Let’s Meet The (Wildly Diverse) Gold Standard Family
December 3, 2015
(This item originally appeared at Forbes.com on December 3, 2015.)
Anyone who investigates the topic of gold-based money for a little while soon runs into an incredible diversity of opinion, accompanied by various proposals that are so divergent as to seem to be coming from different planets. Along with this comes a bit of personal backbiting as each one likes to claim his solution is best.
Many of the proposals are rather contrary to the actual practice of gold standard systems worldwide, during the period 1800-1971. Others follow that example closely.
Let’s meet the family.
The Pragmatists. I come from the “pragmatist” tradition. The pragmatists feel that simply to put the world’s money back on a gold basis, something like an updated and corrected version of the Bretton Woods period 1944-1971, would be such a giant accomplishment that it is silly to make things more difficult by introducing various new demands. The pragmatists are mostly happy working with monopoly central banks as they exist today, including the Federal Reserve. They just want the Federal Reserve to act more like the Bank of England and other successful central banks did during the 19th century, rather than indulging in today’s seat-of-the-pants funny-money acrobatics.
Other people find that monopoly currency issuers like the Federal Reserve are inherently prone to corruption, and would thus undermine any new arrangements. The history of the Federal Reserve since 1913 certainly shows a trend towards corruption, although the history of the Bank of England 1694-1913, as an effective monopoly currency issuer, was a shining example of long-term discipline.
The Free Bankers. “Free banking” is really a name for “multiple independent currency issuers,” which may or may not have anything to do with the commercial banking business. (They were combined in the past, but I think that any future “free banking” system should have currency issuers that are segregated from commercial banking.) During the 1789-1860 period in the United States, hundreds of independent banks issued paper currency, all of them using the unified “dollar” standard of 23.2 troy grains of gold. A modified Free Banking system was in effect after 1863, effectively continuing to the end of the 1930s although the Federal Reserve became more and more dominant after its introduction in 1913.
The Free Bankers argue that a monopoly currency issuer is inherently prone to corruption and abandonment of gold-standard principles. People have nowhere else to go. Diversifying currency issuance insures that any institution that becomes unreliable would find that it is shunned in favor of better-run institutions. Also, the currency would be theoretically free of control by any one party.
If you “End the Fed,” you have to replace it with something, and a Free Banking alternative (perhaps as a parallel currency) is commonly mentioned as a solution. I did so myself in Gold: the Monetary Polaris (2013).
The Government Currency Issuers. Historically, currency-issuing central banks (beginning with the Bank of England in 1694, which set the pattern going forward) were set up by private bankers, with great ambition and effort, basically as profit-making institutions. Issuing currency can be a wildly profitable business, especially when done on a large scale. Today, central banks are either supposedly nationalized, or the profits from currency issuance are officially remitted to national governments. But, some people think this is a bit of a ruse. In any case, being able to control the central bank allows great influence in all sorts of matters beyond profits alone.
Some people thus argue that governments themselves should issue currency directly. Thus, all the profits and advantage would go toward the public good, and the currency would be free from the influence of the bankers. This notion can teeter dangerously close to “Modern Monetary Theory” arguments, but in principle the government would adhere to gold standard discipline and not overissue currency.
This was particularly common among the governments of the American Colonies from 1690 to 1789. They issued paper currencies directly. Unfortunately, despite a nominal link to silver coin, they also blew up their currencies over and over again via overissuance, culminating finally in the hyperinflation of the Continental Dollar in 1776-1782. China had a similar history during 1100-1450. Historically, governments have tended to make a mess of things when they have been given direct control of the currency.
The 100% Reservists: Given the difficulties of leaving currency issuance to either the bankers or governments themselves, some have argued that payment should be made entirely with gold bullion itself. In essence, mining companies make the money. I have chided some of these arguments unfairly with remarks like “I can’t really see myself paying for my Amazon.com order by Fedexing a gold coin to Seattle.” But, this was a misrepresentation. Typically, these proposals involve some kind of payment system where each banknote or checkable deposit account corresponds to equivalent bullion held in storage. Thus it is a “100% reserve” system. This was actually the norm throughout history, from 2600 B.C. until about 1800 A.D. As far back as Babylon of 1900 B.C., and earlier, monetary payment could be made in gold or silver bullion, or also as a deposit transfer (basically a checking account) recorded at the Temple, which served as the central bullion depository and payments clearinghouse. More recently, the 17th-century Bank of Amsterdam (in principle) served as the bullion payment clearinghouse, in a Dutch monetary system otherwise based on metallic coinage. Banknote issuance after 1800 was commonly left to private bankers and then central bankers, who then tended to maximize their profit with the use of debt as a primary reserve asset.
100% Reserve systems tend to be particularly robust, and immune to bank insolvency or currency overissuance. It also removes the issue of who receives the profits of currency issuance, since there are effectively no profits.
Variants of this notion are already active today in institutions like GoldMoney (beginning 2001) and its successor, BitGold, which is run by the former CEO of Paypal Canada and is listed on the Toronto Stock Exchange. Many other proposals are already on the table, sometimes related to recent legislation liberalizing the use of gold as money in states like Utah.
These “100% Reserve” systems may use banknotes, or may be “wholly electronic” like GoldMoney or BitGold, which is a funny term for a system that could also be called “wholly metallic.” In any case, the system can work well and eliminates many issues related to either central banks or government currency issuers. The main problem is that it could demand very large amounts of gold to be held in reserve if applied on a global scale. However, smaller scale systems could certainly be introduced with no particular issues, and already have been.
The problem of small denomination – a coin below about a tenth of an ounce (3 grams) becomes impractical – can perhaps be resolved with some new technologies, for example “banknotes” of durable gold-impregnated plastic in denominations down to fractions of a gram, which function as full-weight coins. (The contained metal is equivalent to the face value.) Plus, they look really cool.
It took me a long time to realize that all of these notions have validity and could be made into a practical working system. Each has a focus on certain issues, which then leads to certain conclusions. Unfortunately, you could also use each of these arguments to make an impractical and unworkable system, and there have been plenty of examples of that too over the years.
Eventually, we will need a community of people who have mastered all of these viewpoints. Embrace them all in principle; and then, choose one that seems most appropriate. The United States, with its libertarian tradition, might opt for the Free Banking or 100% Reserve model (or both simultaneously, as a Free Banking model allows for many variations). China, with its authoritarian tradition, might opt for a government-owned and -controlled monopoly central bank that operates similarly to the Bank of England in the 19th century. Hong Kong, Algeria or Bermuda might piggyback upon another international gold-standard currency, with a currency-board system that does not require any gold reserves at all.
Each government will find the solution that makes the most sense. But, to make an informed decision, you should be familiar with the options.