There’s a particularly good section on the implications of most currencies around the world having left the gold standard in the years between the First and Second World Wars. It includes the following quote:
“In general, a gold standard is probably better than having the currency managed by an ignorant or irresponsible government ...”
Lipsey also talks about some of the historical advantages of having such an asset-backed currency, including:
“Tying a currency to gold meant ... it provided a check on the prince’s ability to cause inflation. Gold cannot be manufactured at will; paper currency can ... the gold standard provided some check on inflation by making it difficult for governments to change the money supply. ”
Lipsey notes some of the downsides of asset-backed currency, including inflation when there were major gold
discoveries.
Replacing the role of gold in an asset-backed currency with a unit of sustainably managed land (without using a fractionally backed approach), however, would make this problem far less significant. Indeed, it would generate an
incentive for beneficial actions, because the creation (or conversion) of (privately owned) land to sustainably managed land would actually be a good thing while at the same time being wealth-creating for the landowner. Of necessity, governments or central banks would need to own (or control) significant reserves of sustainably managed land in order to provide this asset backing to their currencies. Not a problem, though – they already own much land and could always use compulsory purchase powers to create adequate levels of such reserves within a balanced economy and ecosystem.
This new form of currency, which one could call, for example, the Ecopound, providing it was taken up by reputable governments and central banks, could provide all the benefits of being a medium of exchange, but could also provide a store of value (overcoming some of the shortcomings of gold in this respect) while encouraging the maintenance (and expansion) of the stock of sustainable land which backs it. By the very nature of the finite supply of the asset backing, this currency would protect against the worst boom-and-bust cycles of existing economic cycles, by providing a stable and limited supply of the asset (and therefore of the money supply). It would also prevent a recurrence of the financial meltdown of circa 2008 and the fall of banks such as happened to Northern Rock at that time.
The main parties to lose out under this scenario would be the banks, especially because of the move away from fractional backing. As Lipsey points out:
“... each bank was able to issue more money redeemable in gold than it actually had gold in its vaults. This was a profitable thing to do, because the bank could invest its newly created money in interest-earning assets.”
Perhaps this would also provide a further driver for the existing trend of the separation of investment banks from retail (transactional) banks. The former depend on investing for a return, the latter exist to support the use of money as a medium of exchange and store of value for ordinary, individual citizens. Under the asset-backed Ecopound concept, there might not be as much business for the investment banks, but there would still be plenty of business for the retail banks.
The main perceived ‘downside’ might be the constraints this would put in place on economic activity (perhaps limiting money available for lending and growth). However, this might actually be an advantage, especially for anyone supporting a transition to a steady-state economy.