Digital currencies issued by central banks could be the most important financial innovation since paper money. The issuers say they will throw out Bitcoin etc. But given the beginnings of paper money, the digital currency in the beginning would not be a Stable currency It is likely to lead to inflation and other problems.
The Chinese discovered paper money, or “flying money,” as they called it, in the eleventh century. Europeans took 600 years. She followed a popular pattern. Initially, it was convertible into precious metals. But governments have not been able to resist the temptation to use easily earned money to finance their spending, especially in times of crisis. When the problem started, the transfer rights were statically suspended.
In the beginning, the benefits of printing money are clearly realized. But the “golden period of sharp economic growth, not inflation” lasts only a year, according to historian Peter Bernholz. When prices start to rise, paper money becomes a hot potato. Increasing the circulation of money only increases inflationary pressures. People trade their paperwork for safer stores of value or try to get their savings out of the country.
Often governments respond by vetoing the alternatives. In 1394, the Ming Dynasty emperor imposed fines and imprisonment on anyone who used or stored copper coins. Shortly after the introduction of paper money in France in 1719, Scottish economist John Law banned the possession and export of gold. These measures always fail. In the end, paper money was so discredited that no one would accept it. Gresham’s law works in the opposite direction in times of high inflation: good money brings out bad. People turn to other types of money or barter. Towards the end of Weimar hyperinflation, many foreign currency transactions were undertaken.
When enough people are exposed to the horrors of inflation – whether they are workers with late wages or retirees whose savings have diminished – a consensus is formed on reform. But since the government has lost the people’s trust, the alternative currency should be accompanied by a monetary “constitution” that prevents the central bank from financing the deficit. Thus the Rentenmark project, which began in 1923, ended Germany’s nightmare of hyperinflation.
The central bank’s digital currency, or MDBC, could lead to further turmoil. With cryptocurrency, no printing company or commercial banker can impede the flow of newly created funds. After Lehman Brothers went bankrupt, central banks created a lot of dollars, euros and pounds, but that didn’t cause much inflation, as banks deposited most of them directly into central banks. The newly issued digital currency will go directly to the citizens.
This is a big part of its appeal. Authorities say Covid’s measures could have been implemented faster if the payments were distributed in a digital currency. This new money appears to be perfectly tailored for modern monetary theory, which advocates argue that governments should print more money to rebuild infrastructure, reverse climate change, and achieve social justice. The digital currency can fulfill Milton Friedman’s imagination of “helicopter money”, with all its inflationary implications.
Moreover, CBMs are expected to arrive in a period of intense monetary turmoil. In the past year, central banks helped finance huge deficits. Bernholz notes that outbreaks of hyperinflation typically occur when more than a fifth of public spending is funded by newly printed money. Both the United States and the United Kingdom have just passed this point. The US Congress expects the deficit this year to reach 14% of GDP, and a large part of it will be paid for by Fed purchases.
We have so far witnessed another of those “golden periods” in which the rapid growth of money supports activity, but has limited impact on prices. According to the International Monetary Research Institute, US money grew 22% in the twelve months to April, but the CPI rose 2%. However, raw materials are on the rise.
The unlimited coin issue will add fuel to the fire. Since it is easier to exit, it can navigate faster during times of high prices, which increases inflationary pressures. In such circumstances, cryptocurrencies and precious metals can be popular as alternative stores of value. There may be more companies accepting Bitcoin payments. History repeats itself: The authorities are trying to clamp down on any alternative to money, but to no avail.
A point will be reached where people with merciful incomes would have been killed, Wall Street would be closed to businesses, unemployed workers, and corporations in disarray. People were shouting, as always in those cases, for money that would be a true storehouse of value, out of the reach of governments and their accomplices in central banks. It is time to re-launch a digital currency whose annual issuance can be limited to the growth trend of the economy, as suggested by economist Thomas Mayer. It will be real Stable currency Make Bitcoin and other cryptocurrencies unnecessary. It may come, but not before this golden age is over.
The authors columnists for Reuters. Opinions to you. Translation Carlos Gomes DownIt’s a responsibility Five days