An excerpt from The End of National Currency, by Ben Steil in Foreign Affairs, May/June 2007:
It is widely assumed that the natural alternative to the dollar as a global currency is the euro. Faith in the euro’s endurance, however, is still fragile — undermined by the same fiscal concerns that afflict the dollar but with the added angst stemming from concerns about the temptations faced by Italy and others to return to monetary nationalism. But there is another alternative, the world’s most enduring form of money: gold.
It must be stressed that a well-managed fiat money system has considerable advantages over a commodity-based one, not least of which that it does not waste valuable resources. There is little to commend in digging up gold in South Africa just to bury it again in Fort Knox. The question is how long such a well-managed fiat system can endure in the United States. The historical record of national monies, going back over 2,500 years, is by and large awful.
At the turn of the twentieth century — the height of the gold standard — Simmel commented, “Although money with no intrinsic value would be the best means of exchange in an ideal social order, until that point is reached the most satisfactory form of money may be that which is bound to a material substance.” Today, with money no longer bound to any material substance, it is worth asking whether the world even approximates the “ideal social order” that could sustain a fiat dollar as the foundation of the global financial system. There is no way effectively to insure against the unwinding of global imbalances should China, with over a trillion dollars of reserves, and other countries with dollar-rich central banks come to fear the unbearable lightness of their holdings.
So what about gold? A revived gold standard is out of the question. In the nineteenth century, governments spent less than ten percent of national income in a given year. Today, they routinely spend half or more, and so they would never subordinate spending to the stringent requirements of sustaining a commodity-based monetary system. But private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the dollar’s decline. A new gold-based international monetary system surely sounds far-fetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support.”
But then, the author goes on:
“As for the United States, it needs to perpetuate the sound money policies of former Federal Reserve Chairs Paul Volcker and Alan Greenspan and return to long-term fiscal discipline. This is the only sure way to keep the United States’ foreign tailors, with their massive and growing holdings of dollar debt, feeling wealthy and secure. It is the market that made the dollar into global money — and what the market giveth, the market can taketh away. If the tailors balk and the dollar fails, the market may privatize money on its own.”
Sound money policies of Alan Greenspan? What might the author be thinking or wishing us to think with that?
But here’s a different take on the subject:
“You see, if central banking were an honest métier, there would be no reason to have it at all. Private banks could do the job better. But people are ready to believe anything. Somehow, they think that rich financiers and power-mad politicians get together to run a central bank for the benefit of the people! Well, I’ve got news: it doesn’t work that way.”
That, by the way, is from “Mobs, Messiahs, and Markets,” forthcoming this fall from the joint pens of well-known financial writer, Bill Bonner, and yours truly…….