50,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Series
- Sprache: Englisch
A groundbreaking work that paves the way for a new, pro-active financial system With The Monetary System, innovative author pairing Jean-Francois Serval and Jean-Pascal Tranie devise a comprehensive economic modeling system that accounts for the unprecedented situation facing international and regional economies by developing a controversial new stance on the operation of money in society. Presenting a classification of financial instruments with a view toward their underlying legal structures, the book sheds new light on the present economic and financial problems of slow growth and rising debts, and proposes possible outcomes for the global economy. The authors have already gained international attention with their novel approach to currency, and now they turn their attention to the social function of money in all its myriad forms. The book provides a way forward in an era of increased life expectancy and other new social patterns and the social role of money provides a framework for understanding intergenerational redistribution--an urgently pressing task in our time. * New aggregate financial categories and economic modeling reveal a possible foundation for increased financial stability * Companion website includes key mathematical models, accounting standards, and PowerPoint slides * Comprehensive theoretical underpinning presents the contemporary model of money as a social contract * Insights into the current economic situation make sense of sovereign debt risk in markets around the world With questions and answers at the end of each chapter, The Monetary System will help you form a new conception of the role of money in society. Improved regulation and tax policies are needed to stabilize the global economy, and this book provides the framework for getting there.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 724
Veröffentlichungsjahr: 2014
Ähnliche
For other titles in the Wiley Finance series please see www.wiley.com/finance
The Monetary System
Analysis and New Approaches to Regulation
JEAN-FRANÇOIS SERVAL AND JEAN-PASCAL TRANIÉ
This edition first published 2015 © 2015 Jean-François Serval and Jean-Pascal Tranié
Registered officeJohn Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with the respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought.
Library of Congress Cataloging-in-Publication DataServal, Jean-François The monetary system : analysis and new approaches to regulation / Jean-François Serval and Jean-Pascal Tranié. pages cm. — (The Wiley finance series) Includes bibliographical references and index. ISBN 978-1-118-86792-1 (hardback) 1. Money. 2. Finance. 3. Financial institutions. 4. Monetary policy. I. Tranié, Jean-Pascal II. Title. HG221.S4857 2014 339.5′3–dc23
2014022364
A catalogue record for this book is available from the British Library.
ISBN 978-1-118-86792-1 (hardback) ISBN 978-1-118-86785-3 (ebk) ISBN 978-1-118-86791-4 (ebk) ISBN 978-1-118-86780-8 (ebk)
Cover design: Wiley Cover Image: ©iStock/TheRugPile (top); ©iStock/andrearoad (bottom)
Contents
Acknowledgements
Foreword and Introduction
Notes
CHAPTER 1 From Antiquity to Modern Times; Monetary Development Over 5000 Years. What History Explains and Comparison within New Contexts
The Origin of Money; From Antiquity to Modern Times
The Rise and Fall of Civilizations
What Can We Learn from Ancient and More Modern History?
Questions and Answers
Notes
CHAPTER 2 Modern Times – Liberation and Growth of the Money Supply. The Facts Presented in Monetary Units and Resulting Regulatory Needs
Monetary Evolution Backed by Economic Growth
Development of a Global Financial Market Economy
Citizens Emerging in the Process of Financialization
Questions and Answers
Notes
CHAPTER 3 Past and 21st-Century Money Analysis
Defining “Today’s Money”
Money Defined by its Functionality
Links between Monetary Functions
The Intrinsic Definition of Money
How to Ground Trust in Money: AUDITED FINANCIAL STATEMENTS FOR GOVERNMENT AND CENTRAL BANKS
Seignorage and the Privilege of Issuing and Stamping Money
Evolution of Money into a Segregated Intermediation Tool with Imprecise Frontiers
Money Today
The Demise of Traditional Conceptual Approaches
The Operational Scope of Money and its Use
The Extension of Money with Disintermediation
Replacement of Bank Loan Financing by Securitization and the Impact of Pro-cyclical Effects
Guarantees on Receivables: A Securitization Multiplier
Extending the Field of Debts and Guarantees
Deviations from Effective Risk Control: The CDS Case
Towards the Full Liberation of Money from Any Referential
Guarantees and the Extension of Monetary Instruments Liberated from Unified Backing and Issuance Constraints
Shadow or Parallel Banking Systems
Before Accounting for Any Transaction – The Sampling Topic. The Mix Up between Numbers and Formulae
Questions and Answers
Notes
CHAPTER 4 The Contemporary Basis for Money Expression: Accounting Ledgers
Book Balances are Either Money or Potential Money
A Single Worldwide Language; Accounting and Financial Statements
Consequences of the Basic Accounting Principles
Concepts and Rules to Report Exchanges and Determine the Image of Financial Statements
The Image Presented by Financial Statements Influences the Analysis of Economic Data and Transactional Exchanges
Direct Systematic Impact of Accounting Standards
Where Misleading Standards Generate Distorted Images
Monetary Aspects of Financial Statements
The Necessary Approach in Accounting: A Hierarchy of Dangerousness
Questions and Answers
Notes
CHAPTER 5 The Regulation and Observation Limits Already Accepted, Compared with the Realities of Modern Exchanges
Monetary Regulation and Follow-up
A Retrospective Analysis of Classic Money in Operation
Governmental and Central Bank Monetary Operations
Traditional Monetary Aggregates
Accepted Concepts that Complement Traditional Monetary Analysis – Limits and Evolution
Traditional Regulatory Measures to Ensure Banks’ Stability Limits
Money Issuance through Central Bank Interventions
The Investment Multiplier
Following Up on Regulating Money Issuance in a Changed Economic Environment. Monetary Supervision: An Ancient Question
The Present-Day Non-utility of Classical Aggregates
New Forms of Monetary Exchange
The Driving Role of Monetary Velocity
Are Central Banks Prerequisite Institutions that Should Remain Independent from Sovereign Authority?
