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I’m kind of a big picture guy. I would like to see the government of
China issue a parallel
gold-based currency, in the form of banknotes and coins, for
widespread use within China and around the world — or, at least, to
sanction some private institutions to do so, as Hong Kong does
today. Full banking operations, using the new currency, would be
immediately available.
Then we wouldn’t have to talk about it. You could use it if you
wanted to, just as you might use the dollar or euro today. Or, don’t
use it.
In the U.S., however, people seem to like the grassroots, neighborhood
approach. Along those lines, many people seem to think that
making full-weight bullion coins is the way to go. This mirrors the
system that indeed was in widespread use in the United States at its
inception in 1789.
This is fine. You can have both options, simultaneously.
Unfortunately, the full-weight bullion coins approach isn’t going to
get very far, in my opinion.
Why not? Besides the very important considerations regarding de
facto legality within the U.S., and various taxes and so forth, we
don’t really have a shortage of high-quality bullion coins.
We have gold bullion coins from many issuers, including South
African Krugerrands, Canadian Maples, Chinese pandas, and the U.S.
Mint’s own Gold Eagles. All are available at excellent prices.
We also have plenty of silver coins, whether leftover 90%-silver
dimes and quarters from the 1950s, or newly-minted Silver Eagles
from the U.S. Mint.
We even have plenty of copper pennies, although they are called
“nickels” today. (The 5-cent “nickel” is 75% copper and 25% nickel.)
Unfortunately, this system, which worked reasonably well enough in
the pre-1800 era, hasn’t been feasible since the mid-1870s.
The “bimetallic” (silver and gold) system worked because the market
value of silver was very closely linked to gold for centuries,
meandering gently between a
ratio of about 15:1 and 16:1. They were effectively two
different versions of the same thing. This allowed silver to be used
as “small denomination” money and gold to be used as “large
denomination” money.
This 15:1 ratio goes back to Greek times, and earlier.
In the mid-1870s, something unprecedented happened: the market value
of silver dropped dramatically compared to gold. In effect, silver
was “demonetized” by something like a consensus vote of humanity.
Governments had to follow along, but they didn’t instigate the
change. Some governments (notably China and India) stayed on a
silver-based system.
Today, silver is no longer usable as a small-denomination version of
gold (or gold as a large-denomination version of silver). The
bimetallic coinage system doesn’t work today. That’s why the world’s
governments went to a “monometallic” gold-only system in the 1870s.
Rather, what we need today is a currency system that has a full
range of denominations, from largest to smallest. This is really
only achievable with paper banknotes and token coins, which is what
happened after the 1870s. If the gold parity is $20.67/oz., as it
was in the U.S. in those days, you could either take $20 of
banknotes and coins to the currency issuer, and get a 0.97 troy oz.
gold coin (the $20 double Eagle) in return, or take gold bullion (or
coins) to the currency issuer, and get $20 of banknotes and small
change, which you could use in your daily errands as
small-denomination money.
Silver was no longer needed as small-denomination money. Silver
coins continued, but as token coins, whose metal value was less than
the face value of the coin.
You could use such token coins today, instead of paper banknotes.
The main problem seems to be that they are easier to counterfeit
than banknotes, so they are usable only for very small
denominations.
Along with banknotes, you can have the full range of banking
services, including demand deposits and payment systems. Today, this
would include debit cards, personal checks, ACH transfers, online
payments, credit cards, Paypal, wire transfers, and all the rest.
You could even have a variety of encryption mechanisms, such as used
by Bitcoin. Indeed, you could have a “crypto-currency” like Bitcoin,
whose value is linked to gold, and have no banknotes and coins at
all. I wouldn’t recommend this, but it can be done. (GoldMoney had
services such as these for a while, with no physical banknotes and
coins.)
Unfortunately, simply making gold coins, such as the “gold dinar”
produced by the Malaysian state of Kelantan, is really not much more
than superstition, or perhaps a political show of support. A new
monetary system can certainly include gold coins, as it did in the
U.S. before 1933, but that alone wouldn’t be enough. It wasn’t
enough in the 1890s either.
In 1890, the U.S. currency system had a total of $1,429 million of
banknotes and coins. Within this, there was $484 million of bullion
coins, including $374 million of gold coins. The other
$946 million was paper banknotes — redeemable in gold bullion
on demand.
The United States’ 1800-style currency system wouldn’t work very
well today. But, the 1900-style currency system would probably be
just fine.
Despite promising moves on the state level, such as Texas’ recent
move to remove taxes and endorse the use of gold and silver as
money, the U.S. Federal government will probably remain opposed to
any viable alternative to the now-dominant fiat dollar.
But other governments are already anxious to replace King Dollar
with something better. I’m hoping the Chinese
government can figure this out. They have such a great
opportunity.
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