Ideal Money – Ideal or a Far Cry from the Idea?

By Deepthi Mary Mathew*

The world has witnessed two major economic crises over the last decade – Sub-prime and Euro zone crises. These periods witnessed a string of discussions and debates aimed at lifting the ailing economies out of the crises. Keynesian economics that lost its glory during the 1970s returned to the centre stage. The central banks in the crisis-hit countries resorted to unconventional measures and started pumping money into the economies. From ‘Quantitative Easing’ to ‘Helicopter Money’, we were introduced to different concepts, while capital was flooded to financial institutions. The result was a sudden movement of capital between the countries in search of maximum returns. Consequently, there was huge instability in the currency markets that witnessed sudden depreciation/appreciation of major currencies.

Now, the central banks in these economies are in a major dilemma, as the withdrawal of measures meant to combat the crises could possibly lead to another major financial crisis. The whole situation throws light on the inherent weaknesses in the existing monetary system. Under the present system, central banks and governments have a monopoly in printing currency. With ‘fiat money’ in circulation across the globe not backed by any commodity but only by the government, central banks are given a free hand in deciding the amount of currency to be printed. Bubbles and burst experienced by us is mainly an offshoot of this system.

The demand for an alternative monetary system that could ensure stability in the currency market and limit the manipulative powers of central banks gained traction. It was against this backdrop that John F Nash introduced the concept of ‘ideal money’ as an alternative to the existing system. He proposed the construction of a good Industrial Consumption Price Index (ICPI) statistic, which would include the prices of commodities such as copper, tungsten, silver etc that are mainly used in industrial activities. He states that ICPI would serve as the standard for the value of international monetary unit, thus limiting the political roles of the central banks and state authorities.

Nash does not guarantee that such a system would completely eliminate political corruption, and argues that its success, to a great extent, depends on how the index is constructed in the first place. In his words, “… politicians in control of the authority behind standards could corrupt the continuity of a good standard, but depending on how things were fundamentally arranged; the probabilities of serious damage through political corruption might become as small as the probabilities that the values of the standard meter and kilogram will be corrupted through the actions of politicians.”

A major concern is with regard to the commodities that should be included in the construction of the index. From gold and platinum to crude petroleum, Nash maintains that a good ICPI should be accommodative enough to include a ‘miracle energy source’ that would be found in the future. “If a good ICPI is constructed, it should not be expected to be valid as initially defined for all eternity. It would instead be appropriate for it to be regularly readjusted depending on how the patterns of international trade would actually evolve,” he adds.

However, it is difficult to ensure that the ICPI will have a smooth ride. Changing market conditions and growing technology could have a direct impact on the prices of the commodities that are included in the index. This, in turn, will be reflected in the value of the index. As the Consumer Price Index (CPI) for measuring inflation rate varies in different quarters, so will the value of ICPI. The changing value of ICPI can make the currency market more risky and unstable. Thus, the selection of commodities to ensure stability in the value of ICPI could turn out to be a costly affair. 

*Deepthi Mary Mathew is Research Associate at CPPR-Centre for Comparative Studies. Views expressed by the author is personal and does not represent that of CPPR