The Insufficiencies of the Current System for Satisfying Information Needs
Questions and Answers
Notes
CHAPTER 6 Redefining the Monetary System and Measurements of Monetary Flow – Towards M5 and M6
At the Core of the Issue: The Definition of Currency
The New Environment: Broadening the Definition of Currency
New Monetary Aggregates Define Extended Concepts of Money
From a Practical Point of View, What are the Data Limitations for Determining the Values of New Monetary Aggregates?
Defining New Money – The Difference Between Shadow Banking Money, Virtual Money and the New Aggregates
Shadow Banking is Different from Virtual Money
Questions and Answers
Notes
CHAPTER 7 The Monetary System
International Exchanges – Interactions and Monetary Zone Coherence
General Framework
Description of the Current Operational System: Distinction between National and International Systems
The Current International System
International Coordination
Micro- and Macro-prudential Surveillance Agencies’ Framework
Coordination Issues Inside the Eurozone as Opposed to International
The Banking Union
The Fiscal Policy Coordination Issue Compared with the USA
The Growing Issues of the Size of the Monetary Zones – Research for Optimum
The Monetary Interaction of Systems
International Microeconomic Regulation Coordination Specifics
Transnational Realities about Financial Instruments’ Markets and Systemic Risk Measurement
Europe and the USA
Allocated Roles and Goals in the International Monetary Set-up
Questions and Answers
Notes
CHAPTER 8 What is the Conceptual Essence of Contractual Money, Constraints and Implications?
The Intrinsic New Conceptual Views on Money
Stability and Guarantees
The Emergence of a New Seignorage
Modelling the Monetary Windbag Analysis
Questions and Answers
Notes
CHAPTER 9 The New Nature of Money in Electronic Times
New Horizons Concerning Exchanges, Time and Guarantees
Money Accumulations and Interactions
The Paradox of Availability of Money Masses as a Policy Tool for their Holders
Questions and Answers
Notes
Conclusion
Notes
Glossary
References
Selected Articles
List of Monetary Central Institutions and Others (International and National) with Websites
International organizations or equivalent
International standard-setting bodies and other groupings
National bodies
Notes
Index
End User License Agreement
List of Illustrations
Chapter 1
Figure 1.1 Historical chart (author’s view)
Chapter 2
Figure 2.1 Face value of GDP in trillion dollars (after adjustment for buying power)
Figure 2.2 International comparison of the evolution of household wealth
Chapter 3
Figure 3.1 Currency and stamping value: today’s money issuance
Figure 3.2 Tentative evolution in value of a financial instrument over time
Chapter 5
Figure 5.1 The actual money issuance process
Figure 5.2 Euro system: components supporting monetary aggregates – June 2012
Figure 5.3 Monetary regulation and follow-up
Figure 5.4 The Modern Finance System: The Real World
Figure 5.5 The Modern Finance System: The Shadow World
Figure 5.6 The Modern Finance System: Linkages
Figure 5.7 Contraction of US monetary circulation
Chapter 6
Figure 6.1 Allocation of global money supply (trillion $, 2012)
Figure 6.2 M5 and M6
Chapter 7
Figure 7.1 WTO structure
Figure 7.2 The US macro- and micro-surveillance set-up
Figure 7.3 G20 decided international surveillance system chart
Figure 7.4 European surveillance frameworks
Chapter 8
Figure 8.1 Monetary structure
Figure 8.2 The scope: how to categorize instruments
Figure 8.3 The money trap
Figure 8.4 New views on money
Chapter 9
Figure 9.1 Outcome
Guide
Cover
Table of Contents
Chapter
Pages
xv
xvi
xvii
xviii
xix
xx
xxi
xxii
xxiii
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
231
232
233
234
235
236
237
238
239
241
242
243
244
245
246
247
248
249
250
251
253
254
255
256
257
258
259
260
261
262
263
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
Acknowledgements
We must first pay tribute to our ancestors – the ones who invented money. We don’t know who they were, but they left us with a way to organize society. We especially have to revere those of German origin who, in horrible circumstances, invented relativity and linked sociology and money: Von Mises, Hayek and their successors Allais and Mundell, to name just a few. Without them – without the appropriate basis – this work would not exist.
Also, of course, our families have to be thanked. They fiercely and fully supported us when we were reading, thinking and writing, despite perhaps being a little neglected.
Many of our friends helped us by reading, unaided, numerous drafts which were difficult to understand. We mention Gilles Godefroy, who believed that a book on this subject was possible and useful and brought us through the advanced mathematics; George Ugeux, who is our reference in terms of ethics and market functioning but also did us the favour of reading and commenting on some of our drafts; Antoine Treuille, who has been patient in reading and commenting on our papers since we started this work in 2010; René Pierre Azria, the banker and great philanthropist; Donald Lamson, the law specialist in sovereign debts and US monetary regulation; Antoine Maffei, expert in international regulatory matters; Patrice Durand, who is knowledgeable about so many aspects of the entrepreneurial economy and now exposed to the security issues of modern means of payments. They are all great specialists in their field. Without their support and comments, this book would not exist. This year, Robert Mundheim was honored by the American Lawyer as a “Lifetime Achiever” which is one of the most recognized distinctions that a US lawyer can get. Robert Mundheim has served in senior positions at the US Treasury and the Securities and Exchange Commission. He has wide experience in the academic world and in corporate and private practice. We had many discussions, particularly at early morning breakfast meetings in NYC. I am grateful for his sharing, his expertise and his values which help make this book what it is. We are also grateful to President Jacques de Larosière who agreed to read our global document and being the President of the high committee on regulation he inspired the general design of the European Union Financial Surveillance framework. He is the one in the world who had been exposed at IMF level to all possible situations and negotiations after having witnessed as Head of a Central Bank all post war monetary cycles. Off course his sharp comments have been priceless to us.
