Federal Reserve Chairman Ben Bernanke went back to the classroom to educate young minds at George Washington University about the history and role of central banks and the Federal Reserve in particular.
On the topic of financial panics, Bernanke asks the students if they’ve seen the movie “A Wonderful Life.” Not as many students had seen the movie as he had hoped. Bank panics are a serious problem Bernanke explains. Banks borrow short and make long-term loans that are illiquid.
This would have been a perfect time to talk about unviability of fractional-reserve banking. However, Professor Ben avoided that and instead waxed eloquent about a perfect world where Jimmy Stewart would be able to borrow from a lender of last resort–the central bank– and FDIC deposit insurance would quell unsettled depositors.
Bernanke cites Walter Bagehot’s axiom that central banks must lend freely in a panic, against good collateral, at penalty interest rates. After all, the central bank doesn’t want borrowers taking advantage of cheap rates to get through the crisis.
No student hands shot up to question the Fed Chair as to how a Fed Funds rate of zero to 25 basis points could be defined as a “penalty rate.”
“Gold standards are far from perfect,” Bernanke said. “ They waste of resources,.” citing Milton Friedman’s quip about taking gold from one hole in the ground just to transfer it to other hole.
Gold standards are far from perfect because government bureaucrats have always been in charge of managing them. The mere fact that heavy costs and resources are involved to mine the yellow metal is one of the factors making gold a perfect money.
A gold-shackled currency takes away central bank flexibility, which bothers Bernanke. But the question is, how much Bernanke flexibility can the dollar stand before it falls apart completely?
The Fed Chair admitted that the gold standard provides price stability–but only in the long run. He stressed that there have been short-term periods of price inflation and deflation under gold. Well sure, prices increase and then correct, that’s what a gold standard does. Under central bank management prices just increase; either slowly, quickly, or catastrophically.
Exchange rates are fixed under gold thus, Bernanke told the students, shocks in the money supply in one country will affect other countries. He used the example that an accommodative monetary policy by his employer would cause inflationary pressures in China, because the yuan is tied to the dollar.
Bernanke cited speculative attacks on gold-backed currencies as a problem, saying that if it’s believed there isn’t enough gold backing the currency there can be a run on that currency. This is a human problem, not a gold problem. The same thing occurs more often under fiat currency systems. This is the way the market should work.
Amazingly, the Fed Chair rolled out the tired old “there isn’t enough gold to maintain a gold standard” argument. Showing a slide of William Jennings Bryant, Bernanke told of farmers struggling with debt that was fixed, while the price of their crops was dropping. Bryan called for a monetization of silver to increase crop prices.
Nigam Arora picks up on this theme in a piece for “The Trading Deck” on MarketWatch. Mr. Arora writes that Bernanke did a great job and thinks his “comments today on the gold standard may help those who are genuinely trying to make money from their investments.”
Arora writes that there just isn’t enough gold for the modern economy and the production of gold can’t keep up. He cites the Conference Board’s prediction that the world economy will grow by 3.6% this year, and gold production only grows 2-4% a year.
“The point is that the production of gold does not increase enough to accommodate growth in world economy,” Arora writes. “Then there is a peak gold theory which states that gold production has either peaked or will peak sometime in the near future. In contrast, the world economy will continue to grow.“
But growing the money supply doesn’t grow an economy: only real savings does. “Neither the Fed nor the government can grow the economy,” explains Frank Shostak. “All that stimulatory policies can do is to redistribute real savings from wealth producers to nonproductive activities. And these policies encourage consumption that is not supported by useful production.”
The redistribution created by the Fed’s monetary pumping actually weakens the economy over time as real savings is squandered on malinvestments. With gold as money, real production and savings is stimulated. Capital and savings flow to the most efficient and best producers.
Mr. Arora writes that South Africa is number one in gold mining followed by the US. Actually both of these countries are behind China and Australia, with Russia on the verge of pushing South Africa into the number five spot.
His bigger point is that countries without significant gold production would not be interested in a gold standard. No political class anywhere is interested in the gold standard because it limits government expenditures.
