In early medieval times, the Plantagenet kings of England were deemed successful based on their marshal valor, their aggressiveness, their ability to rule their nobility. Weak kings who paved the way for future progress (like John who signed the Magna Carta) were deemed failures. Strong kings like Richard the Lionheart, Edward I (longshanks) or Edward III were conquering heroes. For more, read Dan Jones fascinating book. The quest for eternal glory, however, usually meant the ruin of the treasury. So kings looked for money through taxes. Failing that, they devalued.
Instead of relying on the sovereigns of the age, medieval investors looked for ways around sovereign money. Financiers concocted transnational book keeping systems to move money away from risk and towards safety. While strong kings spent frivolously, embryonic financial institutions (sometimes just families) imposed a little discipline by creating ledgers that tracked the real value of currencies. These ledgers could be considered a currency unto themselves as they more accurately depicted societies internal and external obligations.
Something like that may be happening today. Though I don’t think monetary authorities are devaluing enough to combat deflation and depression, a lot of commentators and investors do fear that quantitative easing is exactly like what the kings of old did for military glory. Now it is the voracious appetite of special interest groups who seek to bankrupt our polities. Indeed, hopes are rising for a pseudo-currency to displace our dollars and euros and renminbi so that we can forever escape the pressure of politics on the obligations accumulated by creators of wealth.
There’s a reason the sovereign controls money, and that’s because the sovereign also enforces the laws. But imagine a world where a digital currency (or multiple digital currencies), more efficient, more trustworthy and more translatable, began to displace our modern currencies. How would it look? Maybe some sovereign currencies could even compete with private currencies (Polish mortgages denominated in Swiss francs, anyone?).
The start of the fall of the dollar would begin with high interest rates. In response to continuing economic turbulence, the Fed would print trillions more in money to raise our collective expectation of inflation. But if they didn’t ease off quickly enough, the Fed that broke the back of deflation would also be the one that reopened Pandora’s Box of runaway prices. If they didn’t then readjust, interest rates would shoot up constantly, striving to catch a forever-upward moving target. Think Russia or Brazil futilely defending their currencies with 10%, 15%, 20%, 50% interest rates. Then think Weimar Republic where 1 mark becomes 100’s, 1,000’s, millions, billions.
Instead of credit shutting down from deflation, it shuts down because no institution will loan at any amount of money that devalues at an exponential rate. But banks and credit will still exist. They will just use a different store (or multiple stores) of value that makes sense. If you want a mortgage, you can pay 3% interest if it’s in Bitcoin or Ripple or Swiss Francs. The credit side of the equation starts to be denominated in crypto- or trusted foreign currencies rather than the ruling government.
Because reserve ratios for a worthless US dollar mean nothing, banks begin to compete for deposits in “real” (ie. non-dollar) money by offering real rates of return on those currencies, then making loans in those same currencies. Highly-skilled labor will begin demanding wages in the new money so they can begin matching their earnings with their obligations. Instead of FDIC guarantees, the upper classes who convert first to the new private currency will research a prospective bank’s reserves thoroughly before making a deposit. After all, the dollar “law” that regulates dollar “savings” would be bereft of political or moral support.
The more a private currency is used: first in loans, then as reserves, then in the wages of highly-skilled, mobile workers, the more demand for it would grow. Luxury goods now must be bought using real money (not the public claptrap promised by the Federal Reserve). Either a massive deflation of prices in the private currency occurs, or the owners of said currency begin to coin more to match increased demand.
Because the private currency began with an offer of cheaper credit, massive deflation won’t be tolerated. Highly-skilled workers won’t accept lower wages when they have to pay higher mortgages. This is the mismatch that causes financial panics and depressions. But instead of massive devaluation, the new private currencies compete by matching the need for a stable store of value with a future expectation of a match between credit and wages.
Currency as a store of value is not best as a fixed amount. Rather currency is an obligation earned as labor, spent as labor, acquired through excess labor, credited on the promise of future labor. So the “best” private currency guarantees a match between wages paid in the new currency vs. the amount of credit dispersed. This equality of situation will persist so that, the more spent in Bitcoin or Ripple or Swissie, the more wages will match that amount spent, and a slowly-increasing bucket will be set aside for more credit. This will combine with a larger pyramid of credit erected by banks.
The winning currency(ies) will not be those that never increase in quantity. Nor will it be those that devalue sharply at the slightest sign of a credit collapse. But rather in the digital code, or in the expectations set by the masters of our new money, earners and bankers and businesses will know there will always be enough of a match between consumption, credit, wages and investment that there will never be too much deflation nor too much inflation. Rather the combined ratios of reserve requirements, deposit-to-currency ratio and velocity will always be kept in balance to accommodate debtors & creditors, employers & wage earners, businesses & investors.
And the centralized, sovereign rule of our money by a handful of chosen bureaucrats exercising out-sized control over all our lives will be remembered as a quaint memory.