|
Anyone who investigates the topic of gold-based money for a
little while soon runs into an incredible diversity of opinion,
accompanied by various proposals that are so divergent as to seem to be
coming from different planets. Along with this comes a bit of personal
backbiting as each one likes to claim his solution is best.
Many of the proposals are rather contrary to the actual practice of
gold standard systems worldwide, during the period 1800-1971. Others
follow that example closely.
Let’s meet the family.
The Pragmatists. I come from
the “pragmatist” tradition. The pragmatists feel that simply to put the
world’s money back on a gold basis, something like an updated and
corrected version of the Bretton Woods period 1944-1971, would be such
a giant accomplishment that it is silly to make things more difficult
by introducing various new demands. The pragmatists are mostly happy
working with monopoly central banks as they exist today, including the
Federal Reserve. They just want the Federal Reserve to act more like
the Bank of England and other successful central banks did during the
19th century, rather than indulging in today’s seat-of-the-pants
funny-money acrobatics.
Other people find that monopoly currency issuers like the Federal
Reserve are inherently prone to corruption, and would thus undermine
any new arrangements. The history of the Federal Reserve since 1913
certainly shows a trend towards corruption, although the history of the
Bank of England 1694-1913, as an effective monopoly currency issuer,
was a shining example of long-term discipline.
The Free Bankers. “Free
banking” is really a name for “multiple independent currency issuers,”
which may or may not have anything to do with the commercial banking
business. (They were combined in the past, but I think that any future
“free banking” system should have currency issuers that are segregated
from commercial banking.) During the 1789-1860 period in the United
States, hundreds of independent banks issued paper currency, all of
them using the unified “dollar” standard of 23.2 troy grains of gold. A
modified Free Banking system was in effect after 1863, effectively
continuing to the end of the 1930s although the Federal Reserve became
more and more dominant after its introduction in 1913.
The Free Bankers argue that a monopoly currency issuer is inherently
prone to corruption and abandonment of gold-standard principles. People
have nowhere else to go. Diversifying currency issuance insures that
any institution that becomes unreliable would find that it is shunned
in favor of better-run institutions. Also, the currency would be
theoretically free of control by any one party.
If you “End the Fed,”
you have to replace it with something, and a Free Banking alternative
(perhaps as a parallel currency) is commonly mentioned as a solution. I
did so myself in Gold: the Monetary Polaris (2013).
The Government Currency Issuers. Historically,
currency-issuing central banks (beginning with the Bank of England in
1694, which set the pattern going forward) were set up by private
bankers, with great ambition and effort,
basically as profit-making institutions. Issuing currency can be a
wildly profitable business, especially when done on a large scale.
Today, central banks are either supposedly nationalized, or the profits
from currency issuance are officially remitted to national governments.
But, some people think this is a bit of a ruse. In any case, being able
to control the central bank allows great influence in all sorts of
matters beyond profits alone.
Some people thus argue
that governments themselves should issue currency directly. Thus, all
the profits and advantage would go toward the public good, and the
currency would be free from the influence of the bankers. This notion
can teeter dangerously close to “Modern Monetary Theory” arguments, but
in principle the government would adhere to gold standard discipline
and not overissue currency.
This was particularly common among the governments of the American
Colonies from 1690 to 1789. They issued paper currencies directly.
Unfortunately, despite a nominal link to silver coin, they also blew up
their currencies over and over again via overissuance, culminating
finally in the hyperinflation of the Continental Dollar in 1776-1782.
China had a similar history during 1100-1450. Historically, governments
have tended to make a mess of things when they have been given direct
control of the currency.
The 100% Reservists: Given the
difficulties of leaving currency issuance to either the bankers or
governments themselves, some have argued that payment should be made
entirely with gold bullion itself. In essence, mining companies make
the money. I have chided some of these arguments unfairly with remarks
like “I can’t really see myself paying for my Amazon.com order by
Fedexing a gold coin to Seattle.” But, this was a misrepresentation.
Typically, these proposals involve some kind of payment system where
each banknote or checkable deposit account corresponds to equivalent
bullion held in storage. Thus it is a “100% reserve” system. This was
actually the norm throughout history, from 2600 B.C. until about 1800
A.D. As far back as Babylon of 1900 B.C., and earlier, monetary payment
could be made in gold or silver bullion, or also as a deposit transfer
(basically a checking account) recorded at the Temple, which served as
the central bullion depository and payments clearinghouse. More
recently, the 17th-century Bank of Amsterdam (in principle) served as
the bullion payment clearinghouse, in a Dutch monetary system otherwise
based on metallic coinage. Banknote issuance after 1800 was commonly
left to private bankers and then central bankers, who then tended to
maximize their profit with the use of debt as a primary reserve asset.
100% Reserve systems tend to be particularly robust, and immune to bank
insolvency or currency overissuance. It also removes the issue of who
receives the profits of currency issuance, since there are effectively
no profits.
Variants of this notion are already active today in institutions like
GoldMoney (beginning 2001) and its successor, BitGold, which is run by
the former CEO of Paypal Canada and is listed on the Toronto Stock
Exchange. Many other proposals are already on the table, sometimes
related to recent legislation liberalizing the use of gold as money in
states like Utah.
These “100% Reserve” systems may use banknotes, or may be “wholly electronic” like GoldMoney or BitGold,
which is a funny term for a system that could also be called “wholly
metallic.” In any case, the system can work well and eliminates many
issues related to either central banks or government currency issuers.
The main problem is that it could demand very large amounts of gold to
be held in reserve if applied on a global scale. However, smaller scale
systems could certainly be introduced with no particular issues, and
already have been.
The problem of small denomination – a coin below about a tenth of an
ounce (3 grams) becomes impractical – can perhaps be resolved with some
new technologies, for example “banknotes” of durable gold-impregnated
plastic in denominations down to fractions of a gram, which function as
full-weight coins. (The contained metal is equivalent to the face
value.) Plus, they look really cool.
It took me a long time to realize that all of these notions have
validity and could be made into a practical working system. Each has a
focus on certain issues, which then leads to certain conclusions.
Unfortunately, you could also use each of these arguments to make an
impractical and unworkable system, and there have been plenty of
examples of that too over the years.
Eventually, we will need a community of people who have mastered all of
these viewpoints. Embrace them all in principle; and then, choose one
that seems most appropriate. The United States, with its libertarian
tradition, might opt for the Free Banking or 100% Reserve model (or
both simultaneously, as a Free Banking model allows for many
variations). China, with its authoritarian tradition, might opt for a
government-owned and -controlled monopoly central bank that operates
similarly to the Bank of England in the 19th century. Hong Kong,
Algeria or Bermuda might piggyback upon another international
gold-standard currency, with a currency-board system that does not
require any gold reserves at all.
Each government will find the solution that makes the most sense. But,
to make an informed decision, you should be familiar with the options.
| |
