After the euro, the digital euro

Hello. It looks as if the number of currencies in the world is set to go up again. Across the English Channel, satisfaction with supra-national monetary arrangements is waning.

[Marine le Pen] said she could see the EU setting up another currency like the ECU, or European Currency Unit, which the bloc used for internal accounting purposes before the euro was introduced in 1999.

From China Media Warn Trump of ‘Big Sticks’ If He Seeks Trade War

Now, younger readers may be unfamiliar with the ECU, but I’ve written about it more than once on this blog. The idea of restoring the Franc while simultaneously creating a new pan-European currency actually makes sense and I’m rather in favour of it. Which makes we wonder how she got hold of the draft manuscript for my forthcoming book “Before Babylon, Beyond Bitcoin: From Money We Understand to Money That Understands Us” that the good people at the London Publishing Partnership have agreed to publish in June? Oh well, since the cat is out of the bag, I may as well give you a sneak preview…

I remember hearing the Chancellor of the Exchequer talking on the radio during the great financial crisis. He referred to the difficulties of currency union and spoke about the problems in Ireland, Greece, Portugal and Cyprus. He spoke about the problems of maintaining monetary policy across currency unions between economies with different fundamentals. All true. But he didn’t explain why this is different for the UK. How is the insanity of trying to maintain a currency union between Germany, Luxembourg and Greece any different to the insanity of trying to maintain a currency union between England, Wales and Scotland? The fact that they are in a political union does not alter the facts on the ground: they have fundamentally different economies. The Chancellor was arguing that if Scotland opted for independence, it would be impossible to maintain a currency union between England and Scotland. But surely that is true now! The best monetary policy for England is not necessarily the best monetary policy for Scotland, and technology means that what was optimal for commerce at the time of the Napoleonic Wars may no longer best for the modern economy.

If the argument for currency union is only about transaction costs within economic zones, then former Chancellor of the Exchequer John Major set out a potential way forward in 1990 (although the idea dates from 1983) with his alternative to the euro, which was at the time was labelled the “hard ECU”. The ECU was the “European Currency Unit”, a unit of account set using a basket of currencies, that was intended to help international business by minimising foreign exchange fluctuations. Major’s idea for the hard ECU was a fully-fledged currency with a “no devaluation” guarantee (Hasse and Koch 1991). Whereas the ECU reflected the weighted average of inflation rates in the countries concerned, the hard ECU would be linked to the strongest currency (which would have been the Deutschmark, of course). This guarantee would be backed by a commitment from participating central to buy back their own currency or make good exchange losses in the event of devaluations.

Imagine what that kind of parallel currency might look like today. It would be an electronic currency that would never exist in physical form but still be legal tender (put to one side what that means in practice) in all EU member states. Thus, businesses could keep accounts in hard ECUs, even in a post-EU England, and trade them cross-border with minimal transaction costs. Tourists could have hard ECU payment cards that they could use through the Union without penalty and so on. But each state would continue with its own national currency (you would still able use Sterling notes and coins in British shops) and the cost of replacing them would have been saved.

The reason for doing this is to minimise the costs of doing business across Europe while giving each country control over its own currency. But the more general point that I want to make is that the advance of technology gives us new choices in the way that money works. The way that money works now is not a law of physics: it is a set of institutional arrangements that could be changed at any time. Thus, if anything, Ms. le Pen is not being radical at all. Why have nation-state control over money? Why not allow regions to have their own currencies? Why not use Google Money? Or Islamic e-Dinars?

I’m not the only one who thinks this, by the way. Check this out from “The Futurist Magazine” in September 2012, where as part of a compilation of pieces envisioning life in 2100, the article asks if we will still have money in 2100, and speculates on what form it may take if we do:

It is quite likely that we will still have money in 2100, but it may not be issued by governments any longer.

[From European Futures Observatory]

I couldn’t agree more. But if not governments, then who? One of the things I discuss in my book is my “5Cs” model for thinking about future issuers: central banks, commercial banks, companies, cryptography and communities. My good friend Rob Allen from PwC was kind enough to use this model in Sydney this week and, frankly, if people like Rob are taking it seriously then I know I’m on the right track.

It’s time to start thinking about the future of money and not just because I have a book about it coming out in June (did I mention that before?) but because the current industrial age monetary arrangements do not support the post-industrial economy.

The Wall

The American President recently re-iterated his plans to build a “beautiful” wall along the border with Mexico, for no reason that I can fathom except to provide stimulus to the Mexican economy at a difficult time. As a good friend of mine says, we should not get too exercised about what is after all nothing more than a harmless public works project of the kind often undertaken by national leaders to secure a place in the national imagination.  

I don’t think it will become an object of awe and admiration, though. This 1,000 mile long, 40 foot high barrier, a vanity project of unusual cost and complexity, may never become a tourist attraction to rival the Great Wall of China (the most astonishing man-made object that I have ever seen in my entire life, and I’ve been to the City of Manchester Stadium) but it may become a new Maginot Line for future generations to study.

Who knows. All I can say with absolute certainty is that it will make no long term difference to smuggling, immigration or the security of American citizens.

How do I know this?