Special thanks are due to Patrick Barth, the respected New York lawyer and Raphaël Douady, the great mathematician and the head of the Paris 1 Panthéon-Sorbonne Labex research center on financial regulation who contributed to the modelling and also gave us some insights about risk modelling and appraisal. Thomas Serval helped us with aspects of the new Internet age. Without them we would not have reached our goals. Long discussions were necessary.
We should not forget those who reviewed our use of the English language – Roger Hanwehr, Nancy Marchand and Elanor Clarke. We are also indebted to our publisher at John Wiley & Sons Ltd., his team and independent professionals for supporting this work.
To all we are deeply indebted. They brought this work into existence.
Foreword and Introduction
One evening in June 2008 served as the pivotal backdrop for a critical meeting between this work’s authors, Jean-Pascal Tranié and Jean-François Serval. Wrapped in thought, and sitting in the kitchen of Jean-Pascal’s Bourville–Normandie country manor, the authors pondered an uncertain economic future – one that could profoundly impact their lives and the financial future of their respective families. At the centre of their dilemma was the question of how to balance actions based on short-term decision horizons against the uncertainty of impending long-term change in the economic environment. Clearly, this was a central theme in deciding how the head of a family should plan, work out his strategic position and then act to preserve his family’s best financial interests. The same might be expected of a corporate CFO/CEO, financial industry professional, government treasury or central banking official, or any other leader engaged in an analytical, strategic planning, risk mitigation or fiscal decision-making position.
In the course of their discussion, Jean-François and Jean-Pascal concluded that the prevailing make-up of the existing financial world would likely undergo an enduring multi-stage transformation in the months and years to come. Accordingly, the authors felt that it was essential for them to understand and characterize the key distinguishing factors which would help shape a future global financial environment. The authors also recognized the collective value of their shared, as well as divergent, personal and professional lives. Linked by a common financial industry pedigree, Jean-Pascal Tranié and Jean-François Serval were financial professionals endowed with a western perspective – nevertheless, both authors keenly appreciated that a newly emerging financial world would look very different from the traditional environment that they had become accustomed to. Jean-Pascal’s long experience in Asia, coupled with the value of his partner’s broad North American background, would be decisive in helping them circumnavigate beyond a strictly European view of the questions at hand, and in considering both the Asian and emergent economic points of view.
Simply due to the scope of the proposed project, it was concluded that the best approach would be to write a book on the subject. This undertaking would require them to understand intimately how the world’s financial system had arrived at its current fragile impasse – and how adjustments to future trends within a transforming economic environment might be anticipated, for instance based on a comprehensive and cogent forward-looking analysis. Moreover, since Jean-Pascal (a former civil servant and now private equity investor) and Jean-François (an expert in public accounting) both valued the importance of serving the public interest, the publication of a book was equally well suited in this regard. The authors agreed that such a work needed to address a number of major questions: what logical underpinning of democratic society had facilitated a transition to the economic realities of June 2008, what were the major drivers that characterized the current economic impasse and how could one forecast future trends? Moreover, given a sense of the potential directions in which the global economic society was headed for, what could be done to “fix” the present economic system?
The seminal idea for pursuing this set of questions originated in the authors’ previous book, entitled The Virtual Money We Live With. The conclusion originally reached by the authors was that the monetary system created at Bretton Woods in July 1944 had become obsolete, and needed to be revisited and broadly reformed. A central impetus for global monetary and fiscal structural reform was the fact that the level of worldwide private and sovereign debt had reached a staggering level. In the authors’ opinion, this in turn necessitated a radical restructuring of endpoint monetary exchange, at the outset centring on the recognition that creditors would ultimately not be repaid. A defining prerequisite for hitting a global “economic reset button” was to organize the best approach for exiting from this historic monetary failure in an orderly manner – a process that needed to be sufficiently equitable so as to prove sustainable, without triggering social revolution on a global scale.
To arrive at a single-step, precedent-setting conclusion seemed too simplified, particularly in the context of the authors’ committed belief in democracy, rooted in the heritage and proud traditions of the French Revolution and rule of law in the modern French State – where liberty begins at the point where restrictions on others’ liberty ends.
Arising from their respect for the legal framework governing the financial systems of modern nation-states, and sharing similar concepts to those espoused by great economic minds of the US and Austrian schools of economics, the authors recognized that they needed to understand not only the causes of the current crisis but also the millennial evolution of monetary systems from pre-antiquity to the 1944 Bretton Woods Treaty – a foundation on which a post-war monetary and financial order would enjoy a lifetime of many decades. The authors were also interested in the events that led to the financial and monetary collapse of Germany from 1919 to 1925, subsequently hurling Central Europe into the crisis of 1929 and the Second World War. These events profoundly shaped the philosophy and economic thinking of leaders born in the late 19th and early 20th century, individuals of historical standing who would later organize and implement the post-1944 Bretton Woods monetary regime.
As a follow-up from their previous published work, the authors additionally realized that they needed to consider a worldwide global market structure, which more recently began to replace the strict confines of the original Bretton Woods system. Globalization is a key differentiating factor that sets our world apart from that of the early and mid-20th century and in recognition of this fact, the authors specifically adapted their analysis, conclusions and projected models for reforming the monetary system.
If – with a dose of vanity – the authors could affirm a personal belief in their conclusions, then it also follows that despite their extensive best efforts to achieve clarity and broad understanding among all readers, the previous work on “virtual money” could not be mastered fully by a lay reader. Admittedly, to do so would demand all readers to draw on a similar background rooted in the operational aspects of a specialized economic and financial culture, not to mention personal or professional exposure to the dynamics of financial and monetary markets. As such, this precedent work may have missed its mark in galvanizing grass-roots support for the acceptance of broadly based reforms designed for the western financial world, as well as for Asia – where financial markets emulate and accept the validity of western financial systems, without fully merging into them.