Arora’s hedge fund is short gold and owns inflation hedges “that have lower risk and higher rewards compared to gold.” He writes, “playing gold as a speculation based on momentum and confusing it with the gold standard and monetary policy without deep understanding of these subjects is a losing proposition.”
Arora’s arguments give us an idea how deep his understanding is: about the same as Chairman Bernanke’s.
Follow Circle Bastiat
Thank you for writing about this Douglas! I actually wrote an e-mail to Danny Sanchez requesting that someone take this task on. I work in a college town and I get a chance to mentor students quite often. Many students are watching these lectures and Ben’s comments have left the door wide open for refute. I appreciate you taking the time to set the record the straight. Taking it further, maybe a video series can be made to directly counter his points…You can paste his clips and then insert the truth.
Keep up the good work!
Bernanke really argued that there isn’t enough gold to run the economy? What are they teaching Fed Chairmen these days? It certainly isn’t economics!
The only real trouble with gold is that a lot of people have already bought into it. But with people like Bernanke around, the price of gold is bound to increase even more than it already has!
A gold standard is not my preference, and gold is not a perfect money in my way of thinking; however, a statutory gold standard, involving a monopolistic monetary authority effectively excluding alternatives and regulating gold bankers for political ends, can turn a less than perfect system into a disaster.
A gold standard competing with a silver standard and other standards has few of these defects, and with the advent of electronic commerce, competing currencies are more practical than ever. An electronic retailer, like Amazon.com, can easily support many currencies, with each customer seeing only his preferred currency. Amazon already operates this way internationally.
Soon, common retailers will support many currencies, and individual consumers will do business as though everyone else used their preferred currency. If an individual is not happy with his currency, because of price instability or whatever, he will switch to a competing currency. Technology supporting this competition is already well established, but at this point, if I want to switch, I must change nation-states.
Gold typically is not the capital backing banknotes under a gold standard; however, if too little capital backs a currency, a run is exactly what should occur. A bank run is a problem only if there’s nowhere else to run. If a bank overextends credit, its notes can depreciate. So what?
In a competitive system, knowledge of a bank’s unbalanced books would spread, and users of its notes would see prices rise in their preferred currency. Users expecting the inflation to persist could switch to a different currency. The bank would either change its business model or lose customers to the point of bankruptcy
One bank’s inflationary (or deflationary) credit policy is a problem for everyone only if everyone necessarily uses this bank’s currency. If everyone eats at McDonalds, everyone has similar nutritional problems too. A choice of restaurants seems a decent solution to this problem.
Bryan wasn’t simply calling for a monetization of silver to increase crop prices. He was calling for the U.S. mint again to coin silver as it had before Congress ordered it to stop in 1873, thus beginning the process of establishing an exclusive gold standard, arguably in contravention of the Constitution, which empowers states to make either gold or silver a legal tender.
Unfortunately, prior to 1873, the Federal government had effectively fixed the exchange rate between gold and silver. I don’t want states dictating any legal tender, but using two different metalic standards never required fixing this rate and never justified a monetary monopoly for gold.
Before the American Revolution, a dollar was a silver coin definitively. If anything, the dollar standard was a silver standard before gold bankers captured the political authority regulating their business. In the final analysis, the gold monopoly was a step on the road to ending free banking altogether.
Anyone who wants a gold standard should have one, but anyone who wants a silver standard should have one too. Any sufficiently large group of people preferring a particular currency should have their preference. Why should money differ from hamburgers in this regard?
I’m over my head here, Martin, but I have a question. I am in SF, and they experienced a coinage shortage in the 1830′s, and the state, as was common at that time, prohibited banks from issuing their own notes. The net outcome involved a gold rush and the building of the SF mint.
The freedom to use any currency is actually possible today, but your choices are amoung the various fiat currencies issued by central banks; the dollar and Euro are not much different in that respect, although there is arbitrage opportunities to trade of relative value fluctuations.
The problem in SF, as I understand it, is that businesses, but expecially individuals, did not want to accept anything but specie in trade, leading to the use of tokens issued by specific businesses (including brothels)for change.
Obviously, the larger the transaction, the greater the need and/or concern for conterfeiting, a major practical problem associate with non-standard coinage.
How does your proposal address this fundamntal problem?
