A World Currency for World Trade

A World Currency for World Trade
by Jacob Steelman

In the aftermath of the global financial crisis (from an Austrian perspective it is a market correction of the malinvestments caused by central banks and governments) a lot has been written about the cause of the crisis and how to prevent it from happening again. In September 2009 the BBC aired a documentary called "The Love of Money." The series focused on the daily events that unfolded during the collapse of the global financial system including the fall of Lehman Brothers as if this resultant consequence of the crisis was itself the cause of the global financial crisis. From this it was ultimately concluded that the greed of the Wall Street bankers and the lack of regulation were to blame for the global financial crisis. The greed factor may have blinded many to keep going when the warning signs were starting to pop up. This is not as unusual as one may think. We experienced these same phenomena during the dot com boom of the late 1990s. An inevitability sets in to follow the boom to its end confident that you will be smarter than all the others engaged in the same endeavor. While the BBC series concluded, as have many of the books and articles written by establishment pundits, that the cause of the crisis was Wall Street greed and lack of regulation, nowhere in the series did anyone raise a question about the role of the world’s central banks in causing this collapse of the new world order’s financial system.
A year earlier (2008) in the midst of the imploding US and European financial systems and the resultant bankruptcies, nationalizations and bailouts the People’s Daily, China’s official newspaper, called for a new global currency to replace the US dollar. Writing in the People’s Daily edition of 17 September 2008 Professor Shi Jianxun of Shanghai’s Tongji University said that "[t]he world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States." As yet nothing has been done to address the concerns raised by Professor Jianxun.
Professor Jianxun was right to express concern about the financial leadership of the United States and the United States dollar. He should be more concerned after the comments of Ben Bernanke the other week before two US Congressional committees (and the IMF’s recent report on the US banking industry’s need for more capital infusion) because it is clear that Mr. Bernanke has no alternative solutions to the ones he and other central bankers have been using. What about the Chinese taking world monetary leadership and implementing a new alternative such as a renminbi backed by a gold standard? It is clear from China’s recent creation of a debt rating service (Dagong Global Credit Rating Co. Ltd.) that they desire to participate in the financial market in a much larger way. Certainly a gold standard would bring about a much more stable world currency than exists with the floating currencies today and allow producers, distributors, retailers, importers and exporters in our globalized economy to do what they do best – provide goods and services at prices global consumers demand.