As a result, the authors decided that a different and more comprehensive approach to what money was and how it operates nowadays should now be accessible to a broad cross-section of society, and not only to members of the financial industry, leading economists and political leaders. In preparing such new work in the form of this book, the authors have attempted to eliminate any focus on technical regulation and abstract concepts, and in their place adopt methods for a transparent explanation of existing concepts of financial organization – particularly in a manner that would be easy to understand for a large public constituency impacted by changes in the world economic system, and eventually by the consequences of its wide-ranging reform.
In addition, the authors felt that the objectives underlying a new book reflected not only a duty to the democratic tradition, but also an integral prerequisite for winning and maintaining the vital public support required to implement economic reforms – the impact of which would be felt most by our children’s generation, who are intended as the beneficiaries of reform. Ideally, effective reforms would result in a world endowed with durable economic improvement and transnational political stability. In the authors’ view, a globally reformed environment would reflect a fiscally improved world with reduced aggravation, rather than a continuing state of crisis and collective social pain likely to ensure a lack of hope, alongside certain political risk.
In essence, we had to discover what money really was, and then form a supportable basis for defining today’s monetary system and its flows, in order to have it understood from all points of view. In doing so, we need to understand and communicate how money is used and what it means collectively for society, as well as for individual citizens who generally embrace an ancient social contract that accepts money as a method for fulfilling price obligations. Such a definition would need to be intellectually accessible to the public and lay the groundwork for an essential conceptual breakthrough required to generate the acceptance of impending economic reform which, regardless, will ultimately emerge as compulsory. In considering the exorbitant privilege that governments exercise to issue the form of wealth we know as money, and how income and wealth are appraised or coveted through its use, the authors review a range of concepts and definitions in their ultimate quest to find a common basis for best describing the role of money in our troubled economic system.
As much as all concerned may dream of a perfect world lacking misery (where the impact of money would be solely to generate prosperity rather than provide a cause for disorder and inequity), money remains a quantitative instrument. As such, an enduring and stable monetary system must inspire the trust of rank-and-file citizens, including a broadly accepted system for associated metrics and regulations governing the use of money and the preservation of the social contract that legitimizes money as tender. To be effective and to form the basis for an ongoing fiscal consensus between the citizenry, regulatory agencies and banks, as well as governments worldwide (who are tasked with ensuring that a global monetary system functions and provides long-term stability), money must meet the highest standards as the ultimate social contract of our time. Let’s start with how our discoveries have been organized to build up the basis of this book.
In Chapters 1 and 2 we cover the history of money from antiquity to modern times, and why it is necessary to have it available. We also try to show the link between the expansion of money’s qualities and the scope of its use, which has come with huge progress in exchanges and general prosperity. However, in doing so we discover the accompanying change in nature of what money is and what are still its key attributes, comparable through the support of universal measurement sampling means with, in later times, a nominal value on the support. We explain the link between the rise and fall of civilizations and money: a reserve allowing the financing of education, philosophers and statesmen.
In Chapter 3 we look at the reasons why precious metals became the staple for money – due to their universal acceptance as a means of payment, because of their unique stable chemical formulae which allow a sampling capacity when associated with a specific weight and therefore a guarantee of acceptance by a wide number of participants in the exchanges. We find out why sampling and acceptability, combined with stability, are conditions for the definition of money and for economic growth as a result of specialization in production and scale economies. This specialization, based on the comparative advantages and scale economies that economists and policy makers have discovered and favoured, is the cause of this extraordinary growth that humanity has achieved. Like many other authors, we lead the reader to rediscover that the “Pax Romana” – the first example of economic integration and prosperity over not a continent but, at that time, the known world; the Mediterranean – was accompanied by monetary unification as a parallel development. We also explain why precious metals are still in existence as reserves but no longer fit the needs of a modern economy. The shortage explains the emergence of script money, with the need to fill the timing gaps of wider geographic exchanges from antiquity to modern times. Transportation of goods over long distances required time and pre-financing. Chapter 3 also describes what needs money has fulfilled – such as payment, measurement and reserve – and how it has expanded into new territories, with new monetary instruments complying with the definition of being accepted by a sufficient number of participants in the exchanges to satisfy a payment. This is how the reader is led to a definition of money that includes, potentially, any receivable that can be exchanged – new aggregates covering every receivable or debt showing on a balance sheet “M5” and for the total of the balance sheets “M6”. To operate these exchanges, and to replace gold’s virtue of being a fixed sampling instrument with fixed chemical formula associated with weight to a physical reality as a unification factor – but no longer practical, and limited in its flexibility – our central thesis is that a new universal language (accounting) for participants to agree upon when exchanging is now the mechanism. The monetary units and numbers to be used for a contract are linked. By human construction they are universal, but the numbers used to operate accounting are transcendental, out of reach for humans in the same way that gold’s chemical formula is independent of human beings. This is their second key discovery. However, users of exchanges, ordinary people as well as finance professionals, are becoming confused about what is conventional, what is value and what are numbers.