On a related note, Section 31 U.S.C. 5103, entitled “Legal tender,” which states: “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.”
This also means that persons and businesses are free to accept any coinage or other forms of renumeration they choose in exchange for goods and services. Therefore there is no barrier to the use of other currency or coinage for private trade.
Why hasn’t his naturally occurred, since what you advocate is already allowed?
@Wildberry
I don’t know the history of SF, but I don’t see how the problem you describe is fundamental. Maybe people in SF in the early 19th century would only accept specie, but in my neck of the woods today, practically everyone accepts debit cards and no one accepts specie. I can easily live without a single coin of any description, but if I insist on spending only gold bullion, I starve.
Counterfeiting is a different issue, but frankly, the issue seems archaic to me. I rarely use coins in trade anymore, and I most often don’t use paper money either. I use electronic money, often in transactions with people I’ve never met and will never meet. I’ve ordered several hundred dollars worth of stuff from Amazon.com in the last few weeks. I don’t even enter my credit card number, because Amazon already has it. Antiwar.com deducts $50 from my bank account each month. I suppose they could deduct $500 one month, and I might not realize it for weeks, and recovery might be a major headache, but I don’t worry much about it, because I trust them.
Under the circumstances, why would I worry about counterfeiting? Counterfeiting is the least of my worries, and I worry little about stuff near the top of the list. I’m not even a young man. I’m fifty years old with three kids in college. My kids hardly know what specie is. Tell my kids that only gold is money, and they aren’t combative. They’re befuddled. They hardly understand what you mean.
Commercial networks based largely on trust, policed largely by their own members and exchanging large sums of money can and do exist. These networks are not theoretical. They exist and are growing rapidly. eBay and Craigslist and many similar sites are further examples. Online scams also exist, but they don’t last long, and they’re not hard to avoid in reality.
Bernie Madoff ran a very old-fashioned scam and sucked in billions, and if you want to run even bigger scams, you go into politics, but I’ve yet to hear of an online scam robbing grandma’s nestegg on a grand scale. A successful scam requires opaque relationships. People today are learning to leave completely in the open online. If you scam me today, your URL is poison tomorrow. You can start over with a new URL, but you won’t get far with that one either.
Private currencies aren’t strictly illegal in the U.S., and some exist; however, U.S. legal tender is hard to avoid. I must accept it in trade, because I must pay taxes in it. I could deal in multiple currencies, but convenience of accounting, economies of scale and network externalities favor a single currency (though less so in the future), so the state needs little force to push its fiat money into circulation and ultimately into a dominate role.
Suppose the United States relaxed its legal tender law. Suppose I could pay taxes in any currency I choose to accept. Government by law accepts my choice of currency, a certain percentage income I receive in this currency, a certain percentage of sales and so on. Government never sells entitlement to the tax revenue it collects, i.e. it ceases all borrowing. It never buys private securities in any currency, i.e. it ceases all bailouts of private creditors. Government pays its bills in the currency of its vendors’ choice. It pays its employees in the currency of their choice. It enforces contracts only in the currency specified in the contract. The Fed could continue to exist and issue its money, but it would just be another bank issuing banknotes against collateral. A stream of tax revenue could not be this collateral.
Under these circumstances private currencies could exist and become dominant. Without these restraints on the state, private currency is much more difficult to realize. Overwhelming force works.
Is it likely? I suppose not. The United States has nuclear weapons and can incinerate hundreds of thousands of innocent men, women and children in the blink of an eye, and it’s willing to do so, unapologetically, as a matter of historical fact. If it wants people to use its money, they will.
But a few hundred years ago, slavery was unlikely to end. Why stop hoping?
Martin,
This is what I’m getting at:
Amazingly complete post to a very good article! Thank you, your well written response, may yet help me explain to friends why any standard, is neccessary as opposed to the fiat currency now in use.
What an abortion of a post. Sorry, no edit function…
first time posting here, my reply was @ Martin Brock, not Wildberry, having scrolled to this point…
if you have not been receiving their e-mails, I could forward some, or find some method to post them here.
