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The May/June issue of Foreign
Affairs, the organ of establishment policy, published The
End of National Currency by Benn Steil. Steil begins with a discussion of
currency crisis and the incompetence of central banks in managing them; then
proceeds to ask:
Are markets failing, and will restoring lost sovereignty to governments put
an end to financial instability? This is a dangerous misdiagnosis. In fact,
capital flows became destabilizing only after countries began asserting
"sovereignty" over money -- detaching it from gold or anything else
considered real wealth. Moreover, even if the march of globalization is not
inevitable, the world economy and the international financial system have
evolved in such a way that there is no longer a viable model for economic
development outside of them.
From there, Steil reviews the history of the
international gold standard, which he deems supportive of global capital
accumulation and monetary stability:
Capital flows were enormous, even by contemporary
standards, during the last great period of "globalization," from
the late nineteenth century to the outbreak of World War I. Currency crises
occurred during this period, but they were generally shallow and short-lived.
That is because money was then -- as it has been throughout most of the world
and most of human history -- gold, or at least a credible claim on gold.
Funds flowed quickly back to crisis countries because of confidence that the
gold link would be restored. At the time, monetary nationalism was considered
a sign of backwardness, adherence to a universally acknowledged standard of
value a mark of civilization. Those nations that adhered most reliably (such
as Australia, Canada, and the United States) were rewarded with the lowest
international borrowing rates. Those that adhered the least (such as Argentina, Brazil, and Chile) were punished with the highest.
This bond was fatally
severed during the period between World War I and World War II. Most
economists in the 1930s and 1940s considered it obvious that capital flows
would become destabilizing with the end of reliably fixed exchange rates.
Friedrich Hayek noted in a 1937 lecture that under a credible gold-standard
regime, "short-term capital movements will on the whole tend to relieve
the strain set up by the original cause of a temporarily adverse balance of payments.
If exchanges, however, are variable, the capital movements will tend to work
in the same direction as the original cause and thereby to intensify it"
-- as they do today.
The belief that
globalization required hard money, something foreigners would willingly hold,
was widespread. The French economist Charles Rist observed that "while
the theorizers are trying to persuade the public and the various governments
that a minimum quantity of gold ... would suffice to maintain monetary
confidence, and that anyhow paper currency, even fiat currency, would amply
meet all needs, the public in all countries is busily hoarding all the
national currencies which are supposed to be convertible into gold."
This view was hardly limited to free marketeers.
The trend toward "monetary nationalistm",
which Steil sees as ultimately destructive, grew out of the Keynesian
macro-economic management framework. Monetary policy makers in each nation,
it was argued, had to have the ability to fine tune the growth of money and
credit in each national economy, in order to provide macro-economic
stability. The present debate, growing out of the increasing frequency and
severity of financial crises, pits on the one hand a new breed of monetary
nationalists who equate nationalistic money with national sovereignty against
the globalist-IMF macro types who want a global central bank based on a
dollar standard.
But is there alternative to fluctuating national fiat monies?
So what about gold? A revived gold standard is out of
the question. In the nineteenth century, governments spent less than ten
percent of national income in a given year. Today, they routinely spend half
or more, and so they would never subordinate spending to the stringent
requirements of sustaining a commodity-based monetary system.
From the context, I believe that Steil means the
international gold standard as an institution managed by a coordinated
agreement of central banks acting with a common purpose. Instead, Steil
raises a far more interesting alternative: the privatization of money:
But 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 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.
Stiel would find common ground with many Austrians in
his contention that capital flow are not per se destabilizing:
The lessons of gold-based globalization in the
nineteenth century simply must be relearned. Just as the prodigious daily
capital flows between New York and California, two of the world's 12 largest
economies, are so uneventful that no one even notices them, capital flows
between countries sharing a single currency, such as the dollar or the euro,
attract not the slightest attention from even the most passionate
antiglobalization activists.
The article is rather
extraordinary piece to appear in such a mainstream journal.
I suspect that Steil is correct in his rejection of a centrally planned gold
standard. Surely the central bankers of the world will not all get together
and decide, at once, to put themselves out of the business of monetary
policy. The effectiveness of national monetary policy is still largely
accepted by most economists. But I do see it as with in the realm of
possibility that the market will choose gold as a parallel currency -- not
for small retail transactions -- but for international capital flows. What I
see driving this transition is the unfolding debt crisis and the ongoing
rejection of the dollar as the world's currency.
The national currencies might continue to exist in this scenario, but gold
would either be accumulated by central banks as a reserve asset, much as
dollars are now, or international corporation would start to price their
products in gold oz or grams, or perhaps to offer two prices, one a national
currency and the other in gold. Private payment systems to facilitate these
transactions do exist on a small scale already.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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