Gold and government.

• Author: Shelton, Judy
• Position: Essay

Something has gone terribly wrong with the world's monetary system. It's evident that some kind of fundamental reform needs to be implemented. The question is: Can governments be trusted to issue sound money, or is money too important to be left to the politicians?

Is it reasonable to expect governments to abide by the discipline required to maintain sound money? Or have we set up an irresistible temptation by empowering governments to control both fiscal and monetary policy? Would it make more sense to return money to markets by privatizing money issuance?

In this article, I propose a reform that would bring the power of market forces and competition to bear on the challenge of providing sound money while still giving government a principled role in the monetary system.

My recommendation is to introduce a special class of medium-term U.S. government debt obligations to be designated "Treasury Trust Bonds (TTBs)." These zero coupon bonds would grant the holder the right to redeem in either gold or dollars. This article provides details on how TTBs would be structured and how they might spur a transition toward new global monetary arrangements.

The issuance of TTBs would fit into a pro-growth economic agenda based on limited government, low taxes, rule of law, and global free trade. Linking the dollar to gold through TTBs would be a bold step toward completing the original economic agenda laid out by President Ronald Reagan, which called for a stable dollar. Consider it a "trust-but-verify" approach to sound money.

A Gold Standard or Competing Currencies?

Most citizens would be hard-pressed to imagine a world wherein money was furnished by private issuers, and where consumers had a choice in deciding which brand of money to use for any given transaction at any given time. We live in nation states, after all, and have grown accustomed to seeing iconic symbols and the familiar visages of prominent national heroes on our currency.

Yet the dismal failure of central banks to furnish a product that successfully fulfills the three basic functions of money prompts the search for new solutions. Money is meant to provide (1) a medium of exchange, (2) a meaningful unit of account, and (3) a reliable store of value. It seems straightforward enough; indeed, given that money has such useful purposes, one would think that people engaged in commerce would demand only the highest quality.

We have settled instead for a mishmash of exchange-rate regimes around the world dominated by two failing currencies, the dollar and the euro. The dollar comes closest to being a global medium of exchange, though its efficiency is greatly reduced because its value constantly fluctuates. Those resulting distortions from minute-to-minute trading also wreak havoc on the dollar's unit-of-account function. How can a global economy function optimally when the foremost monetary unit of account for measuring value shifts unpredictably across borders and through time? And with regard to time: Why are we required to use money that is destined to lose value? The Federal Reserve and other central banks embrace targeted rates of inflation that may seem low (normally 2 percent inflation), but they inevitably erode the purchasing power of currency over time--so much for the notion that money should provide a store of value. Beware when a central banker refers nonchalantly to "benign" inflation.

In short, our monetary system is broken because it rests on the uncertain anchor of pure fiat money. We have just gone through a financial crisis that has traumatized whole economies and undermined global confidence in the existing political order--including support for democratic capitalism. It is rooted in our worldwide monetary dissonance. We need to fix the present discretionary government fiat money regime.

It's more than an economic prescription; it's a matter of ideals and principles. Without sound money, free trade and free markets will always be subject to the whims of government. When money becomes an instrument of government policy, market prices are distorted and resources misallocated. Government expands and economic freedom contracts. Interest rates are manipulated to serve the financing needs of cash-strapped governments rather than the private sector. As a result, the calculations of buyers and sellers, borrowers and savers, are thrown off by la]se price signals that draw productive resources and financial capital into misguided pursuits of profit.

Monetary reform is crucial in the wake of the global financial crisis. If we are to emerge from this prolonged disaster, we must establish a foundation for genuine economic recovery. The world desperately needs sound money to restore the foundation for sustainable growth versus the artificial stimulus of paper profits unrelated to productivity.

Sound money means a convertible currency such as existed during the classical gold standard. As Austrian economist Ludwig von Mises (1980: 185) noted:

The gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties and prosperity for all) called "sound money." For Mises, the automatic restrictions imposed by gold could be relied on to prevent the government from indulging in fiscal irresponsibility. "If, under the gold standard, a government is asked to spend money for something new," Mises (1979: 65) observed, "the minister of finance can say: 'And where do I get the money? Tell me, first, how I will find the money for this additional expenditure.'"

But even if Mises believed that going on a gold standard would successfully deter government from budgetary malfeasance--even if he thought political ambitions would be stymied by the realization that money could not be compromised to accommodate chronic deficit spending--his compatriot from the Austrian school, Friedrich Hayek, did not.

Indeed, Hayek believed it had become impossible to subject government to outside discipline through the imposition of a commodity standard. He did not even trust government to run an honest gold standard. According to Hayek (1979: 1-2):

I am afraid I am convinced that the hope of ever again placing this discipline on government is gone. The public at large has learned to accept, and I am afraid a whole generation of economists has been teaching, that government has the power in the short run to relieve all kinds of economic evils, especially unemployment, by monetary stimulus. Experience has shown, however, that rapid increases in the quantity of money--although they may temporarily reduce unemployment--become in the long run the cause of much greater...