@ Wildberry
I do conduct alot of business in gold, whatever I happen to have. 14k, 10k, occassionally, what I find in the ground is tested with acid, before exchange. those whom I do business with I do so because they have a scale, and usually acid to verify quality. my purchasing ability fluctuates, because the dollar has no collateral, and is therefore unreliable. To adress, why don’t more people do this, the first thing I think is WHY does the federal government have such a large horde to prevent this particular standard? the most stable imo standard. and except that the federal government continues to arrest people regularly for it, It does happen with other standards quite often. I can’t remember them all, but the mises institute newsletters have repeatedly renewed my hope for this country sharing one locality or another that is accepting trade in their own currency
@Wildberry
I only say that I must accept many dollars in trade to pay taxes. If I wait until tax time, I pay dearly for the dollars, so I gain nothing by waiting.
I can’t choose a currency that converts favorably to dollars at tax time, because everyone knows that I must pay the taxes and when I must pay them.
Money is a medium of exchange as you say, but I may not use another currency and convert to dollars at negligible cost only at tax time. I must collect dollars throughout the year or pay more for the dollars at tax time.
The advantage of currency choice is a constraint on unproductive state spending.
I don’t want a fiat currency circulated by another state. I want a private currency of my choice. There is no reason for everyone in the U.S. to use the same currency, other than the force of the U.S. government. We can discuss alternatives if you want.
While the U.S. government forces dollars to circulate, you’re right, but you assume what you purport to prove here.
The fundamental difference is that the U.S. government forces U.S. dollars to circulate by taxing and spending. In the process, it organizes vast resources unproductively by precluding voluntary organization of these resources.
But I must continually collect these dollars or pay dearly for dollars at tax time, and so must everyone else, so I end up paying for gas in dollars. My employer won’t pay me in gold unless I accept a discounted salary, because he must collect dollars to pay taxes too, and the conversion is also costly to him. Also, he probably does much business with the state, directly or indirectly, and the state pays him in dollars.
Fiat money is necessarily costly compared with alternatives, because all of this state spending cannot be costless.
No private currency can replace the dollar overnight, except by act of Congress, which wouldn’t change anything.
Bitcoin has no intrinsic value, and it has supply problems similar to a gold monopoly that we can discuss. A Bitcoin bubble has already occurred. If we had free competition in currencies, I wouldn’t expect Bitcoin to win the competition, but other private alternatives would appear.
People can have standards of value without a state forcing a currency to circulate.
Americans commonly thought in Spanish milled dollars before the American Revolution, even though the colonies were British. The dollar was a silver coin minted by Spain. People don’t need a state to develop standards, other than the most essential, forcible proprieties.
We also pay taxes and wage endless war, but these habits are not inevitable.
People speak many languages as a matter of fact. If a single language is so vital, why doesn’t everyone speak English? I suppose a global superstate could force everyone to speak English. Would we all be better off then?
A British imperialist (or a neocon or an international socialist) might answer “yes”, but you’ll never hear this answer from me.
The monetary policy behind the dollar accounts for endless war and unproductive rent seeking.
This blog is barely a week old and already the spam brothers here have trashed it.
Meaning who? Nice to see you too…
http://www.youtube.com/watch?v=K6_zsJ8KPP0
@Martin Brock March 22, 2012
Yes, but the direct route seems to be to reduce taxes, among other things.
Yes again. If you want to play currencies, you have to engage with the market factors surrounding conversion of one commodity into another. This no doubt increases transaction costs, the benefit for which is unclear to me.
The way to constrain unproductive spending is to constrain spending, especially unproductive spending. Do we have the power to do so? I think so. To paraphrase Ron White, we have the power but not the ability.
I get that. And you have the ability, today, to formulate or participate in that endeavor. If we assume there is some market advantage in doing so, it should be available from the market. It isn’t. Why? I don’t think it is because of lack of permissible alternatives.
Without control of the monetary policies that support a particular currency, you are back in the same soup. To illustrate, if the dollar enters a period of actual hyper-inflation, I think you will see something like a modern version of the tokens used in SF, as I mentioned. What that would look like is a matter of interesting speculation, well beyond my expertise. But the fact that we haven’t reached that threshold (yet) appears to be the primary factor preventing what you propose, not government insistence on the use of US Dollars, except for those enumerated payments I mentioned.
