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It might seem that today we are deeply devoted to the Mercantilist paradigm
in monetary affairs: the notion of a floating fiat currency managed by a panel
of bureaucrats, to address an ever-changing menu of issues including
unemployment, exchange rates, financial markets, government funding, and the
interests of one group or another. Some people call this the Soft
Money paradigm, characterized by the “Rule of Man.”
But, I think it is important that quite a few governments have actually
abandoned this paradigm. They do not attempt to manage their economies by
jiggering their currencies. Rather, they adopt a simple fixed-value system:
the value of the currency shall be X. There is no domestic discretionary
element. This is the Classical paradigm, the Hard Money paradigm, in which
the “Rule of Law” is primary.
But what is “X”? In the past, it was gold. A “gold standard system” is a
system in which gold is the “standard of value,” i.e., “X”. A “dollar” was
once worth 23.2 troy grains of gold.
Today, lots of countries have the same sort of arrangement, but they use the
euro as “X” instead of gold. This includes the eighteen members of the
eurozone, all of which have given up any avenue of domestic money-jiggering.
It is true that the euro itself is a floating fiat currency, and that the ECB
does take into consideration the concerns of eurozone member states during
its funny-money decision-making process. However, we also know that the ECB
doesn’t really take orders from any one state, not even Germany, which is a
little miffed at the central bank’s latest money-printing scheme.
We also know that there are many Mercantilist economists who declare loudly
that any state that gets itself into trouble should have its own independent
currency, which can supposedly be jiggered by its own independent board of
incompetents to make all the boo-boos better, really we promise.
Thus, I would argue that the euro is basically serving as an external
monetary benchmark for these states, much as gold did in the past.
In addition, there are another ten small states and territories that use the
euro but are not officially part of the eurozone. Also, there are
twenty-eight countries, mostly in Africa, that have some sort of euro link,
mostly via a currency board system.
In total, there are fifty-five states and territories that have a Classical
fixed-value system based on the euro. The only difference between these “euro
standard systems” and a “gold standard system” is the choice of the “standard
of value.”
The Classical ideal in money is very common today.
But why use the euro as a “standard of value” instead of gold? The most basic
reason is stability of exchange rates, or what I call the “terms of trade.”
The smaller countries of Europe have always had a high degree of trade with
each other. This does not only include imports and exports, but also
financing and investment. Whatever the potential benefits of using gold as the
“standard of value,” the fact is that to do so would introduce a lot of chaos
into exchange rates with other euro-using states, and other countries as
well, which would be completely intolerable to businesspeople.
One of the primary attractions of a Classical fixed-value arrangement, rather
than an independent floating fiat currency, is to gain all the advantages of
stable trade relationships. That’s why Europe gave up their independent
currencies and created the euro in the first place.
This problem did not exist in the past. Before 1971, the major international
currencies, and most minor currencies, were fixed to gold. Thus, a country
that adopted gold as a “standard of value,” or “X” in a fixed-value system –
the role the euro plays today – would also have stable exchange rates with
most major trading partners. There was no conflict.
At some point, the euro may be so debauched as to render it completely
unacceptable as a benchmark of value in a Classical fixed-value system. At
that point, a government might either adopt another major international
currency as its monetary “standard of value,” or it might use gold.
If the euro reaches such a state – ECB chief Mario Draghi recently said he
intends to make another trillion euros appear out of thin air, I kid you not
– then other major currencies would also likely be close behind, except for
the Japanese yen, which would be far ahead.
Thus, other major currencies would not likely satisfy those fifty-five former
euro enthusiasts either.
Then they might turn to gold – which actually has a rather lovely track
record, and which actually was the monetary benchmark for most of those
countries for a very long time already.
But when might that happen? History suggests that such a changeover does not
happen until the former benchmark currency has been abused beyond all hope of
renewal.
Disaster. Catastrophe. I admit it holds a certain appeal.
However, there is an alternative: to introduce gold-based currencies today,
but to make them optional instead of mandatory. Thus, the present euro-based
and other fiat currencies would continue, but there would also be a
gold-based alternative.
At first, this gold-based alternative might not be very popular. It would
have a lot of exchange-rate volatility with the fiat euro, dollar, yen and
pound. Let’s be a bit Germanic and call it the goldmark, and give it the
traditional value of 2790 goldmarks per kilogram of gold.
As today’s fiat currencies gradually lost their viability, people might
decide, incrementally, that they want to keep at least part of their savings
in terms of goldmarks, not euros or dollars. Borrowers find that they cannot
issue debt or borrow money unless denominated in goldmarks; suppliers want to
be paid in goldmarks; workers demand wages in goldmarks; and producers demand
goldmarks in payment for their goods and services.
As more and more people use goldmarks (and other similar currencies that
emerge), for their own personal interests, they find that they can also
engage in trade with all the other people that use goldmarks, without the
issue of unstable exchange rates. Thus, the issue of chaotic trade
relationships gradually melts away.
But what if everything is fine? What if there is no disaster? People can
still use goldmarks as they see fit – perhaps as an investment product much
like the gold ETFs popular worldwide — but perhaps they would continue to use
fiat euros for most commercial situations. It works both ways. There is no
downside.
The only problem, it seems, is that people are not aware that such a thing is
possible, and in fact rather easy to do. Also, they don’t know how to do it.
But, these are minor
issues, really.
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