In reserve

by David Birch

[Dave Birch] As is clear from the agenda for the Digital Money Forum from its earliest days, I’ve been interested in the subject of alternative currencies for a very long time. In fact, since the days of the Mondex project, when we (Consult Hyperion) were approached by people who wanted to store their own currencies on the cards. I always thought this was a really interesting idea, but no-one else did, and nothing much happened. After a while, I began to realise the ‘alternative’ currency spectrum covered a pretty wide range of topics, concepts, ideas and concerns. The recent discussion on my “Good as Gold” post shows that one of the principal categories — local currency — means different things to different people. My concept of a local currency is a currency that is highly valued highly by members of a community but hardly valued by others. The historic example of wampum in the United States illustrates this neatly.

How would you trade local monies between groups, then? Well, presumably some reserve currencies would spring up (to fill the same role in relation to local currencies as the beaver pelts did to the wampum in the “Super Powers” post) and I imagine it would be inevitable that there would be some that would become privileged, in the sense that some would attract an exchange premium for “irrational” reasons (a belief in long-term stability that could not be proven by spreadsheets, that kind of thing). Having a privileged reserve currency is a very powerful position.

Why am I thinking about something as apparently esoteric as reserve currencies? Well, you might be surprised to learn that the world of reserve currencies, so apparently simple (do we hold dollars or euros? do we hold gold or fiat currencies?) is changing, and at times of change there are always opportunities.

The allocation pattern of central banks suggests that the world has run out of feasible reserve assets to provide sufficient scope for liquidation in the event of globalised distress. Central banks should consider whether holding the same securities remains the optimal investment strategy, and may have to look beyond the US dollar and other G7 currencies to attain a reasonable diversification.

[From Why central banks need more reserve currencies - The Banker]

It’s not completely clear to me why the reserve assets can’t include gold, land, bandwidth or anything else, but it’s certainly worth a note in the margins. If the “conventional” money system is genuinely running out of reserve currencies, that there might be an appetite to do something wholly new in the world of money because technology can monetise so may assets in useful ways. Once again, recession may well prove to be an engine of opportunity.

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

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