Iran is in a state of turmoil,
with elections approaching, sanctions biting hard,
and the economy shuddering to a halt. As a result,
all manner of expedients are being examined to
kick-start the domestic economy, through
infrastructure investment particularly, but a
shortage of financial market expertise is causing
problems.
Oil-backed bonds have been
mooted, and also there has recently been talk of a
new currency to be issued by the Central Bank of
Iran, which is cut off from
the dollar payment system. I was recently asked
for my thoughts in relation to these policies for
the benefit of key officials involved in this
policy making, and the following text has been
well received.
Treasury issuance of
currency "Anyone can issue currency: the
problem is having it accepted" - Hyman Minsky.
In the course of my research at University
College London, I have been investigating the
historic operation of the English financial system
as it was prior to the incorporation of the Bank
of England in 1694, in order to establish if there
are lessons to be learnt that may improve system
resilience.
Indeed there are.
Until 1694, English sovereigns financed
their expenditure simply by issuing credit tokens
(IOUs) to taxpayers at a discount. In other words
a tax-payer could "prepay" his taxes, for instance
by giving the sovereign 8 pounds sterling in goods
and services in exchange for a 10 pound token from
the Exchequer (Treasury,) which could be returned
in payment of taxes.
Interestingly, the
phrase "tax return" derives from the payment of
tax by returning the credit token to the King's
Exchequer, and the phrase "rate of return"
literally described the time over which the
taxpayer could achieve his discount and profit by
returning his tokens/credits to the Exchequer.
So in the above example, if the taxpayer
paid 10 pounds tax in one year, he would make a 2
pound profit on an 8 pound investment and a 25%
rate of return. If he paid 5 pounds in tax a year
then the rate of return would be 12.5% and so on.
It will be observed that no compound interest was
involved.
Energy-based currency
issuance Clearly, neither central banks nor
private banks can issue energy-based currency
(units returnable in payment for energy use)
because they do not produce energy.
But
central banks may have a role as a monetary
authority, which manages the issuance of currency.
In Hong Kong, for instance, there is no Central
Bank, and the Hong Kong Monetary Authority
oversees the issuance of dollar-backed currency by
private banks.
The key point is that in
order to be generally acceptable in exchange, an
energy-based currency must be returnable in
payment for energy in a form useful to the general
public.
Crude oil is limited in that
respect because it is useful only to refiners, and
therefore direct investment in crude oil and
crude-oil-based currency are unlikely to be widely
acceptable in Iran as is hoped.
But a
currency based upon the use value of carbon fuels
such as natural gas, gasoline, diesel, heating
oil, and fuel oil is another matter.
Petro-riyals My advice to the
minister and his colleagues is for the issuance by
carbon fuel producers (initially state producers)
of a new generation of "petro-riyals" that are
returnable in payment for a fixed amount of
natural gas, and also perhaps against an energy
equivalent amount of other carbon fuels.
The beauty of this approach is that
Iranian carbon fuel prices may then be raised to
global levels, with subsidies being payable in
petro-riyals, and not in potentially inflationary
central bank issued conventional riyals. This
would undoubtedly have the effect of changing the
behavior of Iranians towards energy conservation,
and investment in renewable energy and in
energy-saving projects.
Naturally, the
energy currency units in issue would need to be
transparent, and the monetary authority would also
need to work closely with producers in authorizing
issuance. There are many other policy implications
and questions (none insurmountable), but the
concept is based upon the very clear and
fundamental truth that a unit of energy is the
only absolute unit.
An energy currency
could therefore come to set a new standard for
national, regional and even global financial
stability. But note that for a transitional period
of introduction, there is no reason at all why
transactions settled in petro-riyals could not be
priced in the dollar unit of account, which is of
course widely familiar and used in price
formation.
As I said to the Tehran Chamber
of Commerce last year, I believe that Iran will
come to thank the US for detaching them from the
dollar system, because it means that a superior
and sustainable system may now be adopted, one
based firmly upon the values that underpin all the
great religions, but which Islam alone has not
forgotten.
Chris Cook is a
former director of the International Petroleum
Exchange. He is now a strategic market consultant,
entrepreneur and commentator.
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