Should the Chinese need any support for this I suggest reading an interesting book on the subject by Nathan Lewis and Addison Wiggin called Gold: The Once and Future Money. The book comes in English as well as Chinese, Korean, French and German editions. In his book Lewis explores the history of the gold standard (in the US, England, Europe, Asia and China) up to the modern day and the changes resulting from Bretton Woods and Nixon’s end of the gold standard on August 15, 1971 which created our current "system" of floating exchange rates. He also has some interesting stories surrounding various currency manipulations and their impact on various political events including Wayne Angell’s (a governor of the Federal Reserve’s policy board) 1989 trip to Russia to recommend a gold peg for the ruble. Lewis sees the International Monetary Fund’s (IMF) recommendations of devaluations and higher taxes as responsible for many of the modern day country or regional financial disasters (for example the Asian crisis, the Mexican peso crisis, the Argentine crisis, etc.). The book also has an extract from a surprising 1997 exchange between Senator Paul Sarbanes and Alan Greenspan, then head of the Federal Reserve. Lastly, Lewis provides a recommendation for transitioning to a gold standard which is almost as simple as Nixon’s transition was in taking us off the gold standard. Lewis is a pragmatic capitalist and keeps his discussion concentrated on the history of the gold standard and does not explore (except by implication) the broader libertarian and Austrian discussions about the role of government in the economy and society.
Lewis argues from a pragmatic viewpoint that low taxes (including low capital gains taxes) promote economic growth (he discounts the commitment of politicians to cut spending) and the gold standard tends to keep an automatic check on government expansion and inflation. The benefits of a gold standard in facilitating international trade would far outweigh, and thus tend to minimize, government intrusions (government would become less significant in terms of a percentage of GDP). From a pragmatic standpoint I tend to agree that it is unlikely that we will get politicians, bureaucrats and special interests to voluntarily reverse centuries of government intervention and voluntarily relinquish power but morally and philosophically this is the goal for which we should be striving in order to maximize individual freedom as well as economic efficiency. This book is a must read for all Finance Ministers and anyone interested in financial history from a currency and gold standard perspective. If you are a Finance Minister of a country receiving recommendations from the IMF or its consultants you must read this book. Incidentally, Lewis would likely support the Chinese taking the leadership in establishment of a gold standard since he thinks they are less likely to be influenced by Western agencies such as the IMF and have a better track record in transitioning to a more capitalistic economy (as compared to the former Soviet Union which was 10 years behind the Chinese in commencing their transition).
In 1999 the US debt was "only" $3.6 trillion; the government was running a surplus and projecting to pay off the debt by 2015. What a difference years of large government intervention have made with expenditures for wars in Iraq and Afghanistan and other large government expenditures to be paid through inflation of the fiat currency by the Federal Reserve with the resultant malinvestments which this causes. It is not surprising then that questions arise about US financial management and the US dollar. It is time to adopt a global currency for a global economy – a private asset-based currency rather than a fiat currency which is subject to political whims, manipulation and wild swings in value resulting in continuous devaluations, massive malinvestments and destruction of savings. It is time to return to a gold standard for a global economy and eliminate the instability of fiat currency, the uncertainty of floating exchange rates and the game of multiple currency devaluations by countries seeking to gain some trade advantage.
The technological and financial revolution which has resulted in a globalized economy and more open markets among nations has dramatically broken down trade and other national barriers among countries of the world. While far from perfectly efficient (due to the vast array of national protectionist laws and regulations as well as multiple currencies) we have a global economy in spite of the attempts by governments to preserve the past with various national barriers. The least-developed nations can participate in the globalized economy along with their larger developed neighbors. So why do we still have over 150 national currencies in the world today rather than one global currency? Why is this nationalistic barrier to trade still standing? The currency and monetary system to be used in a modern globalized system of trade and development is simply too important to be left to the numerous central bank bureaucrats and power brokering politicians who have various agendas of a political nature rather than the facilitation of wealth creation through free trade, free markets, economic development and prosperity for the people of the world. A global currency should be in private hands and not under political control as it is presently.
The ruling elites of the developed countries must have sensed the train wreck that was about to happen in 2007 and thus began to question whether or not a private system makes more sense then the current system particularly in light of the financial crisis which began in August 2007 and remains with us today. In an article published in the Financial Post November 8, 2007 Benn Steil, Director of International Economics for the Council on Foreign Relations, says that private money is a real possibility if the United States does not "return to long-term fiscal discipline" (raise your hand if you think the United States government will return to long-term fiscal discipline).
"As for the United States, it needs to perpetuate the sound money policies of former Federal Reserve chairmen Paul Volcker and Alan Greenspan and return to long-term fiscal discipline. This is the only sure way to keep the United States' foreign creditors, with their massive and growing holdings of dollar debt, feeling wealthy and secure. It is the market that made the dollar into global money – and what the market giveth, the market can taketh away. If…the dollar fails, the market may privatize money on its own."
Mr. Steil goes on to say
"…private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the U.S. dollar's decline. A new gold-based international monetary system surely sounds far-fetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support."
While it is arguable (among non-Austrian economists) whether or not the monetary policies of Messrs. Volcker and Greenspan were sound (many, if not most, point the finger of blame at Greenspan for today’s financial problems), it is wishful thinking to believe for one second that Western governments and their financiers, their central banks, will maintain long-term (or even short-term) discipline in spending and creating money. Their track record to date is not good and is becoming worse by the day. The events since August 2007 and particularly the response by central banks and governments to the meltdown which began during the week of 15 September 2008 and thereafter clearly indicates that the prospects for a "return to long-term fiscal discipline" is poor. In a December 29, 2009 Wall Street Journal Op-Ed Benn Steil likened the current policies of the Federal Reserve and the US government to the monetary orgies south of the border which the US used to condemn. The appetite of politicians, bureaucrats and governments for expansion of power and spending is too great to resist and the bureaucrats at central banks are all too eager to accommodate the demands of the government and the politicians. It is the reason the world’s economy has been on a course toward economic disaster since the flood gates of fiat currency (initially paper money and now electronically created money) were opened in 1913 with the passage of the Federal Reserve Act in the United States.
The call for more global regulation and hence more government intervention is not the answer. The creation of money and management of the monetary system should be returned to a free (free from government intervention) private marketplace in the United States, the Americas, Europe, Asia, China, India, Japan and all other countries around the world. As recent events clearly show our property, our wealth and our lives should not be entrusted to government bureaucrats and power-brokering politicians who bow and bend to special political interests rather than satisfy private consumers’ demands as does the private marketplace. Let the private free market determine and provide what consumers want, what will be money and how the monetary system will function as the private market does with other products and services provided in the private marketplace. We would not think of the government providing our groceries (scarcity and long lines are the rule from such a system as we saw in the old Soviet Union and as we see in Zimbabwe today) so why do we allow the government to provide and manage something as important as our monetary system?
It is time for a new world financial system of private money and a private monetary system. Close down government-sponsored central banks in the United States and other countries and end the government monopoly of creating money and managing the monetary system which has brought the world financial system to near collapse. It is time to return to a private global gold standard for a global economy.