This first instalment of Patrick Laure’s new column looks at where money comes from, why it holds value, and what these foundations mean for the rise of cryptocurrency…

While I was having lunch with a businessman, to put it simply, a captain of industry, to
quantify, discussing general economic principles and specificities in the Principality of
Monaco, the question was asked. ‘What about cryptocurrency in Monaco?’

It was an excellent question, and starting from the general to the specific, in this case princely,
noblesse obliges, I explained my point of view.

With a primary function of utility and exchange, granted through labour or martial combat,
currency is a matter of state, of kingdom (I). Currency defines the strength of a state through
the labour of its citizens, and its martial power through its politics, expressed in reserves of
gold, black or otherwise, and foreign currencies (II). By becoming virtual, currency, known as
cryptocurrency, determines nothing other than the artificial, ‘second life’, AI, I robot, like a
Dutch tulip (III).

I On the origin of money, its utility and exchange function

‘Easy money’ (John Connor – Terminator 2)

John Connor, son of Sarah Connor, withdraws money from an ATM with a forged payment
card. ‘Easy money,’ he says to his friend, showing him the wad of banknotes, heading for the
arcade, Space Invaders, coins in hand, here we come.

The printing of US dollars follows the same pattern. All you have to do is turn on the ‘money
printing press’.

Money creation is a matter for the state

But what does it really mean to turn the printing press?
It means creating money. This role is essentially devoted to the central bank of each state and,
to a lesser extent, to commercial banks.

Money is created in anticipation of almost certain future growth. Any creation that exceeds
future growth constitutes a ‘bubble’.

So, everything is fine, if our economy is in trouble, we just need to create money!

Yes and no…

  • Yes, creating money allows liquidity to be injected into an economy that needs it, ‘restarting
    the machine’ (see Covid 19 below).
  • No, because if we create money without ‘counterpart’ (i.e. without guaranteeing this
    issuance of money with a “real” asset, this creation of value-wealth), then we are issuing
    ‘monkey money’.

    A currency with no real value that creates inflation at best, deflation followed by
    disappearance at worst. (We all have in mind the images of Germans between the wars going
    to buy their bread with a wheelbarrow full of banknotes).

    So how does the ‘counterpart’ work?

    Very simply. I can only issue money if I have a minimum amount of assets to “guarantee”
    these new banknotes.
    The origin of this ‘money supply’ is linked to the transformation of gold into ‘paper money’.
    This is the consecration of the gold standard.

    Thus, every ‘sovereign’ state that wins wars or develops its economy by selling goods it has
    produced, raw materials hidden in its subsoil, outside its borders, then deposits tonnes of gold
    in its coffers, the famous ‘gold reserves’, such as Fort Knox for the USA.

    Gold is heavy and impractical to trade, and bandits hiding in the woods can easily attack the
    stagecoach and steal the Kingdom’s coffers filled with gold.

    This led to the creation of the assignat, the first ‘bank’ note. The counterpart to the assignat
    was the kingdom’s gold, still in its coffers, the state’s ‘treasury’.

    Kingdoms, principalities, and states also gain war treasures with banknotes from other
    countries that do not always have as much gold as they owe.

    Knowing, moreover, that banknotes from other countries (foreign currencies) correspond to a
    commercial exchange that enriches those who cash them (a trade surplus).

    If a state’s external trade balance is in deficit, it becomes poorer or at least restricts its ability
    to operate its printing press, its ability to ‘mint money’.

    This is a new development, because foreign currency, being ‘external’ (to the value of my
    Kingdom, like gold), becomes a counterpart as such to the currency it prints and puts into
    circulation.

    In 1944, the Bretton Woods agreements formalised this counterpart relationship between
    currency issuance (with the US dollar as the reference currency) and each state’s gold
    reserves.

    However, in 1971, the agreements were terminated because the number of US dollars in
    circulation worldwide exceeded gold reserves. The convertibility of the US dollar into gold
    was no longer possible. This is the famous Triffin paradox or dilemma.

    In order to address these emerging imbalances between different countries in the context of
    international trade, and while the US dollar remains the global reference currency, in order to be able to issue banknotes in each country, the central bank of that country must hold at least 8% (see Cook’s ratio below), either in gold or in foreign currency.

The scheme is simple: it guarantees the value of the currencies in circulation and also controls
money creation, both within the country and abroad.

So, everything is fine?

Yes and no.

  • Yes, because this rule is respected by all countries in the world, which must comply with this
    ‘prudential’ standard.
    Thus, the ECB for Europe, the Bank of Japan for Japan, etc., only issue their own currency if
    they have the equivalent amount in gold or foreign currency in their coffers.
    If they ‘dip into’ their reserves, their ability to issue new currency is automatically reduced.
  • No, because the United States has unilaterally ‘excluded’ itself.
    Having contributed significantly to the financial and human effort to end the Second World
    War, and being in the midst of economic expansion, injecting several hundred million dollars
    into the European and Japanese economies, the ‘Marshall Plan’ was the excuse or reason for
    this unequal singularity in terms of control, regulation and guarantee of the value of a
    currency.

    The US government then unilaterally decided that it could exempt itself from this
    ‘counterpart’ constraint and issue US dollars with gold and foreign currencies (like all other
    countries) as counterparts, but also with its own US dollars.
    At the end of the Second World War, the US could justify this exorbitant right to reasonable
    finance (significant and almost certain economic growth linked to its presence in European
    economies, enabling it to ‘anticipate’ future financial wealth creation, which was therefore not
    guaranteed).

    Today, and for several years now, the United States’ financial position in terms of ‘currency
    value’ has been economic nonsense.

    Why is it economic nonsense?
    The subprime crisis was a perfect example of this.
    We have heard all the possible explanations for the subprime crisis, but they were essentially
    the consequences, not the real cause of the crisis.

    The sole cause of the subprime crisis was the ability of the US economy to create money
    without any counterpart, other than its own currency. To return to the beginning of the argument, as a ‘central state bank’, I can only create money in exchange for gold or foreign currency.

Patrick LAURE
Secrétaire Particulier
+33 6 35 45 27 02
laurepatrick@wanadoo.fr

**The information provided in this article is for general informational purposes only and does not constitute legal advice. It is not intended to create an attorney-client relationship. Laws and regulations vary by jurisdiction and may change over time. Readers should consult a qualified legal professional for advice specific to their situation. The author and publisher are not responsible for any actions taken based on this information.