Heritage Foundation Conference on a Stable Dollar

Heritage Foundation Conference on a Stable Dollar
October 16, 2011

Earlier this month, I was invited to speak at a Heritage Foundation conference on a Stable Dollar in Washington DC. You will notice that this came right after the conference in Utah, and many of the same people were at both events.

I want to thank all the people at Heritage for putting on this event and inviting me to participate.

Here’s my presentation from the event:

Link to .pdf of Heritage presentation

Heritage was prodded in this direction by Steve Forbes and Lewis Lehrman, both of whom have had long-standing affiliations with the group. However, I think this was the first time that Heritage has run an event like this. I spoke with one of the Heritage policy analysts when the event was in planning stages, and it was clear that — although they were very sophisticated regarding all sorts of fiscal matters — they felt that they had a bit of a blank slate as regards monetary matters. Heritage is a “think tank” of course, meaning that it supplies research and background analysis to shape and support political agendas and policies. Recently, we’ve seen a clear trend among conservatives to present an alternative to the textbook Keynesianism favored by Democrats. While the Keynesians promote government deficit spending and some form of “easy money” in response to economic difficulties, conservatives are trending in a more classical direction. On the fiscal side, this means tax reform instead of spending, and some sort of “stable money” policy.

During the 1980s and 1990s, this “stable money” interest tended to take the form of something like this: The Fed has a “dual mandate” of maintaining stable purchasing power and low unemployment. The Republicans tended to emphasize the stable purchasing power, and the Democrats would emphasize the unemployment. In practical terms, this meant that the Republicans would favor a 4% Fed funds rate target, and the Democrats would favor a 3% target. In other words, the entire debate took place within the context of the Keynesian floating currency system, which appeared in 1971 after the end of the gold standard.

This was an outgrowth, I would say, of Alan Greenspan. Greenspan was always a gold guy, and thus created a (very) crude replication of a gold standard system within the context of the Keynesian floating currency system.

Septenber 23, 2007: The Greenspan Gold Standard

This worked acceptably well, so conservatives didn’t feel the need at the time to promote an alternative in the form of a proper gold standard system. However, the “Greenspan gold standard” was nowhere near as good as the real thing.

February 4, 2006: Was Greenspan Any Good?

Let’s also remember that both Republicans and Democrats favored “easy money” at some point. The Democrats favored Keynes-flavored “easy money” centered on interest rates, and the Republicans favored Friedman-flavored “easy money” centered on various measures of short-term credit. The alliance between the liberal/Keynes and conservative/Friedman “easy money” promoters formed the intellectual backdrop behind the end of the gold standard in 1971 — with the deed done by Richard Nixon, the Republican.

Today, people are getting rather nervous about (Bush-appointed) Ben Bernanke’s “easy money.” Indeed, they are starting to think that the whole Keynesian apparatus is bunk. On a grassroots level, support is growing for a more meaningful alternative to Bernanke’s Keynesianism, based on rules. For example, Herman Cain’s campaign platform reads:

Measurements must be dependable.
A dollar must always be a dollar just as an hour is always 60 minutes.
Sound money is crucial for prosperity.

When you give up Keynesianism, which is really Mercantilism, you are naturally led back to a more Classical viewpoint:

September 5, 2010: Stable Money
April 26, 2009: Two Monetary Paradigms

Once you decide that you want “sound money” or “stable money,” an ideal of a currency that is neutral and predictable, and doesn’t change value, then, in practical terms, you end up with a gold standard system. There has never been another sort of method to create “stable money.” (In the past, some used other commodities from shark’s teeth to silver, but they eventually concluded that gold is the superior system.) There was never a need to create another system, because the gold standard system pretty much did exactly what it was supposed to do. So, we already know where this is going.

Today, we’re getting a lot of enthusiasm for “stable money” as an alternative to Keynesian “easy money.” “Stable money” really means a gold standard system, just as the United States used for 182 years, from 1789 to 1971. I liken this to an airplane. Lots and lots of people are saying: “I want a plane. I want to be able to fly from New York to Miami in three hours.”

Now, it is up to the elite policymaking community to actually design, build, maintain and fly the plane. This requires sophisticated technical knowledge.

Unfortunately, regarding monetary systems, we are rather lacking in this sophisticated technical knowledge. It actually isn’t that hard — much simpler than building an airplane — but, nevertheless, if you don’t have it the inevitable result is disaster. The elites have been hesitant to make any promises that they are unable to keep. Unfortunately, the “Austrian”-flavored gold standard advocates of today, though having high principles in abundance, have perhaps an even more acute shortage of technical understanding. I think this is why they tend to favor “100% reserve” systems: not because they are necessarily better, but because they think they are simple enough that they can actually manage them. It’s true that a “100% reserve” system is inherently simpler and more stable, but I doubt that today’s “Austrian” gold standard advocates could even manage that.