No doubt taxes create demand for the currency, but the demand for a standardized medium is pretty strong on its own, it seems to me.
I don’t want to nitpick with you, but there are reasons, market reasons, that the dollar is the currency of international trade. If it was easy to substitute another currency, China and Russia would have already pulled it off. That does not diminish the other points you make, but I think what you purport is not going to give you what you seem to want.
All governments do that, don’t they? One of the first things a government structure needs is a currency. The fact that the same government that created the dollar also created the FRB is an important issue that cannot be solved simply by increasing the number of circulating currencies, I suppose.
And there you have it. Creating a Tower of Babel doesn’t help, does it?
I’m sure we might agree on many things that support this comment. The “costs” you refer to are not a simple element in the cost/benefit equation. Currency is a complex system, which I admit is somewhat beyond me. Affecting the “cost” is a function of control, and more importantly, which control policies to exercise. Merely increasing the currency options is (near) meaningless, in my estimation.
Yes, I agree. And these alternatives would have to appear within the context of a massive volume of transactions in the complex economy in which we live. These factors must be monumental, since no alternative has emerged. I think your analysis is slightly naive, no offense. There is nothing wrong with having faith in the markets, but I think money is a special problem that is more complex than you allow.
Yes, this may be true. On the other hand, having a state structure with a common currency has its advantages, too, as you pointed out elsewhere. In any case, having a relatively ubiquitous currency that people understand how to use facilitates trade. This is the primary factor that makes an established currency effective and difficult to displace. It is only when the debasement gets excessive that alternatives arise. We may well be near such an event.
Yes, and I believe this has something to do with why we have US “dollars”. There was also a shortage of currency in the colonies, similar to the SF story I shared, and use of the Spanish coin was a common solution. In fact, that calibration carried over, didn’t it? The currency that became established subsequently became valued relative to that Spanish coin. The rest is history.
Yes, I agree none are. The question is still which habits shall we change, and why? I presume we can also agree that not all taxes and all wars are inherently “wrong”. Any government requires some form of revenue, and self-defense is still a natural right.
I think this is a useful analogy. Why is it that most Americans don’t speak a second language, unless they have immediate cultural ties to somewhere else that speaks it? I think that unlike Europe, for example, it is rarely necessary in the US to get business done (7-11 jokes aside). In fact, one wonders why English is the international language of business, much like the dollar is the de facto currency?
On the other hand, why to some immigrants find it unnecessary to actually learn English to live here? As long as they stay within a specific ethnic context, they get along fine.
I think there is an interesting parallel here to the discussion of currency.
Yes, me either. But no one is literally forcing language (historically it has been tried and rarely works. Ukrane prohibiting Russian is a contemporary example), or currency conformance. Honestly, how odd would it be to pay your US taxes in Euros?
@Wildberry
Isn’t that route well explored? Doesn’t it lead to inflationary deficit spending? State spending is the problem, not tax rates. High tax rates that limit state revenue (a la Laffer) are not a bad thing. They’re a good thing, as long as useful commerce remains untaxed.
I admit that I favor currency competition for its own sake, because the theory interests me. I’m experimenting with an implementation myself. As a minarchist, I favor markets in everything that markets can effectively provide, and competition in money and credit is certainly possible.
The cost of exchanging currencies is not my point above. My point is that when I accept dollars makes no difference. Only the volume of dollars that I must ultimately accept matters, and if I must pay 30-40% of my income in taxes, this volume is huge. When everyone must deal in dollars to this extent, market forces make the dollar a practically universal currency, but it’s absurd to attribute the dollar’s dominant role within the U.S. to “market forces”. If one band of armed men credibly threatens to shoot me every other time I don’t deal in its money, while another gang only threatens to shoot me one time out of ten, the first band’s fiat money dominates. The question is: why does anyone threaten to shoot me for this purpose?
Transaction costs depend upon the number and nature of competitive currencies that ultimately emerge in the marketplace. The market can optimize transaction costs. It’s always possible to argue, almost always wrongly, that a monopoly provider is “more efficient” by appealing to economies of scale and the like. Empirically, it just isn’t true. Monopolies don’t economize in practice.
