The origin and future of money. By Burkhard Varnholt

Whether it be shells and arrowheads, the coins of Croesus, or abstract book money, the history of legal tender is long, ex- citing and momentous. No lesser man than Goethe realised, with a clarity unparalleled, that unbounded money creation is both a blessing and a curse. Resolving the conflict between the goals of economic growth and preserving resources will become the key challenge of the future.

“The Lord giveth and the Lord taketh away.”

May we replace the term “Lord” with the term “National Bank”? Indeed we may.

By no means should we ascribe superhuman pow- ers to the note-issuing banks; and yet, since their establish- ment, they have regularly held an almost omnipotent posi- tion in society. Money creation legitimised by the state provided the preconditions crucial to economic growth. And the invention of money is perhaps by far the most im- portant invention in the history of human civilisation. It was only the acceptance of money as a general means of ex- change that made possible an economy based on the divi- sion of labour, an economy in which specialisation is the driving force of scientific and technological progress. The al- ternative to the money economy is the subsistence economy,

engraving of an alchemist’s laboratory, 1870 in other words, self-sufficiency. This still exists in certain developing countries, even today. There is no way, however, that a subsistence economy could feed today’s global popu- lation.

The advantage of money has been known since time immemorial. To begin with, it came in the form of useful things like shells, arrowheads or salt, which were easy to transport, store and count. The legendary King Croesus (circa 590 to 541 B.C.) was the first to mint stand- ardised coins in Lydia, a kingdom situated in what is now Turkey. Gradually, coins spread across the entire Mediter- ranean region. Their advantage over commodity money was that they had a fixed weight. In other words, when a payment was made, they could simply be counted, which dispensed with the cumbersome process of weighing them. The value of so-called full-bodied coins was exactly equivalent to the weight of the silver or gold they con- tained. Later, people realised that this is actually unneces- sary: as long as the amount of coins that are made does not exceed the increase in the amount of goods that are traded, they remain sufficiently scarce and thus retain their value.

The invention of paper money

The paper money generally used today, on the other hand, has often proved to be of little stable value in the past. Its origin goes back to the bill of exchange, because a banknote is ultimately nothing else than a promise to pay. These his- toric roots are still visible even today on the English pound note, where it says: “I promise to pay the bearer on demand the sum of one pound.”

Standardised paper money first appeared in China in the 7th century. In Europe, however, it has only been known since the end of the 15th century. To begin with, it was only meant to serve as token money, in case there was a shortage of coins, but by 1661, the Bank of Stockholm was already issuing official banknotes. People had realised that paper money is much more convenient for making pay- ments than using scarce precious metals. It is also a lot cheaper to produce than coins.

The first person to make use of this idea in a big way was the Scottish economist and financial wizard, John Law. He persuaded the French king to print government bills and to use them to buy coins and government bonds. At first the venture was a terrific success but Law made the mistake of putting too much of the new money into circu- lation. In 1720 this resulted in galloping inflation similar to many later cases when the note press was used without due care. The extreme example was the German hyperin- flation of 1923; at its peak, one Reichsmark was worth just about one billionth of a dollar. That things can be different is shown by the much higher number of international suc- cess stories of the postwar period. If money is kept in suf- ficiently short supply, even book money, which is com- pletely immaterial and today accounts for the bulk of the money supply, can serve as a store-of-value asset.

Goethe, the prophet of finance

Goethe, who was a great realist, thematised money both as a blessing and a curse with a clarity unparalleled to this very day. His drama “The Accomplices,” written in 1769, describes a thief walking up to a coffer and talking to him- self as he opens it with his picklock:

Oh come, you shrine! Deity of the coffer. Without you, a king would be a grand non-entity. Thank you, picklocks, solace of the world, Guiding me to the biggest picklock of them all: money!

It is not by chance that, in the second part of the drama, Goethe’s “Faust” also begins his economic venture with the act of money-creation: in his hand he holds the magic key that will open up all the world’s vaults. Here, Goethe explains our modern economy as an alchemistic process that ultimately drives our striving for growth. Even then, he realised that the human urge for power and prop- erty would almost inevitably lead to an economic system aimed at growth – in other words, the permanent creation of money, a system that today appears almost indispensa- ble; and that this kind of money creation, even if, to begin with, it accelerates trade and commerce, sooner or later is bound to lead to inflation.

In “Faust,” it is the court jester, the fool, who utters this timeless message while talking to Mephistopheles.