Von Mises, the great Austrian economist of the early 20th century, had already told us that a repeated statement irrelevant of its original veracity may become an everlasting truth as it is no more than a statement and obsolete. Chapter 4, on accounting language and its main general principles, is necessary for us to ground this discovery about the use of numbers as a replacement for precious metals, and to show the various errors of the type that Von Mises talked about. Financials are taken as realities; they are not. Aggregates are held as realities; they are not. The numbers used are like a precious metal chemical formula. Only transactions with a number attached to them, and taken one by one, are realities. The link between numbers and other non-universal realities like time and values creates uncertainties for market participants, as well as nominal values on bills and coinage and any other monetary instrument. Being linguistic by essence, accounting is of limited nature. The question that has to be asked when using numbers as an operational tool and applying them to formulae to deliver an image of financial operations and situations is: how do we analyse the reality underlying the image separately from the latter? At the same time, this chapter – with a reminder of the double-entry system of posting – will explain the reasons for contagion when a party to a transaction fails, and again show that images can become realities, especially on a legal grounding of insolvency. It will remind the reader that to any debt corresponds a receivable, and that the language to record the transactions on the balances has not only been unified to enable governments to collect taxes and survey them, for individual profits and enterprises, but also made compulsory with the aim that markets (owing to such unification) are more efficient and bring better competition. In summary, we have established that in a matter of decades since World War II, coinage has been replaced by financial instruments that are contracts and coins struck by accounting standards.
Helped by the digital revolution, accounting standards have merged with money both as an accepted measurement language, like gold was, and also as a language describing the transmission and availability of money. It changes the world when economic agents have to communicate to exchange, and to define the way they meet or receive what they expect from a transaction. Therefore, with a unified monetary language, productivity is enhanced by wider competition. If anyone sees the same image of a product and service and the corresponding prices, as well as the financial situation of a company or government, efficiency is improved. We are reminded of the concepts, rules and problems, as well as the fact that this immense breakthrough of financial information is also the root of contagion. Contagion goes through this direct interconnection, but also through price variations that will trigger imbalances in balance sheets’ equity. The firewall1 of ignorance about corporations’ financial situations has disappeared. Rules have to be sensible for spectators and users, otherwise they don’t fulfil their information objective and precious metal, which is no longer usable, has to be replaced by other bases and mechanisms to operate as switches. The amounts of debt and assets have to be related to the revenues and profits shown in financial statements.
This quick reminder moves us on to Chapter 5, which is aimed at explaining how the need for monetary regulation to satisfy the request for stability and coherent monetary zones was brought into the current monetary organization – which was drawn up after the war but is no longer appropriate – with aggregates based on banking credit distribution and its classical multiplier to cope with the new challenge. Even with the current reforms, the surveillance system is still based on outdated aggregates which themselves started from attempts to keep the banking sector a monopoly, to distribute loans and see society trying to define a regulatory scope. This approach does not correspond to the modern world of exchanges and disintermediation that we wanted to free the barriers to exchanges. The system is not only leaking due to the refinancing being operated through banks by non-bank financial entities outside the scope of surveillance, but also companies can now operate directly between themselves as well as individuals can. The revolution in payments, electronic devices and telecommunication hubs will accelerate the phenomenon. We explain shadow banking, and why the notion itself is insufficient.
Chapter 6 details how, in the new environment, new aggregates would better follow on exchange and money velocity, and what new definitions will bring in terms of containing risks, improving security and, as a result, improving the economy. By providing the economy with good money, governments are letting producers enlarge their territories and take more development risks. Our thesis, as already developed in our previous book, is that in the deregulated context of modern economies with their financing mostly made on debt and equity financial markets, the old aggregates will no longer be able to give proper warnings to governments to act in due time. Lobbies do what they are designed for and act separately to promote their members’ business, irrelevant of monetary interconnections. We explain that any receivable which is now convertible or exchangeable is potentially a monetary instrument if accepted by a sufficient number of actors. We consequently explain how we see today’s money – the new aggregate M5 resulting not only from central banks’ and regulated financial institutions’ balance sheets, but from any balance sheet. It covers not only potentially all instruments, meaning any receivable, but also any actor of a balance sheet as counterpart. The money concept of M5 is being extended to allow a follow-up of transformation (between instruments) and velocity of flows which will determine the volume of money needed for exchanges. It is distinguished from shadow banking in the sense that shadow banking surveillance is an attempt to apprehend what has flown away from the banks and is now with the retirements systems, hedge funds and money market funds, while all the data exists to get a global picture. The world has changed, with no territorial or jurisdictional borders that governments have agreed to suppress over the years (they fight against trade barriers and currency exchange freedom with no intervention from monetary authorities) to achieve a wider world competitive marketplace. Monetary surveillance can only be renovated to encompass the entire space of monetary exchanges and all operating actors. We do not divide the monetary space between banks and other registered financial institutions, but between all financial entities combined with other non-specifically financial entities issuing financial statements and the public (households). In doing so, we resolve the issue of the scope of regulation and surveillance that encompasses all the first categories. Of course, especially due to major changes in economic equilibrium between nations since the war, and to the economic and demographic growth in general, the Bretton Woods monetary system has been dismantled. The 2007–2008 financial crisis, which needed government intervention to avoid collapse, has trigged new international forums such as the G20 and new laws which create new patterns of regulation and international cooperation.
In Chapter 7 we describe where we stand in respect of the fluidity of money inside zones as well as the interconnections between zones; what is aimed at and what is missing. We uncover the problem already taken care of by Robert Mundell of optimum monetary zones – an issue that creates a dispute between the objectives of gain from larger-scale and resulting efficiency savings, and better serving citizens placed in totally different social patterns and production capabilities depending on where they are located.