And currency exchanges aren’t as costly as you imagine in a multi-currency system. Most businesses would accept all of the most common currencies, pricing their goods differently in different currencies. Businesses did so in the nineteenth century, when the accounting was much trickier, and multinational businesses already do so today.
Today, computers do the accounting, so while it’s still tricky, consumers are largely oblivious to it. At Amazon, if you want to see prices in pounds or euros or Canadian dollars rather than U.S. dollars, you just use a different URL. I’m a U.S. citizen, but I travel a lot in my business. I’m in Canada now. I use my U.S. debit card here and hardly know the difference.
If a device, like my cell phone, shows me the price in dollars before I spend, the system I imagine exists even in brick and mortar stores, and this feature can’t be far away. Such devices probably exist already. I scan a UPC code, and the device retrieves the price from the store’s computer, retrieves an exchange rate from my bank and shows me the price in my currency. An electronic price tag could also detect my currency and display the price in dollars on the store shelf. This sort of thing will definitely happen if states don’t prohibit it. You’ll see it in international airports first. Once this technology is ubiquitous, the marginal cost of competing currencies is practically zero. The only impediment is the state.
I’ve used the same debit card to trade in pounds, euros, Canadian dollars, Taiwan dollars, UAE dirham, Serbian dinars and other currencies. I’m not discussing a wildly speculative theory here. Businesses accepting many currencies are already commonplace.
Good luck with that.
Distinction without a difference?
Ron Paul aside, I’ve basically given up on politics. I’m not interested in political solutions to state money. I’m interested entreprenurial solutions. Can these solutions succeed? I’m not betting my life savings on it, but I’ll bet a little savings and a lot of time. I am convinced of one thing. Technology makes the alternatives to monopoly money more practical than ever before. What can be usefully done will be done somewhere eventually, but I don’t expect it to happen through the political process.
Permissible alternatives are limited. Just ask von NotHaus. Within permissible limits, competing with a statutory monopoly is no mean feat.
Your say that a common currency is useful, in the way that a common language is useful. You’re right of course, but what if everyone had a “universal translator” a la Star Trek? You’d speak your own language, and everyone else would understand you in their own language.
With language, this idea is still far fetched. Computer translation isn’t nearly robust enough yet. With money, the idea is not far fetched at all.
I’m not sure you mean by “modern version”, but I expect future money to be largely electronic, whether or not it’s fiat money.
You’re right. A little coercion goes a long way toward circulating fiat money, because market forces favor few currencies anyway; however, technology is changing the meaning of “standardized medium”. I can have my accounting standard, and you can have a different standard at the same time. Computers and communications technology make this choice very practical. We both walk around the same world but see different prices in different currencies. Online, enabling this choice is easy, and the choice already exists. The world has changed a lot since the 1830s.
There are market and non-market reasons. The two interact. Not so long ago, the British Pound was the currency of international trade.
Not overnight by act of Congress. When Dave Thomas opened a Wendy’s restaurant in 1969, his Wendy’s was the only one. I don’t want a currency starting any other way, and I don’t much expect a currency starting this way to dominate fiat money as long as the state effectively forces its money to circulate, but coercive forces do change in a more liberal direction occasionally. It’s not impossible. In the next decade, it’s a very long shot. In the next century, who knows? Will Bitcoin or Ripple become common currencies? I doubt it, but I can’t possibly know, and I don’t want to know.
In 1969, no one knew that Wendy’s would displace Burger King as the second most popular burger joint in the U.S. in 2011. Will Wendy’s ever displace McDonalds in the number one spot? I don’t know that either, but McDonalds will fall from grace some day. Creative destruction is a powerful force.
Historically? No.
The United States government can be trusted to ruin its fiat currency. I don’t pretend to know how long it’ll take, but a competitive medium of international exchange is easier to imagine every day.
With a Universal Translator, a Tower of Babel is indistinguishable from everyone speaking the same language.
Currency options without meaningful liberty to use them don’t change anything. I can’t dispute this fact.