THE FOOL asks, while looking at a “note” [banknote]:

But see here, is it truly worth its weight in gold?

MEPHISTOPHELES: You have what belly and throat desire.

FOOL: And can I buy a field, house and cattle?

MEPHISTOPHELES: Of course! Make a bid and it is yours.

FOOL: And a castle, with a forest, hunting and fishing?

MEPHISTOPHELES mocking: Trust me! I’d like to see you as a gracious Lord!

FOOL: Tonight I’ll rest my head in an estate of my own! MEPHISTOPHELES alone (appreciatively): Who still

doubts our fool’s a wit!

The fool, who, as always, is the only clever one, has realised the danger of inflation and at the same time the way out of it: by taking refuge in tangible assets. The state- ment is as topical as ever. Creeping or rapid inflation will undermine the present and future value of private savings and pension claims, and at the same time invisibly reduce governments’ (mainly huge) debts.

And Goethe foresaw yet another highly topical issue: how our striving for more growth and prosperity would mean that natural resources would be dangerously

overexploited. We may therefore assume that in his ballad “The Sorcerer’s Apprentice,” in which a sorcerer’s appren- tice turns brooms into servants carrying water, only then to lose control over them, which results in a tremendous flood, he is referring to modern economics. Modern eco- nomics also knows the magic word that sets the machinery of progress in motion, but not the one to bring it back un- der control when it is about to develop a life of its own and disregards saturation tendencies. And then there is no point in addressing the Machine Man in the words used by the sorcerer’s apprentice when beseeching his broom to:

Stop now, hear me! Ample measure Of your treasure We have gotten! Ah, I see it, dear me, dear me. Master’s word I have forgotten! Ah, the word with which the master Makes the broom a broom once more!

The water, which in the poem stands for all natu- ral resources, will turn into a flood, so that ultimately we are the ones in danger of perishing in its masses, by polluting the environment through the consumption of resources.

So, what next? Will our economic growth con- tinue to provoke conflicts with nature and the environ- ment, and if so, what can be done about it? Will money continue to be the driving force behind trade and com- merce in the years to come? Or will inflation risks trans- form the global monetary system?

Three theories about the future of money

As Goethe was soon to realise, the conflict between the goals of economic growth and the environment will be- come even more apparent in future. After all, the essential fiction of any paper currency, namely that it securitises or “liquidises” its economy’s mineral resources, usually accel- erates the overexploitation of nature. Given undiminished demographic, technological and economic growth, this development can be expected to accelerate even further. Most likely it will lead to a sharp increase in what we pay for nature and its resources. Only then will people have a better understanding of the conflict between the economy and the environment so clearly presaged by Goethe. The realisation that you cannot be fed by money alone – cou- pled with scarcity-driven prices – should provide impulses for a more sustainable form of economic development.

The dominance of the dollar will give way to a multipo- lar international monetary system. To begin with, as in Goethe’s “Faust,” only those who are thought of as “fools” will show concern about inflation and the pyramid-like financing of the American state. The dollar, however, will gradually surrender its role as the anchor currency of many emerging nations. Instead of linking their currencies to the dollar, many of these emerging nations will liberalise their exchange rates. These countries have meanwhile achieved so much and have so much to lose that their currencies are sufficiently trustworthy to hold their own without being linked to a major currency. Ironically, this transition from a unipolar to a multipolar system will not weaken the in- ternational monetary system, but, on the contrary, will make it more diversified, more flexible and thus ultimately stronger.

III

Gold sometimes glitters more brightly than money. Some of the biggest debtor nations may not have the strength for a politico-economic shakeout in the next few decades. For them, the ultima ratio will be a haircut or a monetary re- form. Both developments would radically undermine the reliability of their currency. Despite all the disadvantages, a temporary gold standard would then be a possible way of creating a new, trustworthy currency once again.

Burkhard Varnholt is Chief Investment Officer and Member of the Executive Board of Bank Sarasin & Co. Ltd as well as co-founder of the Think Tank W.I.R.E. Before he joined the bank, he taught at the University of St. Gallen, the Massa- chusetts Institute of Technology (MIT) and the London School of Economics. He has published numerous books and articles in academic journals. A dedicated art-collector, he was a Member of the Purchasing Committee for the Tate Modern Gallery, London. Burkhard Varnholt is a family man and the founder of the charity “Kids of Africa – Schweiz- Afrikanisches Waisenhilfswerk,” which runs an orphan- age for homeless children.