The emergence of a single-world currency is a central element of the natural tendency of the market economy
to expand, to unify all people, all regions and all nations in one global division of labor.
Since the collapse of the USSR and other centrally planned economies almost two decades ago,
the pace of this expansion has significantly accelerated,
bringing previously unimagined prosperity to countries like China and India,
while improving living standards in the US and other developed countries.
Unfortunately, the current semi-barter arrangement of national fiat currencies
that wildly fluctuate in value against one another
greatly impedes the growth of international trade and investment
that is the outcome of this process of peacefully integrating all nations
into the social division of labor.
The time is now right to scrap this chaotic monetary regime.
In its place, we must now consider implementing a bonafide world monetary system that will facilitate peacefully and mutually beneficial transactions between all nations.
Before describing such a system, let us briefly review the historical development of our current monetary arrangements.
The present disarray in international monetary relations is a result of continual and intensifying government intervention into the monetary sphere,
which culminated after World War II in the absolute monopoly and central planning of the supply of national fiat monies by central banks.
Government intervention in money began almost concurrently with the reintroduction of coinage into Europe in the 13th century.
Kings immediately recognized that money was the necessary means to greatly enhance their power domestically and expand their domains.
In order to acquire more money, the king established a royal monopoly of minting coins in his realm.
Once in control of the mint, the king began debasing the coinage, that is, reducing the weight of gold or silver in the coins he had issued,
while maintaining their face value and declaring them legal tender for all debts outstanding.
By retaining and coining on his own account the residual gold and silver that was shaved off and stolen from his subjects
When their coins were reminted at the lighter weight, the king effectively inflated the supply of money.
He then used this stolen money to pay for the building of more palaces, the maintenance of a royal court,
the bribery of powerful domestic interests, and the financing of wars.
In the latter case, the central importance of money in waging war quickly became generally recognized,
and a new principle that is still with us today emerged and was formulated into a maxim of political wisdom.
In Latin, pecunia nervis belli, that is, money is a sin use of war.
From the 13th to the 17th centuries, the kings used this device to the greatest extent possible.
There was, however, a natural technological limit to how much money a king could get his hands on by currency debasement under a gold or silver standard,
namely, the minimum size of a coin that could still feasibly circulate in exchange.
So by the 18th century, the kings and later, increasingly, democratic parliaments of the larger European nations
began to turn to the issuance of paper money to help finance their wars and other spending schemes.
Since the ability to inflate the money supply by printing paper fiat currency is practically limitless,
the result was that wars during the dawning democratic era became broader in scope, more bloody and more destructive,
beginning with the wars of the French Jacobins and Napoleon, including the American Civil War,
and culminating in the horrors of World War I.
Actually, many people believe that World War I would come to an end after a few months
because the treasuries of the various belligerents would quickly run out of money
to pay the troops with and buy weapons.
However, within two weeks after World War I started,
Every Single Belligerent Suspended the Gold Standard
Nonetheless, even during this period, it was never questioned that money was fundamentally a market commodity
and that paper money inflation was a wartime expedient that was to be terminated as soon as hostility ceased
after which a gold or silver standard would be restored.
Thus, for example, during the brief period of the Paris Commune in 1871,
The fanatical, revolutionary French Communards took over every single public and private institution in Paris, except for the Bank of France.
The latter institution, with its vast reserves of gold and silver, was left unmolested to continue operating the gold standard.
It was only with the acceptance of the ideology of central planning by most Western academics, intellectuals and policy makers between the First and Second World Wars
that government control the money supply came to be seen as a permanent and
desirable policy
one after the other the governments of european and north american countries
abandon the gold standard the nineteen thirties in favor of independent national
fiat currencies
which they tried to centrally plan in order to extricate their economies from
the great depression
this peacetime abandonment of the gold standard was unprecedented
again even these crazed communards abided by the gold standard
The experiment failed miserably and the international monetary disarray that resulted caused a huge
decline of international trade and a complete drawing up of international investment in
the 1930s. In addition, the political monopoly of national money supplies was indispensable
in financing the unimaginable and indiscriminate bloodletting and property destruction of World
War II and the imposition of fascist war economies by allied as well as axis governments.
Predictably, once governments had experienced the enormous augmentation of power that absolute monopoly of the money supply conferred, they were reluctant, understandably, to surrender it again.
Yet they also wished to avoid the monetary chaos and protectionism of the 1930s, which they dimly perceived had led to war.
So when World War II ended, the allied powers, primarily the US and Great Britain, primarily the US, imposed a pseudo gold standard known as the Bretton Woods system on the rest of the world.
And I recommend the book that David mentioned, The Monetary Sin of the West, to show that this system was doomed to collapse.
And no one but the Austrians and a few other continental economists saw this.
This system was designed to allow governments to have their cake and eat it too, that is, governments were free to continue to exploit their national monopolies of the money supply, again, especially the U.S., while international trade and investment were supposed to grow steadily under a regime of pegged exchange rates.
This system quickly ran to trouble as governments or their central banks inflated their money supplies at different rates, causing chronic and severe balance of payments problems.