In Chapter 8, in light of this analysis, we reconsider what needs “extended money” should comply with in terms of trustworthiness and stability to guarantee the flow of exchanges and the functioning of the financial markets as they now exist. After having resolved the key issue of what conceptually designed modern money is, we address the matter of its contractual nature and why it does not oppose regulation, laws and where the resulting new seignorage stands. We also address the topic that claimable money, by being better able to flow through, can also accumulate wrongly – due to the behaviour of financial agents – in non-productive safe assets instead of feeding the economy. This is what we address as the money trap; the fact that after being issued and before the end of its term, if any, money can only be deposited somewhere, creating excesses within some instruments and shortages elsewhere. Interest rates can be linked not to risk taking as in classical approaches, but rather to risk avoidance. This trap – finding its roots in the general accounting standard of double entry, combined with the de facto monopoly of financial institutions to open payment accounts – is the new basis for seignorage that is now shared with governments; the one that has allowed the extraordinary salaries some bankers receive. Commissions or margins on passing flows can logically explain these bonuses. Once explained, we see the way that the power over money issuance functions today can be handled. We propose mathematical research and a mathematical formula to comprehend today’s monetary system, which is described as a hot air balloon transporting passengers with leaks in the envelope and a furnace to balance the hot air leaks that are accumulations.
Chapter 9, after exposing the effect of electronic markets on exchanges from both operational and structural points of view, raises the question of the resulting lack of individual accountability. It also raises the topic of deciding how to determine the most efficient money endowment for each agent. This analysis supports our thesis of a need in the new environment for surveillance that only extended money can provide, combined with better principles to let it flow freely. This allows us to come back again to the difference between numbers, conventions and values – prices becoming the first variable with the other factors being contained or tangible. The new transparency brought about by electronic markets and clearings is not only a complication but also an opportunity, as it provides a possible view on transactions and uncleared amounts. Mathematicians may operate with tools that have been developed for physics, with the notions of time and speed that accountants are not able to comprehend. The static formulae and slice-by-slice observation can no longer apply to determine a rating or valuation risk without misleading the public about what can be done to have it properly informed. New topics are appearing that were previously hidden, such as money being guaranteed by general principles and becoming more transparent as to the observation of its flows. The described monetary world being global, it is no surprise that price fluctuations (which are different from values if the latter have any meaning besides being exchange ratios), becoming visible instrument by instrument and market by market, create a systemic risk through the mere accessibility of their image and obvious gigantic size. This exists out of necessity, but the increased visibility adds to the speed of irrational movements. This is the matter dealt with when raising the topics issuing from the new, targeted set-up with centralized counterparties (CCPs) for credit default swaps. This topic regards how central banks can operate their stabilization duty under the Democratic control of parliaments and install the necessary market breakers, as well as who should do this. Five years after the crisis, these topics are still on the tables of policy makers on both sides of the Atlantic and are of great concern for all citizens.At the end of our journey we propose an entire upheaval of the current approach to money. Any economic transaction potentially triggers money issuance or use. Today’s money is no more than a piece of equity or a receivable with an exchange right attached to satisfy a commitment but no more claimable at a Central Bank. Nominal values, conventional exchange ratios, prices and values are different dimensions than the monetary unit standard and its physical or digital support. Because of the general individual identification of all participants in monetary exchanges throughout the Western world, observation of flows that old aggregate did not permit is now possible. The resulting granular data, modern mathematics and sociology can be used to diagnose some of the causes of the current crisis and suggest some possible ways to fix them.Ultimately a new surveillance system with condition to stability open the possibility, with new knowledge to cure discovered anomalies in flows and values, is not alone in wanting to avoid a collapse of the current monetary set-up without the development of strategies to deal with them. We believe that both the implementation of such a surveillance system and the new lights it will bring will show the need for a general reform.
NOTES
1
See Glossary for definition.
CHAPTER 1From Antiquity to Modern Times; Monetary Development Over 5000 Years. What History Explains and Comparison within New Contexts
“We are used to setting a company either for our entire assets or for a specified business purpose: such as the buying and selling of slaves. There was a dispute over whether a company could be set in order to have one of the participants granted a bigger part of the profit and less of the losses; Quintus Mucius considered this to be against the mere nature of a partnership while Servius Sulpicius, whose decision prevailed, considered that a partnership could be set in order to have one of the partners not participate in the losses while sharing in the profits subject to the fact that his personal contribution was precious enough to make such provision equitable”1
— Gaïus, Institutes, III, pp. 148–154
THE ORIGIN OF MONEY; FROM ANTIQUITY TO MODERN TIMES
Money is a central component of civilization’s evolution from subsistence and barter economies into finance and trade societies. The initial step in economic development usually involves the bartered exchange of goods and then physical-value equivalents, in a manner that validates simultaneous transactions between two or more parties. Heralding further transition into a financial economy, the potential issuance of currency-based tender subsequently enables legal contractual consideration and a range of transactions via a monetary standard that favourably supports economic development and labour specialization.
A Metallic System Allowing Intrinsic Measurement Stamping: Ingots to Coinage
Consistent with prevailing knowledge, it is generally accepted that money appeared in Mesopotamia concurrent with the emergence of an alphabet and a written system of Cuneiform language, around 2900 BC.2 Excavations have uncovered numerous terracotta tablets stamped with cuneiform signs, and detailing inventories, entries and exits of valuables.3 Examples of valuation in metal weight appear much later, around the time of the “Hammurabi Code”, or 1650 BC. Within the “Hammurabi Code” itself there are several references to the prices of goods and services.4
Through archaeologically recovered remains of palaces and both inscribed stones and Cuneiform terracotta tablets, a detailed description of organized Sumerian society and ruling structures has been compiled by experts. This includes the characterization of a general system of laws required for qualifying and distinguishing monetary tender from other value standards such as goods.
