The End of National Currencies?
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.
- 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.
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.
- 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.
- 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.
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.
Comments (16)
newson
re: parallel payment systems - whilst these do exist, it seems to me that there future is largely thwarted by the tax treatment of gold/silver. that is, any nominal currency gain gives rise to a capital tax obligation. domiciling the gold fund offshore may enable tax to be avoided/evaded, but opens up the pandora's box of fraud. chasing fraudsters in a different jurisdiction is a costly exercise. although crude, it may well be that in a financial meltdown, physical precious metals could be more easily used for barter and thereby fall under the tax radar.
Published: November 24, 2007 11:43 PM
John Reed
re: falling under the tax radar.
Given the actions currently under way against e-Gold and Liberty Gold, it seems unlikely that gold barter will get much traction with the general public.
re: parallel systems.
Why would anyone use gold for transactions while the legal tender laws supporting FRNs is in place? Holding (hoarding) gold against a currency collapse is not the same as using it as money.
Published: November 25, 2007 8:25 AM
HaroldC
The tax hurdle is generally considered the barrier to widespread use of precious metals as currency.
The hurdles certainly aren't technological. I see no reason why smart cards could not be used in every day transactions. The smart card would be connected to the depository bank. A transaction would create either a buy or sell order. The depository bank would make the necessary transaction and the vendor would receive the designated currency. The system could be made seamless with a fiat system.
The idea would be to severe the different functions of money. Use precious metals as the method for store of value and fiat as the unit of exchange. When fiat fails to maintain its value for even the length of time necessary for a unit of exchange, at that point precious metals would step in to fill all the roles of money and supplant fiat.
Published: November 25, 2007 9:52 AM
fundamentalist
Maybe OPEC will make the first move by pricing oil in gold. That would be great for all the world's economies.
Published: November 25, 2007 10:22 AM
Robert Blumen
To those bringing up the tax issue, this is a US issue. There are many places in the world where this is not an issue. Also, things like this can change. Ultimately the law tends to follow practice.
Published: November 25, 2007 10:57 AM
David White
HaroldC:
I agree, having posted this article several times previously:
http://www.cipe.org/publications/ert/e32/e32_2.pdf
As for the end of OUR national currency, the "Panic of 2008" might well do it:
http://www.upi.com/NewsTrack/Business/2007/11/19/forecast_us_dollar_could_plunge_90_pct/4876
Published: November 25, 2007 12:02 PM
mikey
"The present debate, growing out of the increasing frequency and severity of financial crises, pits on the one had a new breed of monetary nationalists who equate nationalistic money with national sovereignty."
I don't understand the above sentence.Can someone please explain ?Also, what exactly is "national sovereignty"?
Published: November 25, 2007 3:41 PM
Robert Blumen
There was a typo in that sentence, which I corrected.
What is meant by "national sovereignty" is roughly that the political institutions within a country are able to govern the country without outside pressures or influences. If a country becomes beholden to the IMF through assuming large foreign debts, or to the US, by hosting military bases, for example, then there is some loss of national sovereignty.
The point that Steil is making is that this particular group of thinkers and activists think that for a country to have its own distinct monetary system makes the country more independent, while for a country to be using someone else's money, or the world's money, is to give up control.
Some of this is probably based on the ideas of macro-economics, which teaches that counter-cyclical monetary policy within a region is important to fine tune and stabilize the economy of that region. One argument that one frequently hears is that the same monetary policy is not appropriate for different countries because one might be in recession at the time that another one is in a growth phase. Therefore, the argument goes, each country should have its own monetary policy, which can be tuned to the business cycle of that country. And therefore each country must have its own central bank to print its own currency. Not that I'm endorsing this view, I state it to explain it.
Published: November 25, 2007 4:33 PM
scineram
This happens in Europe. Hence the cry for lira, frank, mark, peso etc.
Published: November 25, 2007 5:00 PM
mikey
Robert-thanks for clarifying.In my view the final paragraph in your article adresses the heart of the matter.Central banks won't put themselves out of business.We should not expect any change imposed from the top down.Large transactions involving forward delivery will only be protected by contracts
specifying gold as payment, if paper money begins depreciating too rapidly.
I wonder how fearful of gold-as-money the central bankers and other powerful individuals are.How far would they go to suppress its use?
Regarding remonetization of gold for use by masses of people- I have been reading a lot of comments lately to the effect that it is legal tender laws that put the buyer in the drivers seat, giving them the option to settle in the more rapidly depreciating money. This may have been true at one time.However a strong case can be made that a fundamental change has occurred in the way people regard paper money. Today the seller thinks in terms of dollars or yen or whatever.If offered gold in payment he might accept, but would be mentally converting the value into units of currency he has known all his life.Thus legal tender laws are largely superfluous.True remonetization of gold will require a sea-change in the way people think of money.
Published: November 25, 2007 5:26 PM
newson
further to my earlier comments re: unfavourable tax treatment of precious metal accounts - i'm actually in australia (but the same arguments apply to all but the tax-haven countries). i find it difficult to believe that tax legislation would become more accomodating towards an inflation hedge like gold. quite the opposite, i think that a monetary breakdown would see higher taxes and a desperate bid by the tax authorities to plug all escape routes. hence my belief that physical will be easier to use in a direct barter situation, in much the same way as the black economy thrives on cash. the future of gold seems destined for the informal market until the existing system is completely repealed, something i could only envision after massive social unrest and societal breakdown. sadly i think this is the final destination, but it surely will be resisted vigorously by the powers that be and may take many years.