The special problem is statutory monopoly. States have sought to monopolize money for ages, and endless problems with various monopolies don’t dissuade them, but I see no reason to stop hoping. A few hundred years ago, expecting hereditary slavery to end was also naive, but it did end in most of the world. I’m not saying that fiat money is the moral equivalent of hereditary slavery, but I am saying that change is possible.
Technology is changing the necessary degree of ubiquity. People can now act as if their currency is ubiquitous even while their neighbors use a different currency and act the same way. I’m not speculating here. It’s already happening. I experience this change myself routinely. I was in Canada last week. I’m back in the U.s. this weekend. I’ll be back in Canada tomorrow. I’m living in a two currency world, but I hardly ever need to think in Canadian dollars, because computers automate the translation.
I agree. This event is an entreprenurial opportunity.
I want as little taxation as possible, because I want as few one-size-fits-all services as possible; however, I’m not quite an anarchist yet.
War is not self-defense. It is the defense of a state, typically from another state or would-be state. Subjects of a state may defend the state, and they may also defend themselves against the state.
The analogy is sound, but the currency translation problem is much simpler. Current technology already solves this problem very effectively. We’re literally on the verge of a Universal Translator for money. This translator makes a universal money obsolete.
If most people accept Euros at various rates of exchange, the U.S. government could accept Euros while still keeping its own books in dollars. The government accepts my Euros in taxes, converts their value to dollars at its exchange rate, and accounts accordingly. When it spends Euros in its account, it must spend them at the rate accepted by its vendors, but it must pay its vendors price in dollars in any event. If it needs to spend more Euros and fewer dollars, it might see a higher (or a lower) price in dollars at the time of purchase, but prices change all the time anyway.
Computers do all of this accounting. An IRS employee need never see anything but a dollar sign. When I spend U.S. dollars with my debit card in Canada, the Canadians don’t think in U.S. dollars any more than I think Canadian dollars, because we both have the Universal Translator. That’s not naive. It’s my daily experience now.
Martin,
OK, I can see how it would be basically trivial to exchange currency on any transaction. It is simpler than translating a joke into Russian, but I still don’t see the advantage.
Every time you convert something from one currency to antother, you are paying someone a spread. Any time you hold a currency, you risk fluctuations.
I just don’t see what is better is you handled your transactions like you propose. What do you gain?
I agree it is possible, and the technology is mostly in place now. But all currencies it the world (any that matter, anyhow) are fiat currencies tied to a central bank.
You have to store value in something, and unless you store gold, silver or some other precious commodity, you are basically dealing with the same situation, whether Euros or Dollars. I don’t see a solution to anything here, but I see it is possible to float among many currencies. SO? Why would you, as a consumer, want to do that? It just looks like overhead to me with little or no added benefit.
What am I missing?
@Wildberry
You won’t convert currencies often. Your bank will hold multiple currencies and optimize conversions. The actual transaction cost will be low, and you won’t be aware of it anyway, because you’ll see the cost reflected in the price of goods you purchase. We know these costs can be low, because banks already operate this way internationally.
You need not hold currencies yourself. The value of your currency will reflect the cost of your bank’s holdings, as it reflects inflationary credit policies now. If you don’t like the effect of your bank holding too many volatile currencies, you’ll switch, so banks won’t hold too many volatile currencies.
I just don’t see what is better is you handled your transactions like you propose. What do you gain?
I gain choice, which is an end in itself. I gain the benefits of competition among providers of money and credit. I gain restraints on the spending of the state to which I am subject.
Why McDonalds and Wendy’s? Can’t one burger chain provide the burgers that everyone wants? Why not grant McDonalds a burger monopoly? Wouldn’t life be simpler? Can’t a burger monopoly be trusted to economize?
And they’re all mired in a financial crisis. The U.S. is hardly unique in this respect. The Euro arguably is worse. The Yen is definitely worse. Basically, the dollar is saved currently by the fact that other currencies and related sovereign debts are so much worse, but U.S. politicians exploit this advantage incredibly, so I don’t expect it to last. Listen to Lew Rockwell’s recent interview with David Stockman at Lewrockwell.com.