Precious metals such as gold and silver (or their electrolytic mix) were recognizable by anyone, regardless of language or regional culture. The rapidly appearing utilization of weight standards for value measurements provided a form of monetary unification that facilitated trans-Mediterranean trade, as well as trade between “capital kingdom” cities and states such as Egypt throughout the greater Middle East, prior to the introduction of coinage and before the Hellenistic period (8th to 2nd century BC). Further west, from Mesopotamia towards the Mediterranean, it is believed that the Greek Attic Talent of around 26 kg in metal ingots was one of the usual units of trade between palaces, temples and then cities.5 It was the equivalent of modern central bank money; only usable to clear what would be today’s international trade but not money that a citizen could carry to satisfy their day-to-day needs and pay for them. It was probably not the first monetary unit to be used. Without coinage artefacts dating back to the period of the Hammurabi Code, one does not know exactly when and where coinage appeared first.6 Nevertheless, it is hard to understand how monetary references such as prices could have existed without a tangible supporting means of payment, which a coinage system would provide when paper did not exist. We can already note the distinction between the means of payment though, the coin or metal ingot, and the accounting records found on terracotta tablets.
Claimed by Herodotus7 to have been introduced later (after the Hammurabi Code) as an invention of the Lydians established alongside the Pactole River (in today’s Turkey), coinage was subsequently struck to be used as monetary tender. The oldest existing examples of such coins from the ancient Greeks date back to between the 8th and 9th centuries BC.8 Controversy over the chronological appearance of coinage guarantees and units did not abate until the 19th century. Sovereign guarantees attached to coinage and units became historical with the Athenian civilization9 of the 5th century and much later, under the Roman Empire, as we will see later. Historical analysis of the interaction between political power and currency then reveals deepening thought on the historical evolution of a role for monetary currency in society.
Grounding the Guarantees of Stamping: From an All-Metallic System to Paper Bills
The split between the management of sovereign assets versus those belonging to the people, and the complexity of currency flows in the Roman Empire, are topics that have inspired many authors since the 18th century.10 After the disappearance of collectivist economies where property belongs to no one, including the sovereign (for example, ancient Egypt),11 this topic became important to the understanding of the guarantees and trust that an issuer of coinage or scriptural money may grant, or merely inspire. Analytical emphasis is frequently centred on the sovereign power to strike coinage (money species) versus the state allowing or disallowing a sovereign to issue money notes and bills-of-credit. The power to print notes with bargaining power (commercial notes and then note bills) gives those deemed to be in possession of coinage or paper counter value the capability to exchange goods in a manner that others would lack. The debate about whether the issuance of money should be a privilege of the sovereign, of the people collectively or be left to private initiative will go on subject to the limitation of the single or small number of stamping recognitions over a territory that efficient trade requires. We will see later that measurement stamping and its guarantee require authority. Specific topics include where such authority may derive from, and through which mechanisms.
Fluctuations in financial power characterize the core of market economies – in particular from the time of the 15th-century Lombardy traders to the 19th-century English Industrial Society, where the Bank of England’s power to print bills dates back to a charter instituted in 1694. (26 years before, the Swedish Risken Ständers, acting as a central bank, was accorded the same privilege as successor to a failed private bank whose privilege had already been granted in 1656.) The French Banque Royale, chartered in 1718 and having the monopoly to issue bank notes with the guarantee of the King, was the first to operate as a modern bank and to be used by a government to finance a war and reimburse budget deficit with paper. It also allowed a reduction in public debt. It dragged a large public of 2 million citizens out of public debt and brought forward the concept that gold should be put aside. People were forbidden to hold gold. It also facilitated the development of colonial trade companies, such as one for Louisiana, one for India and one for China. France’s yearly external trade with its colonies was multiplied threefold by volume (number of boats sent) after 1719 due to the capacity to finance its cargo. The bank failed because of an uncontrolled speculation on its shares and bonds; the first example of the possible disconnection between price determination processes for financial instruments, Banque Royale shares and realities. Even more interesting was its organized liquidation, with over 2,000,000 creditors, 251,000 depositors, holding up to 100 gold Louis, will be reimbursed totally while larger depositors, 100,000 with over 2,000 gold Louis would not, and 185 speculators would be sanctioned with penalties amounting to 137 million Louis. The resolution process for Cyprus’s 2013 process on a much smaller scale was not much different. Nothing is new in the world but France, like the USA later, was very much against pure paper money for 200 years, and both returned to gold worship.
Of course, Europe was only following a process already known in the east as a promise to pay the bearer. They were made on leather and appeared in 118 BC during the Han Dynasty. In fact, public literature says that even prior to China’s 7th-century Tang dynasty, paper bills guaranteed by the state were being issued. As claimable instruments, these issued bills were differentiated from instruments issued between private individuals as promissory notes, and utilized to clear a trade. In these evolving systems of currency-based economic societies, democracy or liberty was defined as the power of the individual to act without coercion, thus linking economic commerce with the freedom to trade – and limited only by the capability of traders to come into possession of valuable coinage, goods, notes or their equivalents.
In many settings, the scarcity of metal – and consequently of metal coinage – was the reason for the emergence of paper bills (Massachusetts Bay Colony, 1690),12 as had occurred at earlier points in history. By serving to eliminate the transport of heavy currency metals and decreasing the motivation for theft thereof, the utilization of paper bills appeared to favour long-distance trade as did loan contracts in ancient times.13 Compared with metal coinage, paper bills lacked intrinsic value as goods; the holder had to be recognized by the receiver, and the use of recognition codes facilitated the use of carriers unknown to the receiver.
Viewed as a whole, bills or credit issued by sovereign authorities and/or chartered banks (the system that prevailed in the USA until 1913) in essence constituted a loan to the beneficiary of the bills. The growth in use of paper bills paved the way for the birth of a fractional reserve banking system. A fractional reserve did not require the issuer to meet an eventuality where all bearers and depositors could simultaneously demand execution of all guarantees, in total, at the same point in time. However, the reserve issuer could be liable for reimbursement of a large fraction of the deposits on hand.
Regulations were required to maintain some discipline, but extenuating circumstances, such as extraordinary government expenses or wars, led to relaxation of the rules and issuance of credits where an inherent complicity between governments, central banks and chartered banks (with authorization to issue paper bills) inevitably developed. Such collusion could predispose to instability.
