Gold standards that work

In previous posts I talked about how we discovered money, and about the failed Bretton Woods gold standard.  One must ask: is it possible to have gold as our money, yet still use paper or digital currency?  The answer is yes.

In 1971, could anyone have told the bad little US that they must honour their promises, and have forced the US to pay out gold for dollars?  Well, maybe the Soviet Union, but it would have started WWIII.  There was no (immediate) disincentive to the US to cheating its trading partners, because there was no global authority to force it to, and no bigger bully, so it did.

Can we imagine a US dollar currency system that might have worked, and that would not have required some bigger bully, or some global authority to force honesty?  Again, yes.

Suppose that the US actually adhered to their own constitution, and had never embarked on getting into the banking business, and the creation of currency for domestic trade was left to the market.  What might have happened then?  We would have to go back to pre-Jekyll Island, pre-central banking, to find a model that actually works.

Before the advent of central banking ushered in in the early 1900s, trade was conducted in gold and silver bullion and coin, and private banks would issue their own paper currencies.  Some might be convertible to gold, some not.  Those that weren’t didn’t last long.  Those that were, but that didn’t have enough gold backing also didn’t last long.

But, and this is an important point, there was a market for competing currency.  While the US “dollar” might have been well defined as 729 and 4 sixteenth grains of pure silver, paper dollars could be issued from all kinds of banks, some good some bad.  Some might have been shy a few grains of silver in the vaults.  Some not.  Banks that were prudent in their lending, and in keeping gold and silver reserves on-hand in case of depositors demanding metal had strong currencies that survived, and others didn’t.

What is critically important to catch is that it is the market that provides the disincentive to currency over-issue when currencies compete.  All that matters is that a market exist, with enough players that people can move their wealth if they suspect shenanigans, and the system will self-balance.  Evolution will ensure sound banks and sound currency as long as a bigger bully exists (the federal government) to force banks to convert paper (or digital bits that represent deposits) to gold, so that savers can take their savings to another bank with better practices.

Had such a domestic US currency system been in place, and the Bretton Woods global reserve system been put in place on top of it, it is true that over-issue of the domestic currency in order to support its use as a global reserve would have been avoided.

In the sixties, a fellow named Triffin noticed something going wrong with the US dollar and Bretton Woods, and coined a dilemma around it.  He saw a conflict between domestic and international monetary policy objectives.

The right answer?  Simple.  Don’t have monetary policy.  The only way to have sound money other than coins and bullion, which is antiquated and awkward, is to have competing issuers of specie-backed currency.  It is through the independent and uncoordinated action of the competing issuers that stability is gained.  This precludes having “monetary policy” per se.

And that would be a very good thing.

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