Academic journal article The Cato Journal

Gold and Government

Academic journal article The Cato Journal

Gold and Government

Article excerpt

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. …

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