Your money is not your store of value, except in the shortest term. When you have “money in the bank”, money is not your store of value. Bank capital, like the bank’s equity in mortgaged houses, is your store of value, because the bank’s obligation to you has priority over its obligation to shareholders.
Your bank can hold gold, with or without a gold standard, and this gold can be part of its capital, but even under a gold standard, these holdings are not the largest part of the capital backing your deposits, and I would also say that gold reserves are not money under a gold standard any more than your bank’s gold holdings are money now. Money is what you accept in trade only to exchange soon thereafter for something else. Money is not what you hold by definition.
The solution must abandon fiat money. I understand why you think this change unlikely, but unlikely events can occur.
You have the overhead of inflationary state spending fueled by the state’s money monopoly now. I expect the overhead of currency competition to be lower.
Martin,
I think you are hanging your hat on this:
To which you propose to attack with use of non-US dollars to do essentially US business. This is not going to do what you say, IMHO.
The fact is, as you already point out, you have most of what you want now. It is just not common practice except by those who are seeking arbitrage, and that’s pretty much a full-time job.
If what you propose has some advantage, and people generally have it available to them, yet it is not practiced, there is no doubt a reason.
It may be because they, as I, do not see it.
No. I propose currency not issued by the United States government. This currency could be issued entirely by U.S. citizens and circulate exclusively within the U.S., but I wouldn’t limit the options of U.S. citizens this way. If you want this sort of currency and enough other people want it, you should have it, but why force this currency to circulate?
If you doubt a specific assertion, we can discuss it.
I don’t know what you mean. I want currency competition as opposed to fiat currencies. I don’t have what I want at all. You might as well give McDonalds a monopoly and then say I have most of what I want because I have any food at all. I also want competition in education and other things that states increasingly monopolize, because I expect competition to improve results.
If you trade internationally, you interact with currency arbitrageurs without being an arbitrageur yourself. It’s called specialization and trade.
We have discussed the reason. Fiat currencies predominate because states force them to circulate.
People don’t see choices they don’t have. People don’t have meaningful choices in currency in reality. You use your state’s fiat currency, because it is your state’s fiat currency.
Currency competition does not exist where states establish fiat currencies, and states routinely do so, because states uniformly benefit from it. At one time, states routinely enforced slavery too, but this common practice was not itself a defense of the practice. You have called abolitionists naive a few hundred years ago, and you would have been right.
Correction: You could have called called abolitionists naive a few hundred years ago, and you would have been right. Again, I’m not suggesting that state money is morally equivalent to slavery, and I’m not accusing you of defending slavery. I’m only saying that reform is possible.
Martin,
To carry this discussion much farther takes me beyond any expertise I might need to argue persuasively.
You last point first; of course reform is possible, and in fact imperative. But that does not mean the roads of reform are clearly marked.
As far as currency goes, it seems to me that the challenge with forming a useful currency is tantamount to forming a new government, or convening a constitutional convention.
It is not, I agree, a matter of handling transactions in multiple currencies that is problematic, it is the establishment of an alternative, especially if your premise is that it would arise spontaneously from the populace, and not by government decree.
If we control our government (which we do only in theory, it seems) then we also control our currency. It is the monetary policy that is the issue, not under whose name a currency is issued.
You in fact issue you own currency now when you write a check, or use your debit card. It is only the calculation of value, as you rightly point out, that is denominated in a specific currency, and I agree, at any instant, once can be easily and cheaply converted into the other. It is the policies of debasement that destroys the value of money. Were it not for that, would you still be complaining?
As for not seeing choices we don’t have, yes I can agree. Conversely, we don’t have choices we don’t see. I personally do not see what you propose as a choice worth having. I already spend too much time and energy trying to counter the inflationary policies of the FRB.
As to what states benefit from, it is not having a currency, per se, but controlling the monetary policy, including the ability to debase the currency’s value. This has been the historical trend of state monetary policy, and we, meaning most countries with a central bank, which is most countries of any economic significance, are no different.
“No political class anywhere is interested in the gold standard because it limits government expenditures.”
This is the central point. Government is not there for serving but “ruling” and with the money in their hands they get far on the “ruling side. Criminals have take a risk not the government. The break laws, they kill and lie but that’s fine it seems.