Whatever happened to honest money?

Your wallet is your statement of hope that somewhere in the world around you the wrong men will not default on their moral principle which is the root of money

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Houses of Parliament burn down as honest money went up in smoke
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Charles Crawford
On 27 September 2012 12:51

For some time I have been trying to track down video footage of Prime Minister Margaret Thatcher's interview with Robin Day on Panorama before the 1987 general elections. Maybe my ageing memory is playing tricks, but I recall him asking her about Conservative policy on inflation. The camera closed in on her face. "I believe in honest money," she sternly replied.

Honest money! What an idea. Maybe it could even catch on, despite the fact that there is scarcely a politician round the world who now can face the camera and say that that is what he or she believes in, or even understand why honesty and money might be related.

Money fulfils several vital functions simultaneously. It is a medium of exchange (you use it to buy stuff), a unit of account (it explains and describes trade) and a store of value (you can save it to spend in the future). Ever since money has been invented, crafty people have tried to play tricks with one or other function to make improper gains. So down the centuries different ways have been invented to stop that happening – to keep the link strong between Money and Honesty.

One of the very greatest ideas came 900 years ago to Henry I as he pondered the problem of both borrowers and lenders trying to defraud each other: the tally stick. When money was lent, markings on a stick would be used to show how much money was involved. The stick would then be cut down the middle so that borrower and lender alike each had their "copy" of the transaction. The grain on the wood made it almost impossible to cheat.

This system gave us the financial words "stock” and "foil" (as in a cheque counter-foil). It lasted for over 700 years until the need for more complicated paper-based instruments drove it into desuetude.

The Treasury in London ended up with vast pile of redundant ancient tally-sticks, and in 1834 burned them in the furnace of the Houses of Parliament. The vast heat set the chimneys on fire. Parliament was burned down – a sure sign of divine indignation that Honest Money was going up in smoke.

Honest money rests on trust. For most of human history people have trusted in the value of things (gold, silver, rare shells) rather than the reliability of other people. For good reason. There is scarcely any example of a fiat currency (i.e. one backed only by the authority of government) that has not eventually been debauched.

The British pound stood proud for a long time as a store of value. When I was growing up in the 1960s penny coins dating back a 100 years were still found in one's change at the sweet shop. Then came bigger and bigger government, and the temptation to trash the currency became overwhelming.

The US dollar likewise was built upon robust principles. The Founding Fathers were conscious of the tendency of European kings and queens to wreck the value of money through greed or stupidity. They made it a capital offence to debase the currency. As late as 1968 US silver coins still contained some silver. President Lyndon Johnson finally ended that noble tradition, and alas was not executed for doing so.

The value of any fiat currency rest upon popular trust in the present (national assets, infrastructure) and in the future (education, innovation, demographic profile). No one wants to be paid in North Korean won and chon: Those scraps of paper represent nothing serious, honourable or reliable. Above all a currency's value stands or falls on the trustworthiness and reputation of the people who take decisions about the value of that currency.

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