ARCC: fulfilling a historic destiny
The ancient Chinese philosopher Lao Tzu wrote “New beginnings are often disguised as painful endings.”
A study of modern economic history would certainly seem to support these wise words. While the world battles against an invisible enemy that knows no borders, at IBMR we believe that 2020 is a seminal moment in humanity’s financial evolution.
The make-up of the financial system as we know it today — central banks, tariffs, stock exchanges, deposit insurance, credit — was not created by some ‘one-off’ moment of grand design. Rather it emerged from crises as policy makers and governments at the time grappled with how best to solve the challenges facing them. The financial system is the product of evolutionary development over centuries rather than the result of one seismic moment of creation. A study of economic history reveals a telling story as to when these evolutionary moments took place: they emerged in times of crisis. Often, what begins as a short-term solution in the depths of a crisis eventually evolves into a long-standing and permanent feature of the financial system. If studying economic history reveals any clues, it is that the decisions and choices we make today, during our crisis of a century, will remain a key feature of the financial system for decades to come. Within this context, the question facing all of us is how, and into what, will the global financial system evolve. For sure, the financial system will not be the same once this global health and economic crisis eventually passes. We firmly believe IBMR has a leading and critical role to play in the next chapter of the world’s financial system.
After declaring independence in 1776, the newly formed United States of America was beset with economic problems. Throughout the 1780s, the nascent country was struggling to repay war debt, restore the value of the currency, lower inflation and re-establish trade and commerce links to generate growth. Alexander Hamilton, then the First Secretary to the Treasury, had ambitions to create a national bank, arguing that by drawing upon aspects of the Bank of England and adapting it to the United States’ unique characteristics, the institution would be able to issue paper money, offer bank facilities for commercial transactions and act as the government’s fiscal representative. Despite vociferous opponents, such as Thomas Jefferson, who argued that a national bank would create a financial monopoly in the nascent nation and disadvantage plantation owners over merchants and financiers, the Bank of the United States (BUS) opened in Philadelphia on 12th December 1791. With an initial capitalisation of $10 million, the BUS became the largest and most powerful corporation in the United States. Within 15 years of the Wars of Independence and the ensuing economic malaise throughout the 1780s, the United States had created a new financial institution: the central bank. Out of a crisis emerged a novel and hitherto unheard of financial institution in the United States.
Within two years, a new crisis emerged. When BUS opened, the amount of credit it created swamped the market. In the first two months alone, BUS made $2.7m in loans thereby realising Jefferson’s prior concerns of undermining state banks. Awash with credit, speculation gripped the markets as BUS shares soared from $25 in July 1791 to $300 in August 1791. By March 1792, nerves began to appear as the BUS began to run low on the hard currency that backed its paper notes. The bank sharply cut access to credit, and combined with rumours and fears in the market, BUS shares plunged, at one point more than 25% in the first half of March 1792. Fearing a repeat of the economic crash in 1720 in France, Hamilton initiated America’s first bank bail-out using public money to buy federal bonds and effectively insuring traders who had bought at the top of the market. Cash was redistributed and sent to troubled lenders. Within 18 months of the creation of the new nation’s central bank, the credit crisis created a new form of financial behaviour; one that we were to see repeated in later years; the bank bail-out. Out of a crisis emerged a new form of financial behaviour and policy.
The crash in BUS shares shook America’s nascent economic and financial system to its core. It stung investors, undermined confidence and seemed to reinforce opponents, like Jefferson, who were advocating for a more agrarian form of society and who were arguing that the Constitution did not grant the government authority to establish corporations and national banks. In response, lawmakers, under the direction of Hamilton, passed legislation and a raft of regulations in April 1792 that were intended to protect investors including banning public futures trading. A small group of traders balked at these regulations and decided to establish their own private trading club in downtown Manhattan. This private club later became none other than the New York Stock Exchange. Once again, out of a crisis, emerged a new financial exchange that would become a bastion of American economic growth and dominance.
Further examples of financial innovation that emerged during times of crises are repeated throughout history.
In the 1825–26 Latin American bond crisis, the world’s first emerging market crisis, the Bank of England was forced to replicate the form of bank ownership that existed in Scotland by changing English bank ownership restrictions so that they became ‘joint stock’ lenders with as many partners as they wanted, as opposed to the smaller private partnerships that characterised banks in England before the debt crisis. This laid the seeds for the creation of megabanks as smaller partnerships that were viewed as more risky fell out of favour. By 2009, Britain’s top four banks held around 75% of the country’s deposits. Again, out of a crisis, emerged a new form of financial institution that arguably is still with this us to this day.
The 1907 US banking crisis that engulfed trust companies, including the famous Knickerbocker Trust, created widespread panic as interest rates peaked at 125% and saw bank runs, culminated in the novel idea of a lender of last resort. By 1913, the Federal Reserve Act was passed. Out of a crisis, America’s third central bank was born.
The 1929 Crash and ensuing Great Depression resulted in a radical deleveraging of the entire system. The Glass-Steagall Act separated the riskier activities of investment banking from the more mundane world of commercial banking while the Fed assumed new powers to regulate banks whose clients used credit for investment activities. Out of perhaps the greatest crisis, the financial landscape was remodelled as the Fed gained more power in controlling the cost and supply of money.
Only months after the 2008 financial crisis, the anonymous Sitoshi Nakamato released in January 2009 the Bitcoin whitepaper explaining a new form of money that is decentralised, ownerless, stateless, immutable, tamper-proof with a pre-programmed supply. The mere fact Bitcoin exists over a decade later is an achievement in itself.
At IBMR, we believe we are in the midst of another financial crisis of historical proportions and that we are ideally positioned to lead the next stage of humanity’s financial evolution. The fragilities and ineffectiveness of the centralised financial system will again be laid bare. Inequality will again be cruelly exposed. But, this time, a new socio-economic order, drawing upon the innovation of cryptocurrencies and the application of blockchain technology, will emerge.
What economies need is not more loosening of monetary policy to even lower levels. What economies need is not more fiscal stimulus that balloons national debt that will ultimately be paid through reflation. What is needed is aggregate demand stimulation. At IBMR we believe ARCC is the solution that will change the lives of over 650 million urban poor in the developing world. ARCC is a microasset, not a microloan, which will be positioned as an accessible store of value. ARCC is a crypto-reserve currency and a macroeconomic development coin. As debt free capital, ARCC will create a vibrant environment for entrepreneurship that in turn will boost productivity, create a more efficient market, improve living standards and generate upward mobility.
This may sound like a fantasy. But then, so did all the previous innovations before a crisis triggered human ingenuity and opened the way to a new approach. Every innovation feels like a fantasy; until it is not. The time for ARCC has arrived. The time for a decentralised, inclusive economic development model that creates wealth and prosperity has arrived. We just need to seize the opportunity before us. The Brazilian lyricist Paulo Coehlo puts it perfectly: “If you’re brave enough to say goodbye, life will reward you with a new hello.”
Come say hello to IBMR.
Join us
21 March 2020
Research of IBMR.io & ARCC
Editors: Eric Tao, Head of Media IBMR.io & Sinjin Jung, Managing Director IBMR.io.