THE RISE AND FALL OF CIVILIZATIONS
Civilizations are characterized by their populations’ acceptance of common values; overall cultural ones such as language and religion. They also correspond to a political and military common space. However, they don’t always have all of these attributes. An organization’s exchanges and what it shares with the public characterize best what a civilization is, and through economic exchanges will tend to use common price sampling mechanisms such as that brought about by a generally accepted monetary unit over a territory. Money will ever more cause an extension of such civilizations outside their own territory as a result of superiority in trade. Civilization, currency and political unification are parallel phenomena, if not closely interlinked. On the contrary, financial difficulties of the head of state, whatever they are caused by, may lead to monetary decline and the extinction of a civilization by reducing exchanges between the populations from which it is composed, or the centralized power to regulate wealth and taxes.
What differentiated successful public issuance of paper money from instances that failed was the quality of the issuer or authority that represented the mandate to levy taxes, and the potential capability to redeem the issued bills with levied taxes. The value of bills to be issued was pegged in relation to the magnitude of expected tax levies. The link between what characterizes a civilization and the capability to gather forces, including a military to defend its future, does not have to be demonstrated here. The forces are, out of necessity, economic ones as those in military service are retrieved from production, and money and taxes are the tools for the consequent required transfers.
Already, in ancient times, many authors denounced the pattern of an exploding distribution of credits followed by impaired liquidity, which frequently presaged a major crisis. Greek philosopher, trader and statesman Solon,14 deemed to be the father of Athenian “democracy”, issued laws cancelling the debts of peasants unable to repay and therefore at that time condemned to slavery. Again, referring back to Greek antiquity when philosophical ideas traced their ancestry to Sumerian times, and when 4th century BC trans-Mediterranean trading flourished, Rostovtzeff writes: “Systematization and regulation of commerce widely benefited from the development of banks which professionalized. Banks were practicing on a regular basis monetary transactions that included a wide variety of credits.”15 Yet, why did an ensuing economic crisis fall over Greece – was it primarily due to the nation’s political evolution?
Rostovtzeff’s comments sum up the essential societal value and perception of what money represented during the pinnacle of ancient Greek civilization, starting in the 5th century BC – namely, a monetarily unified economic exchange system based on both coinage and standardized “letters-of-credit”, which recognized the metrics of time and transactional duration. This system thereby facilitated the requirements of advanced monetary commerce, specifically in allowing for the clearance of an exchange transaction during the period beginning with a decision to ship the merchandise, to the end point where the merchandise was delivered to and accepted at the buyer’s end of the transaction pipeline. Implementation of this type of system represented major progress in economic society, considering the risk and time involved in having ships transiting the Mediterranean Sea, and in continuing maritime commerce even during periods when sea travel was precluded every winter due to inclement weather.
The historical interaction between the rise and fall of civilizations, regional and distant trading patterns, the emergence of philosophical ideas, the political evolution of democracy and tyranny, as well as the emergence of increasingly complex means of economic exchange represents a continuum in the human experience. The exchange of goods (as well as intangible assets such as ideas) by electronic means of transport, namely the Internet, remains to be completely standardized in the monetary context. Ultimately, these patterns bear continuing relevance to the concept of prosperity, described by Adam Smith16 as arising by consequence of improved efficiency and the advantages of competitive processes.
With globalization, goods not readily available in one region may be located elsewhere in an instant and transacted by means of the Internet, solely due to the options provided by the existence of monetary currency and advanced technology. There are, however, innumerable detractors of the monetary system of commerce, who since the dawn of “money” disdain its perverse impact on society – a point of view that can be extended to suggest that money is to blame for underlying causes leading to the decline of civilization, solely based on adversely interpreted issues involving systems of monetary commerce.
The Greek economic crisis of antiquity described by Rostovtzeff demonstrates parallels with our contemporary financial crisis. The Greek model was a unified political assembly of independent cities with common cultural elements assembled around the leadership of Athens or Sparta. Greek civilization was extending its economic and cultural influence across the entire littoral regions of the Middle East,17 including areas under the political domination of the Persians – the naval Salamine Battle in 480 BC, won by the assembled Greek cities, marked the peak period of its civilization but also the start of its decline. The Parthenon monument in Athens, ordered by Pericles as a development, is proof of the degree of sophistication reached by the ancient Greeks with their mathematical expertise used to determine how to calculate optic effects of dimensions in order to correct them for the eyes of citizens passing by this sacred area. Many dedications record in stone the cost in Drachma of the huge constructions launched in this period, but sometimes interrupted by wars requiring other priorities. Democracy has also left behind proof, in the form of stone slot machines to count votes, to demonstrate the link between state resources (treasuries) and their allocation.18
A major factor in the rise of regional Athenian influence may be attributed to the Athenian currency, the Drachma. We note that Athenian prosperity allowed the Greek government of that time to indemnify citizens who participated in public charges, making possible the recruitment of competent citizens irrespective of their class.19 In the same way, the Greeks had the monetary resources to be educated and to become scientists, philosophers and teachers (usually all at the same time). Eventually, however, the Drachma’s value declined, triggered by the combined effects of ancient Greece’s growing debt, a loss of competitiveness in its economic structure and output, and an associated decline in Athens’ military superiority.20 The inherent domination of Greek culture in the Mediterranean and Middle Eastern regions then began to wane, as its commercial/monetary strength and competitiveness weakened – in part as a consequence of and due to the costs of multiple foreign wars against the Medes and Phoenicians, as well as domestic exhaustion from internal strife involving civil wars between Greek cities and social revolutions. The Peloponnesian wars started the decline that ended the brilliant 5th century BC.21
