CRYPTOCURRENCIES UNTETHER THE GOAT OF SOVEREIGN TENDER / THE FINANCIAL TIMES

Cryptocurrencies untether the goat of sovereign tender

The existence of digital currencies challenges the idea that money can only be created by nation-states

Simon Gleeson


Growing on trees: we have removed the real goats from the system, and now use only notional goats © Dreamstime


Back in the 1930s, according to John Maynard Keynes, one of the jobs of a district commissioner in Uganda was to inspect and evaluate goats.

The local unit of currency was the goat, so most goods were priced in goats. So when a local sought to discharge a debt by presenting an animal that was exceptionally sick, old or otherwise undesirable, the district commissioner would rule on whether that particular animal was fit to count as a “goat” for transactional purposes — whether it was, as it were, a negotiable goat.

One way of understanding this system is that the relevant economy was in effect on a “goat standard” — the value of its standard currency unit was linked to the value of an underlying commodity. If the value of that commodity decreased relative to other commodities, the value of the currency unit would decrease proportionately (that is, there would be inflation) and vice versa.

The goat standard and the gold standard are identical concepts. In both cases the idea is that money has value because it is in some way associated with a real thing, for which it can be exchanged. However, this “commodity standard” model has now been largely abandoned.

Today’s “fiat” currencies derive their value solely from the promises of their sovereign issuers.

In effect, what has happened is that we have removed the real goats from the system, and now use only notional goats.

This means that we have stripped the idea of currency down to its barest essence — that it is no more than a token deriving its value exclusively from the expectation it will be generally accepted in payment. In a world that operates on this model, anything that is accepted as payment functions as currency, regardless of the identity of its creator. It should therefore be no surprise that we have seen a boom in the creation of cryptocurrencies: entirely private tokens created for the purpose of functioning as payment mediums.

The existence of such currencies challenges head-on the idea that money can only be created by nation-states. In particular, it refutes the idea that what gives money its status is the existence of national laws obliging citizens to use it — deeming it “legal tender”.

If this were the definition of currency, then it would provide the necessary link between sovereign status and money creation. However, it is clearly not. Citizens of Weimar Germany, for example, did not stop using the mark because it ceased to be legal tender, but because it ceased to be accepted in payment by their fellows. Equally, the Zimbabwean economy switched in a relatively short period of time from the Zimbabwean dollar, which remained legal tender, to the US dollar, which was not, without losing a monetary function. In practice, when a unit is no longer confidently expected to be generally acceptable in discharge of debts, it ceases to be money, regardless of its legal status. So where does this leave the sovereign link?

In any economy, the thing known to be acceptable as payment to the largest participant in that economy will function as money. Since the sovereign is the largest participant in any national economy, anything it accepts as payment will be de facto “money” in that economy.

This link, however, comes at a price. Because currencies are perceived as obligations of the sovereign, they gain or lose value as a result of fluctuations in the creditworthiness of that sovereign. Viewed in this light, the sovereign promise that backs currencies is simply a modern variation of the goat — the link tying a notional unit of account to an external thing. In 1971 the US untethered the dollar from physical gold; a move away from fiat currencies is the logical next step.

Breaking that link through the use of privately issued payment instruments is equivalent to ditching the underlying goat. Once he is gone, the goat will probably not be missed, any more than the gold standard is missed today.


The writer is a partner at Clifford Chance and author of ‘The Legal Concept of Money’