Good Money – Saving And Paying In Value Currency by Steven De Klerck Also follow him on Twitter here

In the field of money I do not want to prohibit government from doing anything except preventing others from doing things they might do better.

Friedrich A. von Hayek, 1979

1. Introduction to Good Money

In this article I will present the idea of introducing a private currency backed by value stocks, i.e. by the shares of fundamentally sound, cheap-in-the-market companies. This idea is proposed in the book entitled Good Money – How complementary value currency can save us from the current crisis. The book is written by Bart Van Coppenolle, Flemish entrepreneur and philosopher.

Van Coppenolle correctly describes our current monetary system as a central banking monopoly that, in combination with a cartel of banking elites, exercises discretionary control over the money supply. The system results in an ongoing confiscation of wealth, a financial system characterized by ever higher risk taking and risk concentration and recurrent booms and busts, as witnessed in the ongoing financial, economic and social crisis.

Instead of leaving monetary (mis)management to governments and central banks, in Good Money, Van Coppenolle appeals to the ideas of the Austrian economist Friedrich A. von Hayek; in Denationalisation of Money Hayek defends a complete free market in money. The concept of the value currency is summarized on page 209 of Good Money in the following way:

The solution of financial crises proposed in this book combines Hayek’s ideas with those of Rothbard, Graham and Lietaer. The complementary (Lietaer) value (Graham) currency must always be redeemable in other currencies (Hayek) and in the complementary value currency fractional reserve banking is forbidden (Rothbard).

2. Towards A Denationalisation Of Money

Given the disastrous consequences of government intervention in the sphere of money, in Denationalisation of Money, Hayek introduces the idea of competing private currencies. Hayek proposes a scheme where private issuers would regulate the quantity of their currencies in circulation so as to keep the purchasing power in terms of a collection of industrial commodities as constant as possible. The success of the proposed scheme will depend on the extent to which private issuers comply with the promise of stable purchasing power. Issuing banks that violate their own rules and cannot control their money supply will quickly be confronted with a loss of business and in the long run the withdrawal from circulation of their respective currencies. Hence producers of money have every reason to offer currencies that protect the consumers’ interests as good as possible.

In Good Money Bart Van Coppenolle introduces the concept of a private value currency, i.e. a currency backed by value stocks. The same way that a currency can be backed by gold or a basket of industrial commodities as proposed by Hayek, it is also perfectly possible to introduce a currency backed by the shares of cheap companies with a relatively low fundamental risk profile.

3. The Value Currency: Backed By The Shares Of Value Companies

From an accounting or so-called fundamental perspective value investing implies buying financially sound companies at below average valuations. Financial health of a company can be assessed using accounting items derived from the financial statements, i.e. the balance sheet and the income statement. Cheapness can be estimated by the use of valuation measures such as a price-to-book ratio. Both “margin-of-safety” aspects minimize the possibility of a “permanent loss of capital”.

One of my recent empirical studies on value investing for the US stock market over the 1970-2012 period was published by Austrian economist and world-renowned investor Dr. Marc Faber as part of his September 2012 Market Commentary. In this study I find that in all 33 ten-year periods value stocks realizes a positive real total return with an average of 203% and a minimum of 47%. This is shown in the following graph (where I compare real total returns over ten-year periods for value and growth stocks for US stocks).*

Good Money Value Currency

All other investment strategies analyzed as well as asset classes are confronted with at least three ten-year periods of negative real total returns, implying a loss of purchasing power. This is notably the case for gold and oil. Both asset classes suffered from a long period of negative ten-year total returns after the commodity boom in the late 1970s.

The practice of value investing has shown robust results over many decades and in many countries [Of course this is no surprise for the readers of ValueWalk]. A value currency, which is backed by a sound portfolio of globally diversified and liquid stocks, is propagated in Good Money as being extremely suitable in order to securely store saved value or purchasing power over time. The high liquidity of the stocks in the portfolio assures that the value currency is redeemable at all times. According to Van Coppenolle on page 197:

Since value money stores value most securely over time people can save for later in full confidence. Value money is the best security available. This means it is also objectively the best money, as far as its value storage function is concerned.

We all know that the US dollar as managed by the Federal Reserve is not a safe store of value. Since the founding of the Federal Reserve in 1913, the purchasing power of the US dollar has been decimated by more than 95 percent. Taking into account a supposedly achievable inflation target of 2 percent per year as explicit objective of the ECB, holders of the euro experience a similar loss in purchasing power across time. A currency backed by the shares of fundamentally safe companies experienced on the other hand a significant surge in purchasing power.

4. Conclusions

Some critics, perhaps also value investors, will discard the idea of innovative private currencies as fantasy. It should be remembered that it was Benjamin Graham himself who advocated a basket of commodities as candidate to serve as a monetary base. The godfather of value investing even wrote World Commodities & World Currency – a book on this topic! In this book Benjamin Graham offers a global analysis of the systems that could reduce dangerous business cycles in order to achieve economic stability in a postwar economy. Graham, in an astonishing display of foresight, shows how commodity reserves can play an important part in any business cycle policy. In Good Money, Bart Van Coppenolle takes this idea one step further, viz. to the introduction of the private value currency.

The underlying economic insights and the practical implementation principles of the value currency are extensively worked out in Good Money. For further details I gladly refer the reader to Bart’s website or to for a copy of the book. On my own website I wrote an extensive theoretical-economic review on private currencies in general.

*In his March 2012 Commentary, Dr. Faber explains the outperformance of value stocks in the following way:

There are always “plenty of buyers for stocks of companies that are continually written up in the major financial publications, and whose officers are treated like celebrities. That’s what pushes their prices to levels that end up disappointing their investors. These glamour stocks command unreasonably high prices for their

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