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Modern money


by daniel archibald

 

"What did the bank manager shout to the thief that was running away with pockets full of bullion?"
"A U ! Where's my gold?"
 

For almost all of recorded history, gold (chemical symbol AU) has been revered and used as a key store of wealth and status symbol. This is due to its shimmer and rarity, along with its malleability and resistance to decay. For millennia, gold (along with silver) was the main currency of trade. And up until the last century, it served as the standard for most country's minted notes and coins (i.e. each dollar of currency was backed by a dollar of gold sitting in the vaults of the issuing country or bank). 

Spending on wars in the 19th and early 20th century saw the eventual demise of this golden currency and the rise of fiat money. Rather than being backed by real assets such as gold or other commodities, a fiat currency is simply backed by the promise of the issuing country. Whereas old notes would have wording such as 'redeemable in gold on demand', new notes now simply state the status of it as 'legal tender'. 

Of the 180 or so world currencies, the US dollar is by far the most important. It is currently used in settling the vast majority of global trade and is included in 90% of all currency transactions. On average, the US dollar makes up roughly 60% of central bank reserves and accounts for about 40% of the International Monetary Fund's 'special drawing rights' (XDR) basket of currencies. Importantly, many small and big economies still peg their own currencies to the USD or us it as their own currency entirely. 

There have been calls for the world to move away from the USD as its main trade and reserve currency, particular as the US as a nation is involved in a smaller proportion of global trade each year (below 30%). The rise of the Euro, one of the world's newest currencies, may have put it on track to supersede the USD dominance. However, the European debt crisis and Brexit have put a stop to such talk. The IMF's XDR has also been touted as a possible global currency. 

But in reality, for the USD to be supplanted as the world's global currency, countries and merchants that have relied on the USD as the basis for pricing will need to agree to switch to another currency (somewhat simultaneously as there are 2 sides to each trade). But there has been one surprise entrant into race to become the next global currency - cryptocurrency. In what many believe to be the anti-fiat currency, not only is cryptocurrency not backed by gold or any commodity, it is also not backed by any country or bank or anyone. It is simply a medium exchange that gets its value from its scarcity, secure portability and perhaps, notoriety. 

The most dominant currency in this peer-to-peer monetary system is Bitcoin. The exponential rise in its market value in the decade since its creation has sparked debate about its true value to society and, perhaps more importantly, the value of today's fiat currencies. The fact that investors, speculators and merchants alike are willing to give away $10,000 worth of fiat currency for something that has no intrinsic value, highlights the potential pitfalls of a world hooked on debt and money printing. 

Just as the world's idea of money has evolved from shells and gold to national promises and digital coding, the future of money is likely to throw up even more surprises. Perhaps, we might return to the gold standard. Or maybe we will institute a new global currency. Or just maybe, we might look forward to the world fabled in the post-scarcity society of 'Star Trek' - a world without money entirely.

 

LBW Wealth Management is an Authorised Representative of Wealthsure Financial Services Pty Limited AFSL 326450

This article has been prepared by LBW's investment committee based on its understanding of current regulatory requirements and laws. It is not considered advice and provides general information pertaining to our ideology surrounding future asset allocation strategies. It does not take into account each client's individual objectives, financial situation or needs. If you would like to know how LBW's understanding of the current environment impacts on your portfolio please contact a Financial Adviser and to discuss your options or before making an investment decisions. 

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