the south sudanese pound

The South Sudanese Pound

Note: written two years before the Russia, Ukraine War

History may not repeat itself but it often rhymes

Mark Twain

A very smart friend of mine asked me a question on the Chinese e digital currency and its implications reported by The Guardian. 

I had the privilege of studying US Constitutional History and Economics forty years ago with the only microprocessor being the soft matter between the ears the professors sought to save from extinction. 

Herewith an attempt to dust the soft matter.

To wit

The premise of the article is that the Chinese are adopting e-money for domestic retail use and are considering a sovereign digital currency to compete with the US dollar to make sanctions difficult to enforce. The second part of this appears to be a journalistic toss but both are worth the time to consider.

E-money is money stored in digital form on a chip card or hard drive that can be exchanged at the same value for cash in the same currency as central or commercial bank money. The e-money is backed by cash on the balance sheet of the Chinese Central Bank pledged to commercial banks for credit to individual accounts with the same collateral for retail and related transactions. Each unit of e-money is backed by an equal unit of cash, a peg if you will. 

E-money is not a digital sovereign currency which in today’s world are backed only by the full faith and credit of the government that issued the currency. The United States Dollar is backed by the full faith and credit of the United States government and the CIA opines that over $80 trillion equivalents course through global commerce. It is is the full faith and credit part that challenges all contenders to the Dollar because there is no peg today, nothing behind the currency but an unsecured promise in the dark, by the Chinese or any other contender.

The Short Story

The Chinese used weapons as currency, graduated to paper, and exported four great inventions west in the 9th century: gunpowder, the compass, paper making, and printing. The Swedish Central Bank issued paper money in 1661 and first the colonies and then the United States adopted it with reckless abandon. 

By the mid-1850s in the United States there were 10,000 forms of paper money issued by state banks each worth less than the next right up to the Civil War. 1865 saw the formation of the United States Secret Service to combat counterfeit bills, two-thirds of the money supply, floating south of the border with impunity a gift from then British Canada. 

The US flirted with the Gold Standard, that the Dollar would be backed by a unit of Gold, made official in the Gold Standard Act 1900, $20.67 per unit, confirmed by President Wilson with the Federal Reserve Act in 1913. President Roosevelt signed the Emergency Banking Act in 1933 which outlawed the hoarding of gold, devalued the currency, and required him to conduct a one-man daily gold fixing in his pajamas before breakfast. The Gold Standard held in one form or another until Mark Felt encouraged Woodward and Bernstein to follow the money in Watergate and Nixon removed the peg as a parting gift.

The Dollar is the reserve currency of the world today, oil is priced in dollars and will be as long as the Gulf needs the US protection that President Roosevelt agreed to provide in 1945. The full faith and credit of the United States is expressed in a military budget of over $1 trillion that ensures 10 million barrels a day of oil reach China, 4 million from the Gulf, without being hijacked by Houthi rebels with a few stingers, thinking the stingers are a US export but that is a subject for another time. There may be other contenders, the South Sudanese Pound comes to mind, but their military budget is wanting.

That the Chinese started thinking about the next form of money, e-money, in 2014, roughly 1100 years after inventing paper money, is the world as it should be. That the Chinese domestic e-money will be backed by cash is a lesson well learned and an ingenious method to avoid leverage and keep money routed from state government borrowings out of Vancouver real estate.  

That the sovereign digital currency has been returned to the drawing board is even better though the Chinese Central Bank Vice-Chair can be forgiven for trash talking after the sanctions were announced last September in a speech in Beijing. Something about the world would be nowhere without the four Chinese inventions, back to gunpowder again, and, oh, yes, the Chinese economy needs no partners. Not sure he was clear on the plan for keeping the lights on and the cars moving without the naval escort.

But seriously the Chinese are challenged by calculating precisely how much of the money printed by the central bank and borrowed by the state governments remains in the country because it appears that those same monies take flight into penthouses and outhouses around the globe with the pace of an Olympic sprinter given a fraction of a chance. Digitizing the domestic money supply is a start for the bean-counting and holding that capital hostage to do as the Party directs.

A sovereign digital currency will require more thought, more might, more faith, and less oil from the gulf but it makes for good press and sells, well, digitized newspapers.