The Future of Money in Crisis
It is no secret that we face a crisis in our monetary system. A popular chart from the Federal Reserve that circulates newsletters and blogposts shows the purchasing power of the US Dollar from 1913 (the creation of the Federal Reserve) to the present and the loss of over 90% of purchasing power in that time span.
A historical chart of the S&P 500 over the last 90 years dimly showcases the system's boom-and-bust cycle ingrained in its characteristics.
From a Gold Standard to fiat currencies, it seems there is no ideal monetary system available that delicately balances price stability with economic growth.
Money is a tool used to create economic efficiencies in the real economy. To be able to transact goods and services more easily and efficiently. Price instability from changes in the supply or demand of money makes it more difficult for the real economy to do well.
Over the history of our current monetary system, this is exactly what we have seen, and it has become increasingly apparent that a change is urgently needed. The issue now lies in what this future monetary system will look like and who decides the outcome.
Rise of Digital Currencies
If you look up the terms “future of money” on the internet, it is nearly impossible to find a search result that does not include Bitcoin or other cryptocurrencies in the headline.
The rise of digital currency in recent years has quickly accelerated conversations about what the future of money looks like; and as of now, all signs point to this new financial technology having at least some part to play in it.
Proponents of digital currencies laud their accessibility, fast transaction speed, and decentralized network that protects transactions from control by governments or central banks.
If you have made your way to georgegammon.com, there is a good chance the idea of kicking big governments and thieving central bankers out of your pocket sounds like a wonderful idea!
But as Brent Johnson points out in this panel discussion, the separation of money and state has never occurred throughout human history, and to think modern governments will voluntarily give up control of money is sadly unrealistic.
Whoever controls the money, holds all the power. This concept has been true throughout history and remains true today.
This is where speculation about a “FED Coin” or a Central Bank Digital Currency (CBDC) comes from. Although it is still unclear how a Fed Coin would work, foreign governments like China have already gone public with their plans for a CBDC and we can make assumptions about how similar a FED Coin would be.
Return to the Gold Standard?
Since 1971 when President Nixon abandoned the Gold Standard, the US Dollar was no longer backed by any reserves of physical precious metals, and a new era of fiat currency and boom-bust cycles was ushered in.
Today, with out-of-control government spending and increased volatility in the markets, many experts are calling for a return to the gold standard and a return to the stable value of the dollar that the precious metal backing would bring.
However, as the panel suggests, the main concern with the gold standard is the lack of elasticity and gold’s tendency to “pool up” rather than distribute throughout the economy. An inelastic currency is an economic growth inhibitor.
At the same time, gold has been used in monetary systems for thousands of years, which makes it hard to imagine a future without it.
US Dollar Reserve Currency Status
The United States has, for the most part, benefitted immensely from the 1944 Bretton Woods Conference when the US Dollar became the world’s reserve currency. Increased buying power due to an increase in demand for the currency spurred economic dominance for the United States.
But there have been drawbacks. Namely in the strength of the dollar causing US exports to lose competitiveness on the global market. This has led to a loss of jobs and economic output for the United States.
There is a common belief that the Chinese Government would love to replace the US Dollar with the Yuan as the World Reserve Currency. Yet this effort has been occurring for many years with no definite result at this point. As of now, the US Dollar Index is trading in its upper ranges compared to other foreign currencies.
Another option favored by some is for the digital currency world to take over the global monetary system and to do away with traditional currencies. Even in its infancy compared to gold, digital currencies have staked their claim to the conversation.
But for another currency to replace the US Dollar as the World Reserve Currency, the US Dollar would have to lose. Going back to the power of money, it is unrealistic that the US Government would willingly give up this power. It may happen, but it will not be without conflict.
The Future of Money Uncertain
While the future of money and our monetary system remains uncertain, it is has become ever more important that we educate ourselves and prepare for any possible outcome. Whether we see a return to the gold standard, the fall of the dollar, a digital currency takeover, or some combination in between, it is difficult to predict when these events will inevitably occur. What we can predict, is many more intriguing discussions and investment opportunities along the way.