In practice, a 100%, 20% or 0% reserve system operates in almost exactly the same way. The main difference is that having more gold in a vault gives you a larger cushion for error.

I should note that, in my general disdain for the level of discussion and understanding today, I am not directly referring to the other presenters and attendees at the Heritage conference, who, in my opinion, were really the best in the U.S. regarding conservative monetary thinking today. One thing that amazed me is what a small circle it really is, just a couple dozen people, most of whom are directly related to the Robert Mundell/Arthur Laffer group that first began to gather in the 1970s. Most of them are also directly involved in financial markets, which is probably why they have a grasp of how economies really work rather than a collection of platitudes they got from some Murray Rothbard books from the 1960s.

The politicians can’t be expected to be monetary sophisticates — although Ron Paul does a pretty good job. The politicians rely on the technical people to deliver. Thus, politicians are also hesitant to make any concrete proposals, and instead rely on rhetorical vagaries like “sound money.”

The conservative-minded elites are beginning to realize that they have some catching up to do. This process is just beginning.

Of course the conference had a high portion of gold standard advocates. However, it is worth noting that there weren’t really any advocates of some other sort of system. Nobody was promoting doctrinaire “inflation targeting” or some Friedman-esque “stable expansion of the money supply” scheme. People seem to have realized that these are really just alternative flavors of the Keynesian floating currency system. The ECB today doesn’t have a “dual mandate,” it has a single low-inflation mandate. But look at the euro: is it a meaningful alternative to the dollar in any way? Not really. It is just another floating currency, managed (badly) by a high priest class which is not recognizably different than our high priest class. Brazil has taken “inflation targeting” about as far as it can go, but, despite a rather strong currency in recent years, Brazil hasn’t shaken its reputation for monetary pratfalls. The Friedman-type stuff was tried in the early 1980s, and basically abandoned as unusable.

The rest of the world has tended to adopt a currency peg of some sort with either the euro or dollar. For them, “stable money” has a specific meaning — a value peg with a major international currency. This is mostly for trade reasons. Smaller countries have higher trade as a percentage of GDP, so they are dramatically affected by exchange rate fluctuation, although even the larger countries have the same difficulties. Thus, they get many advantages by maintaining stable exchange rates even though the target currency may be rather unreliable and chaotic. A gold standard is really the same idea, replacing a floating international currency with gold. A gold standard is a “stable exchange rate with gold.”

The last thing I would note, at both the Utah and Heritage conferences, is the widespread interest and acceptance of the “multi currency” idea. Thus, we wouldn’t just switch the Federal Reserve onto a gold standard, we might introduce a parallel gold-linked currency and allow people to do business in whichever one they liked best. This has a number of advantages, especially for other countries. One of the big difficulties for other countries is making the switch from a dollar- or euro- linked currency framework to a gold-linked currency framework. If a country like Vietnam were to adopt a gold standard system tomorrow, the Vietnamese dong would have tremendously volatile exchange rates compared to the dollar or euro — basically, it would look just like the price of gold in dollars or euros. This would cause rather traumatic business dislocations. However, the Vietnamese government may also recognize that the dollar or euro are currencies on their way to absolute failure (or maybe they are), so to simply maintain a dollar or euro link is not a long-term strategy for success either. By allowing Vietnamese people to do business either in dollars, euros, the floating Vietnamese dong, or some gold-linked currency, then this question of transition is resolved. People will do whatever they feel is best, naturally migrating toward one currency framework or another at the appropriate time. Or, perhaps, doing business in multiple currency frameworks simultaneously. Indeed, these parallel gold-linked currncies might quickly become international currencies. Just as you can spend U.S. dollars in Mexico today, you might find that you can just as easily spend State of Utah Gold Dollars in Mexico. I can easily see a situation in which a gold-linked currency, whether privately issued or issued by a government, becomes widely accepted internationally even though it may not be the most dominant currency in any one country, even the country of its origin.

The other advantage of the parallel currency idea is that it gives the elites some time to experiment with their gold standard systems on a small scale. Everybody understands, instinctually, that they need some time to practice and perfect their techniques. You wouldn’t want to take a coast-to-coast flight in the Wright Brothers’ original prototype. Let them establish a track record of success, and learn from each other, and perhaps also have a few accidents on a small scale where not too many people get hurt.