Published: November 25, 2007 8:34 PM
Anthony
Good article, many thanks.
Published: November 25, 2007 8:54 PM
David Hillary
The events of this year with ALD/NORFED and e-gold show the importance of not living in, incorporating in, having bank accounts in, having assets in, or doing business in, the USA.
There are plenty of civilised countries left in the world such as Switzerland, Hong Kong, Singapore and Panama to store physical and financial assets, and to undertake your main business operations and to secure financial data. Use of a combination of these places can provide effective protection, operational efficiency and avoid over-reliance on one jurisdiction. Obviously you need to actively plan your protection strategy to make it difficult and unattractive to try to 'take out' any of your structure, and to reduce the financial loss and operational disruption involved.
To serve and provide access to US customers, you can incorporate Nevada and other LLCs using nominees, and have some entities in reserve so that if the authorities take out one, another takes its place. Obviously you should be sure to keep balances in such bank accounts to a minimum by sweeping them offshore frequently.
Published: November 25, 2007 10:12 PM
Milo Minderbinder
Here in Europe we saw what can do the communist version of a centralised government. Especially the Eastern European countries just escaped from the communist system, immediately experienced the betrayal of the so called "democratic transformation". The communist government running into debt, created the conditions to take-over the transformation. Daniel McAdams correctly describes this process.
In the early years after the transformation some silent but very important changes has happened with the National Bank of Hungary. The government changed the National Banking Act giving up the right to print money. (from the libertarian perspective for someones this could be just nice and enough) From that point the money supply is created by the international money community and these countries pay interest rates for them. Once in this global World the money printing is exclusively in the hand of central banks, giving up or not giving up the money printing for some small countries is not enough to resolve the problem. Moreover, these central banks in fact are private banks who use the government as a cover. So they are "de jure governmental, de facto private banks".
From the perspective of those countries this means giving up "national sovereignity" and not else. And remember that not all national banks prints money! Like in the Animal Farm by George Orwell 'All animals are equal, but some animals are more equal than others.'
That doesn't mean that in these countries everybody agree with the current monetary system based on interest rate and they refer to "national souvereignity" as they are statists and oppose to private property. As Murray N. Rothbard in Ethics of Liberty clearly point out that 'the crucial question in society is not, as so many believe, whether property should be private or governmental, but rather whether the necessarily "private" owners are legitimate owners or criminals. For ultimately, there is no entity called "government" and acting in a "governmental" manner. All property is therefore always "private"; the only and critical question is whether it should reside in the hands of criminals or of the proper and legitimate owners.' (p.56) Thus, even if in these countries there are enough critics toward the local (not federal!) national government, these people does not want to give up completely all the form of national government. Ron Paul once mentioned, if you give up some of the national sovereingity, immediately there is the global goernment, the NWO.
The current government of Hungary (the former communists) are selling out everything possible for just nothing. Once they as communists where those who seized the properties, telling people (by coercion) that healtcare, public schools, retirment funds and all the capital goods are in good hands. Now citizens from these countries fight for at least the remaining capital goods installed as "common property" to not be wasted for fiat currency and they want settling of accounts for the entire robbery. But what is happening, the current government hand in hand with those globalist institutions finalizes the robbery which has begun in the communism. Some of the people calls piratization instead of privatization.
Several generations ruled in a counterfeiting monetary systems suffered so much distorsion in their property rights that there are too much "unjust" properties. In this context nobody should expect an easy transformation. Just utilitarians would accept all the current property titles as valid and are pushing the globalisation as is right now, like an oncoming crawler tractor with no driver within. That missing driver in the cabin symbolizes that everything is happening within a network of faceless institutions as no responsible can be found to be accountable for their actions.
Until the fundamental ethics of a system is not validated enough, the system easily can be ditched and at the end people will likely compare for example with Milo Minderbinder's actions
.Published: November 26, 2007 5:39 PM
newson
david hillary makes valid points in his post, but this highlights the very comment i was making earlier, ie that in high-tax jurisdictions (most of the western world), using gold as an alternative currency is going to put you at loggerheads with an aggressive tax department, hungry to tax your nominal paper profits every time you withdraw from your gold account for any transaction. as david hillary says, offshoring is the way to go for the wealthy/sophisticated, but the whole point of an alternative currency is to involve the population at large, not a savvy few. also, offshoring still has the problem of how to bring the money back onshore without attracting attention. tax authorities are interested in the use of debit cards from offshore banks.
Published: November 26, 2007 6:10 PM
Ethan
Actually I read David Hillary as saying that there is little reason for LIVING in the USA any more, so there would be no reason to bring anything back in. If you are earning money outside the US, simply spend it outside as well. Repatriating money is the big sticky problem: buy an investment property in Panama, earn money there, deposit it locally, spend it locally either on yourself or friends and business collegues. Maybe you will recieve intangible gifts or services from them stateside. The way I see it, you simply have to change completely your perspective of nationality, if you want to live free.
Published: October 1, 2008 6:52 PM