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introduction - theory - practice - London - ( revisions )


Newtonian and post-newtonian monetarism

When David Birch opened DMF #5 last year, he described how 300 years ago Isaac Newton was appointed Master of the Royal Mint with the challenge to sort out the British financial system. David proposed that we are now in need of something similar. At that time, three things were critical to Newton's success:

1) matching the complexity of the market

    variety matching

      scale and form of payment systems must match complexity of society / economy / market

    reducing transaction costs / uncertainties

2) state of the art technology

    presses, milling, composition

    should convey "substance"

    make replication very difficult if not impossible

3) legal tender / monopoly

    it helps - you get the best government their money will buy

    the illusion of symmetry - the impression that the money system is free

    minting / management / banking costs more covered than discovered

These three - variety matching, state of art technology and legal monopoly - but the greatest of these was the elegance of Newton's technology and it had consequences that were, perhaps, unexpected.

Here I cite "Adam Smith" - not the usual suspect, however, but the much more current PBS financial analyst and journalist aka George J W Goodman and his book "The Power of Money".

By Goodman's account, Newton designed his sovereign with such dimensions and composition that it was a finely-tuned gong. If the coin was shaved, rubbed, or recast in baser metal it quite simply no longer had the ring of truth to it. By this elegant technical device, Newton made the sovereign instantly verifiable by anyone with ears. I pay off my debts by dropping coins in a pile, and if I drop a clanger, it's not accepted.

According to the later Adam Smith, this not only had an immediate and positive effect on the confidence of traders, it also opened the door to fractional reserve banking. Prior to this deposits were not often aggregated as each depositor wanted their own money back. Coinage of secure value made this unnecessary.

Smith further supposes that this led quite directly to the sovereign becoming the strongest currency in Europe, to London becoming the leading banking centre of that world, and thence to the financing of the emergence of the British Empire. Maybe so.

Now let's consider Newton's criteria in our current context.

1) matching variety

    The market is increasingly diverse, multiple, fast, and granular

    certainly recommends itself to digital technologies.

    There's clearly no point in moving heavy metal around any more.

    But more than this, we can do it our way. There's no need to wait for the banks to open.

      not appropriate for governments / banks to issue

      not big corporation money

        unstable, less useful in macroeconomics

      SME foundation

        more diverse, resilient, stable

2) state of the art technology

    of course, but NOT absolutely necessary - just obviously advantageous

    the technicalities are almost trivial - security a non-issue

    building the internet would have been easier if the internet already existed

      internet makes the establishment of the money-net particulary easy

3) legal issues? - yes and no

    yes - legitimate - tax, death etc

    no - NOT legal tender

      the fsa present no problem

      really, they don't - although they might not know that yet

        not their department, not their interest
        and in any case out of their range

    and no monopoly - open money is beyond monopoly by definition

      so NOT a matter of ensuring value of instrument and institutions

      clearly a cardboard replica - explicitly insecure

In summary, in theory - there are two sorts of viable money -

1) money that's required to be valuable in itself, independent of users

    it must go anywhere, so issue controlled by central authorities

2) money whose value lies in the performance of its acceptors.

    it just goes around, doesn't leave its community of origin, and can be issued by any who are credible in the community