The Monopoly of Money Issuance
21 April 2009Guest-blogged by SNS Member Ricardo B. Salinas, Chairman of the Board, Grupo Salinas
Last month, on my own blog, I shared my general view about the energy monopoly. Here, I want to write about another monopoly that affects our pocketbooks: the monopoly of money issuance.
The total amount of money circulating in a country has to correlate to the amount of goods and services produced by the economy. The production of these goods reflects the efforts of millions of workers, who, together with capital, add value to society. The least that can be expected in exchange for this effort is that it be recompensed by a means of exchange that retains its value over time.
For this to happen, by definition, inflation must be kept under control, which is achieved by respecting the relationship between the amount of cash in circulation and the value of total production. In my country of Mexico, the institution in charge of maintaining the value of money is the Banco de México (or central bank), whose website states that its “priority objective is to ensure the stability of the currency’s purchasing power.”
To achieve this goal, the Banco de México operates the constitutional monopoly of the printing of money and has several mechanisms for monetary regulation. That is, it must issue the bills and coins necessary to make transactions in the economy possible, and not a penny more. Monetary theory is very complex, but I’m sure the central bank has people who have been trained to understand it and are able to fulfill this function.
However, the reality is that at some point, something went wrong, because the value of our peso has dropped dramatically over the last three decades. Let’s look at the figures:
When I graduated from the Monterrey Technological Institute (the TEC) in 1976, a dollar was worth Mex$12.50. But we have to take into account that at that time, Mexico’s currency had three more zeros added on: that is, a dollar was worth Mex$0.0125 at today’s rate. Today, that same dollar costs Mex$14. To make it simple, we went from Mex$12.50 to Mex$14,000 (old pesos). This means that after 33 years, in dollar terms, the peso is worth 0.89 thousandths of what it was worth then. It’s hard to imagine such microscopic figures.
But that’s not the whole story.
If we look at the price of gold, the loss of our currency’s value is even worse. Today, an ounce of gold is worth US$925, compared to US$120 per ounce 33 years ago. That is, the dollar, the currency of the most powerful country on earth, the country where the gurus from the Chicago School of Economics are from, lost 87 percent of its value in gold over the last three decades.
While the dollar is worth only a little over one-eighth in terms of gold what it was in 1976, today’s peso is worth one-ten-thousandth of what it was worth in gold in 1976.
So, we Mexicans have been the victims of a huge fraud. But, in contrast to the Madoff case, this mass fraud affected millions, even if it took decades to pull off.
The loss of the value of currency creates, among other negative effects, the inflationary tax. This is the most unjust tax of all because it’s not decided by decree, it’s not published anywhere, and it’s not put to a democratic vote. It’s just levied. And to top it all off, it hits the purchasing power of the bottom of the pyramid (BOP) the hardest of all because this is the part of the population that keeps a large part of its savings in cash.
Put Not Your Trust in Money
With great insight, an American poet once said, “Put not your trust in money, but your money in trust.” If the bottom of the pyramid had had access to banking services in times of the highest inflation in modern Mexican history, it would have earned interest on its savings, compensating somewhat for the currency’s lost purchasing power. In fact, this is part of the vision behind Banco Azteca.
However, since most of the population has practically no access to banking services, the impoverishment of millions of families was proportional to price hikes, effected to finance disproportionate and inefficient public spending.
One definition of madness is to “do the same thing over and over and expect different results.” Today, many people propose using the same remedy that has been applied for decades. Isn’t this what’s happening right now in the U.S., where the Fed has nearly tripled its balance sheet with the stroke of a pen?
The world has gone mad, but that’s a matter for another entry.
Related Entries from Ricardo’s Blog:
Economic Freedom in Crisis
Following the Words of Buffet
What Should Be Done About the Billion People Trapped in Poverty?
What the Government Spends Affects You
One Response to “The Monopoly of Money Issuance”
April 21st, 2009 at 12:22 pm
Thanks for sharing those thoughts. Last September, in the midst of crisis week (the week Lehman failed), I did a presentation at the Web 2.0 conference. I posted the text online at http://www.tnl.net/blog/2008/09/19/coins-to-qq-at-web-20/
Building on your post, I would add the following questions, which were the conclusions of my presentation:
“So if we take the trends we’ve just explored:
1. Virtual currencies have grown to be traded as if they were real currencies
2. People are moving money from one person to another via the internet or mobile devices
… we may be able to come up with the conclusion that where this is going, in the long run, is an area where exchanges could be set up either online or on mobile devices to use virtual currencies are real currencies.
And if we assume that this first step is possible, then it’s not too far away from the next step, which is an explosion in the number of currency offerings we may see in this world.
What we’re seeing here is the first shot in what I think is the next evolutionary step in the history of currency and it’s an evolution that could either be a transitional phase without major disruption or a massive change in the way people are interfacing with currency: this could be our generation’s Nixon Shock.
The issues around this new world are significant.
The first issue is around who is controlling those currencies. For most of history, currency was under the control of the currency issuer. But in the last couple of centuries, there’s been an increasing trend towards government control of currency.
How will government react when their own currency is challenged? And will their reaction matter? After all, the Chinese governments actions to date, as far as the QQ is concerned haven’t stopped trading.
What will happen in terms of tax collections? Will government have to start accepting currencies beyond their own as agreed form of payments? And if they accept other forms of currency, will they have to accept other government-run currencies as form of payment?
How will criminal behavior be dealt with? Today, criminal elements can be tracked because whenever they have to deal with some currencies, they have to eventually deal with banks. And because banks are regulated, criminal behavior can be intercepted. What happens when those money flows move outside of the financial institution control? Shouldn’t governments think about regulating those institutions as money transfer operations ?
What happens when the number of currency explodes? Sure, computer systems can do the conversion without problems but how will WE assess the worth of a currency?
And, as currency initially proliferate, there will eventually be a move towards an agreed upon set of new currencies because remember that currency is ultimately, about an agreement value by all of us. But when some of those currencies die, what will happen to the people holding them? Will the dead currencies be converted to emergent ones? And what happens if the dead currencies are ones that were controlled by governments? Will they fight for survival?”