Well, we Brits have been there and done that. We built a wall. We built a wall that was twice as long as Mr. Trump’s wall. And there is nothing left of it today. Nothing. Absolutely nothing.

Dronning victoria

In the days when Her Majesty Queen Victoria was not only our ruler but also the Empress of India, the British administration in the subcontinent had, amongst other depredations, increased the hated salt tax (which later spurred the noted insurgent and rebel Mahatma Ghandi to begin his campaign against the many benefits of British rule with the Dandi March). The salt tax was particularly despised because hundreds of millions of people in India’s interior were dependent on salt from the coast to survive.

The British salt tax was not the first (under the Mughal Empire, for example, there was a salt tax of 5% for Hindus and 2.5% for Muslims), but it became a cash cow under British rule and the price of salt more than tripled. The natural result was that salt was smuggled from the Bay of Bengal to the interior.

Other things were smuggled too — opium, people and such like — but it was the smuggled salt that upset us Brits the most. So the East India Company decided to do something about it. Remember, India was ruled by the Company until 1858, when it was taken under the wing of the Crown following the rebellion of 1857.

The Company decided to build a wall down the middle of India. A big, beautiful wall. And they made the Indians pay for it.

This wall, or the “Inland Customs Line” as it was called, turned out to be quite hard to build. In large parts of India, there wasn’t the rock needed to build it or bricks to build it from. But a British civil servant thought laterally and came up with an amazing solution. Allan Octavian Hume, a man who remains unknown to the masses but who should be as celebrated and revered as a Barnes-Wallis or a Dyson, was appointed Commissioner of Customs for the North West Province (1867-1870) and the Line was officially his problem.

Allen Octavian Hume A British innovator: political reformer, ornithologist, botanist and one of the founders of the Indian National Congress.

Hume had noticed that along various sections of the Line, thorny hedges had taken root. In 1869 he began to experiment with different shrubs. As a result of his work, the British were able to grow a thorny barrier that stood in for rock, bricks and other traditional materials. A green alternative had been found!

From Above Top Secret.

Yes. You read that correctly. The British built a 12 foot high thorny hedge to stop the smuggling of salt, opium, cannabis, sugar and who knows what else. This living wall, as described in one of my all-all time favourite books, Roy Moxham’s The Great Hedge of India, eventually extended for some 800 of the Line’s 2,500 miles 

Now, it wasn’t only smugglers who found the Company’s Line  inconvenient. The British Viceroys of India didn’t like it either because it was an impediment to trade. They did not feel that the tax collected to the benefit of the East India Company would compensate for the reduction in trade and, in the end they won. You can read about it in “The Economic History of India Under Early British Rule: From the Rise of the British Power in 1757 to the Accession of Queen Victoria in 1837”, where Romesh Chunder Dutt writes:

The East India Company would not willingly sacrifice even a revenue of £220,000, or any portion of it, for the prosperity of the internal trade of India. Professing the utmost anxiety for the material welfare of the people of India, they were unwilling to sacrifice a shilling to promote that welfare.

By 1872, the Line had a staff of 14,000! There were customs posts every mile, and in order to pass through you had to pay the tax. No tax, no deal and you would be detained. Many of the customs posts had a police cell where smugglers could be detained on the spot. These were called “chowkis”, the Indian word for a police station (from the Hindi cauki). This is why English people of my parent’s generation (my grandfather served in the British Army in India in the 1930s and my mother lived there as a small girl) still refer to prison as “chokey”, the anglicisation of the word.

So what happened to the smuggling? In some places the smugglers just drove laden camels through the hedge, in other places they threw the salt over it. Smuggling was reduced, but at what was eventually seen as an unacceptable cost because apart from the running costs it led to clashes between smugglers and custom officers (including an event in 1877 when two customs men attempted to arrest 112 smugglers, with predictable results) as well as stimulating bribery and corruption. Dutt again:

evils had grown under British Rule as compared with the state of things under the Nawabs of Bengal; manufactures were killed and internal trade paralysed by the Customs’ Officers who were paid so low that it was possible for them to live only by extortion; travellers were harassed and the honour of women passing through the lines of customs houses was not safe; and that this huge system of oppression was maintained for the sake of an insignificant revenue.

In the end, the Viceroys won. After all of the work it took to build this incredible artefact, in the end it was abandoned. Work stopped in 1879. When India became independent in 1947, the remnants of the hedge were torn up. In some parts of India, the Inland Customs Line provided the only surveyed straight line and so it was used for the route of highways in the new country, which is why nothing remains of the Great Hedge of India. No Ozymandian testament stands as a reminder.

The wall was an exercise of corporate power, not a sane economic proposition, and what eventually ended the smuggling was tax reform, as it always has been and always will be, but that’s a story for another time.

 Sir John Strachey, the minister whose tax review led to the abolition of the line, later described it as “a monstrous system, to which it would be almost impossible to find a parallel in any tolerably civilised country”.

So, my advice to Mr. Trump is to create a cheap, green and sustainable wall out of thorny cacti, which flourish in abundance in places like Texas and New Mexico. After all, since the wall won’t make any difference, why waste money.

P.S. I notice that there are expert tunnellers in Mexico, so the wall needs to go down about 50 feet and I’m not sure cacti can really help with that, sorry.