Old money, new money

1 March 2009

The PI business isn’t really down at the moment, it’s just changing. Suddenly a lot of desperate people want to find out what happened to their money. The stories are depressingly similar: they toiled for decades in a job they hated or struggled to build up a small business and then some smooth bloke in a nice suit and a BMW came along and offered them this fantastic investment deal that would set them up for a very comfortable retirement. They put all their money into shares in a luxury villa development at Tranquil Haven – previously known as Sandfly Inlet – only 13 hours drive north of Brisbane, and suddenly they can’t get Mr Smooth on the line, so they go round to his office and it’s obviously been closed for some days …

Ah yes, what happened to the money? When they bought in, Smooth assured them those half-built luxury villas at Tranquil Haven were ‘worth’ at least $25 million and now they find they’re not worth a cracker. Typically, I make a few phone calls and turn up a raft of angry subcontractors who haven’t been paid for weeks and a bank manager who laughs hysterically when I mention Smooth’s name.

I’d just finished one of these calls when Old Possum came hobbling up the stairs bearing a six-pack of cider and we set to talking about the changing nature of money.

“What percentage of your total weekly spending is via cash-type money – you know, coins and banknotes?” Old asked, twisting the top off a cider.

“Me? Oh, not much at all. Maybe five per cent. Only train tickets and cups of coffee and stuff like that. I eftpos almost everything, or I put it on the credit card if it’s too big for eftpos.”

“Exactly. And when ‘stored value’ cards come along, you won’t even need to use physical cash because you’ll pay for your train ticket with more electronic cash.

“Think about this. In the old days, if there was a panic and a run on the bank, what happened was that people queued up and withdrew cash until the bank ran out of banknotes and coinage to give them. But what would a run on the bank look like if you were able to put all the ‘money’ you had in the bank onto your stored value card – provided, of course, there was no withdrawal limit?

“Well, they’d just give you all of your savings, as an electronic transfer onto your card. At that point you become your own banker.” He took another swig of his cider and went on.

“The big, fundamental, uber point is that once, not so long ago, money was a commodity – it was gold, or, at least, a valuable metal. It was a thing, independently valuable for its utility in making stuff.

“Then, for convenience, a stand-in version, called the banknote was invented and, originally, the veracity of these ‘notes’ was that if you turned up at the bank – later, the treasury – they’d give you the real thing in exchange for your note. It was guaranteed ‘as good as gold’.

“As confidence in this convention was established, more and more paper money was issued than there was gold in the vaults to back it up. They could get away with that because it seemed obvious that not every punter would turn up at the bank at the same time, wanting their gold.”

“Hey, on that basis, you could greatly expand the money supply and therefore the economy!” I remarked.

“Right. And that’s just what happened. Over time, governments restricted the right of every Tom, Debbie and Hussein to go to the bank and get gold for their paper, but the “gold standard” remained for international government-to-government dealings until August 15, 1971, when Nixon took the dollar off gold. Within months, the gold standard was dead everywhere.

“Before 1971 the nexus between the pile of gold bars in the treasury and the amount of paper in circulation acted as a psychological and policy barrier to the creation of endless floods of paper currency – and debt, which in invisible paper. After 1971, all barriers were down. With no independent measure of value to weigh paper against, there was no limit to the amount of new paper and debt you could create.

“And then along comes electronic accounting and transfer. Money has gone from being a physical thing, a commodity, to a paper representation of that commodity, to an electronic signal representing the paper representation. It’s gone from being a material thing, to a concept.”

“So what’s an Australian dollar really ‘worth’?”

“Well, how much you can get for it in exchange for US dollars which are worth as much as you can get for them with British pounds which are worth whatever a faceless mass of traders bet they’re worth based on a guess about where the oil futures market might go in the next hour or what the upcoming budget might mean. It would be an understatement to say the whole thing is wildly subjective.”

“Now that for all practical purposes, we’re in the situation where all money is just signals, just accounting, society needs an agreement about what, basically, these signals are measuring, what they account for, and, on that basis, who’s entitled to what.”

“Ohhh … I can see where this is heading: right back to the labour theory of value. Welcome back, Adam Smith, Ricardo and Marx.”