Written by Saga’s Chief Economist, Barry Topf
Do we really know what money is? We know what it does — according to the textbooks, it can be a medium of exchange, a store of value, or a unit of account. But what is it actually? In parts of the world, it used to be a certain number of beads or weight of salt or gold. Nowadays, things are not that simple.
We could look to the banknotes we use for the answer: a ten-pound sterling banknote states “I promise to pay the bearer on demand the sum of ten pounds” — circular logic which doesn’t help us very much. Similarly, the U.S. dollar states “This note is legal tender for all debt, public and private” which does not help as well — but the dollar gives us another clue, pointing us to the heart of the matter: it states “In God We Trust”. Because, ultimately, our money, fiat currency, is based on trust.
Trust is hard to build and maintain, but easy to lose. To serve society on a large scale, it needs a strong system of governance. Today’s sovereign fiat currency is basically a system of governance, to ensure that promises are met, trust maintained, and acceptance widespread. In stable economies, this is so basic that it is taken for granted — but we do this at our peril because there is no room for complacency. When governance fails the results can be severe: inflation, depreciation, instability, and sometimes catastrophic hyperinflation, financial crisis, expropriation, or collapse.
Money is an agreement, a social contract requiring governance. Governance has two functions: to implement and enforce agreement; and modify agreements when necessary. The role of governance is absolutely crucial: it is the foundation on which the trust and acceptance of money are based. That is the reason that privately issued money never succeeded — it could not attain and maintain widespread trust and credibility.
In modern economies, sovereign currency has essentially replaced private money. Governance is entrusted to institutions and the rule of law- often to independent central banks charged with maintaining the value of money. Sometimes it is “outsourced” by using foreign currency or another nation’s governance institutions (for example, a currency union or a currency board).
This governance can work well for nation-states and within geographic boundaries. When the need for governance transcends geography, it inevitably falls short. Governance by nation-states works well to protect its citizens, but when governance needs to extend beyond sovereign states, it has a difficult time coping.
The US dollar plays a major role for hundreds of millions of consumers and investors around the world — yet they have absolutely no say in decision making unless they happen to be citizens of the U.S. Even then, their influence is only indirect. As the major reserve currency, decisions about the dollar affect countries around the world, who have no say in what happens. As we have seen, the interests of the disenfranchised might diverge or be counter to those making decisions, but they remain without a say.
Alternative forms of governance are trying to meet the need. For example, multinational corporations need governance that serves all its stakeholders, not only certain citizens. As more activity and interests become global, no longer organized behind borders, the need for new forms of governance grows. Social and economic changes are creating the need for additional forms of governance. Progress has always created demands for better governance. Advances in technology might provide some of the means.
The internet and distributed ledger technology make available new tools for governance. Unfortunately, until now, cryptocurrencies have not recognized the need for adequate governance, relying for the most part on inefficient and primitive arrangements. In many ways, the recently announced Librainitiative by Facebook seems to be a promising attempt, but it falls short. It remains totally based on sovereign currencies.
It is not new money, but simply a new form of existing fiat currencies, thus inheriting all their disadvantages. Nor does it break new ground in terms of governance — it is highly centralized, and governed by a non-representative group, whose members have purchased their right to govern the platform. The users of the currency have no voice but are potentially exposed to conflicts of interests and lack of privacy.
A much better path, representing real progress is available. Combining transparent decentralised on-chain decision making, along with centralised off-chain decision making, makes possible superior systems of governance, to serve non-sovereign yet non-private monetary models. Properly designed and implemented, it can assure high levels of both effective decision-making and participants’ representation, balancing between voting by identity and voting by stake and include system-wide checks and balances. The result: independent and unbiased money managed in the best interests of all its users.