.

This demonstrates the need for sound money as a store of value as much as a medium of exchange. If you have worked hard for years making and selling a product or perhaps selling your intellectual skills, it’s important that you trust the long term purchasing power of your savings that you have from this earnings.

Money is the oil that facilities the economic engine. We could describe the economy in its simplest form as a sophisticated barter system enabling value created to be stored and later used to purchase goods of that value.

If everyone relies on “the money” for the economic system to function properly, then it’s very important that money does what it’s meant to do. Historically this has mostly been performed by using gold and silver as money and even bank notes were a promise to hand over a weight of gold if presented to the issuing bank.

Private currencies or local barter systems have generally had a hard time being allowed to operate by governments and regulators. The reason they might give is that they want to protect the consumer from bad practises, default or anything that would mean the consumer losing their savings.

The reality is that the governments and the central banks of the world do not want to have any competition when it comes to the ability to issue money. The governments need to be able to print money that buys their own government debt at sometimes even a negative interest rate. This is known as the Monetisation of debt or simply printing money.

But is this monopoly position in money creation that governments have in the interest of the population as a whole? Most commercial monopoly positions eventually end up being abused. Having competition and alternatives drives innovation and efficiency.

We have seen the way that global regulators and central banks have leant on Facebook to encourage them to water down their planned digital currency “Libra”. Even owning some bitcoin has sometimes felt risky in case the authorities deem the ownership of crypto currencies as a form of money laundering.

Whilst barter may have been the original enabler of commerce, gold has been used as a medium of exchange and a store of value since the beginning of our civilisation.

In recent years most of the world’s central banks have been quietly building up their gold reserves. Here in the UK, Gordon Brown, when he was Chancellor of the Exchequer, made the decision to sell a large chunk of our gold at $250 per ounce in 2001. Mr Brown even signalled to the market that this was going to happen, enabling traders to sell ahead of the Bank of England’s sales. This resulted in the price of the sale being a multi decade low, known in the gold market as Brown’s bottom.

I believe that we have entered a dangerous period economically, where many of the world’s fiat currencies are at risk of collapse. Efforts by governments to stop alternatives such as bitcoin will only make the problem bigger, as sensible people will look for ways to protect themselves from currency instability.

By allowing currency competition, governments can facilitate a smoother transition through this period of instability.