The U.S. government in particular exploited its monetary monopoly to the hilt, building up a hugely expensive welfare warfare state in the 1960s,
which combined a domestic war on poverty with a cold war against the USSR together or all the while perpetrating imperialist hot wars and military adventures in smaller countries like Vietnam, Laos, the Dominican Republic and so on.
The Bretton Woods system eventually collapsed in the late 1960s and was finally interred by President Nixon in 1971 when he reneged on the solemn pledge of the U.S. at Bretton Woods to convert the dollar into gold at the rate of $35 per ounce.
Since then, the world has been in the throes of monetary disorder with numerous ad hoc intergovernmental treaties and agreements negotiated and then quickly and quietly cast aside.
All of these agreements have been futile attempts to reestablish the monetary order of the gold standard without abolishing the national fiat money monopolies, so governments in a way are always trying to reestablish the gold standard or what the gold standard did, but yet they don't want, they hold with all their power to their monopolies.
The gold standard will eventually win out. All fiat money systems will eventually collapse.
This is like trying to square the circle, doing both these things, having the order of the gold standard while having national fiat money monopolies.
It's like trying to square the circle or invent the perpetual motion machine.
Instead of criticizing these nonsensical policies, however, mainstream economists have jumped in with inane policy proposals of their own.
The intellectual level of these proposals is unwittingly betrayed by the titles their authors have chosen for them.
One is named by a very famous Stanford economist, A Gold Standard Without Gold, which sounds like the ultimate Randian heresy and nightmare, A is not A.
My personal favorite is A Crawling Peg, which sounds like the title of some cheesy 1950s science fiction movie.
In fact, the author, a former IMF bureaucrat, has provided a choice of variations,
a crawling peg with soft buffers or a crawling peg without soft buffers.
I will spare you the gory details, but suffice it to say that the proposal, like its name,
is a consummate product of a bureaucratic mind for which every detail must be centrally planned.
So, as a result, there continues in existence today a superannuated, an outmoded, quasi-border regime
with numerous national and now supranational currencies like the euro fluctuating erratically in value against one another
and undermining the emerging global division of labor.
Ironically, the latter-day followers of John Maynard Keynes,
who constitute the vast majority of a contemporary economics profession,
persist in referring to the gold standard in Keynes's hackneyed phrase as a, quote,
barbarous relic.
In fact, it is a national fiat currency that is a barbarous relic of a barbaric and bloody century.
Since the death of the classical gold standard in 1914, fiat money has financed homicidal dictatorships, two world wars, the incendiary and atomic bombing of civilian populations,
massive standing armies and a nuclear arms race during peacetime, ethnic cleansing and the economic despotism of socialist central planning.
Thus, the most important characteristic of an ideal world money is that its supply and value be determined completely independently of political institutions, including national governments, as well as supranational intergovernmental agencies and organizations, like the International Monetary Fund or the European Central Bank.
The variations in the supply and value of a viable world currency must be immune to the plans and machinations of the political elites, who always stand to benefit from deliberate inflation of the supply of money.
This means that the world currency must have its value determined wholly and exclusively by market forces.
Such a currency therefore must be a market commodity, whose supply, like any other commodity, is dependent on consumer demand and the technical conditions of production, such as technology and the relative scarcities of inputs.
Also, like all other market commodities, the money commodity must be free to fluctuate in value according to changes in the market forces of supply and demand.
demand. While overall money prices would continually rise and fall depending on market conditions, these fluctuations would be minor, as they were in the 19th century, and would not interfere with entrepreneurial calculations of profit and loss, and the efficient allocation of resources to the different branches and stages of production. We built up a tremendous capital structure that entrepreneurs did during the 19th century under the gold standard, despite the fact that prices fluctuated up and down, but nothing like they have in the
The immunity of the value of money to the influence of politicians and special interest groups and from large fluctuations in purchasing power caused by the intentional manipulation of its supply is the primary feature of what Ludwig von Mises called a sound money.
We don't want a stable money, which involves a central bank continuously and feverishly printing money to prevent prices from going down.
Okay, we never seem to worry about prices going up though.
We don't need a stable money.
What we want and what we need is a sound money
in the sense that I've presented it.
This brings us to this crucial question.
Is there a commodity available that is fit to function
as a sound global currency?
For if there is not, then such a currency remains
nothing more than an unattainable ideal,
an idle fancy, a utopian dream.
And we are then stuck with the grim reality of national fiat currencies, or worse yet, the nightmare of a world paper currency issued by a World Central Bank, and there have been proposals among academic economists for this also.
The commodity composing a sound world currency would need to be a blend of so many different physical qualities and attributes that its existence would be a literal marvel.
Almost any of the hundreds of thousands of natural resources, capital goods or consumer goods that one might name would be rejected out of hand.
Ordinables, cattle, wheat, PCs, Big Macs, diamonds, etc. None of these things would do for a lack of one or more important attributes.
First and foremost, such a commodity would have to consist of a substance that is both naturally rare and yet familiar to and widely desired by
This would ensure its general acceptability, the indispensable quality of a global medium of exchange. The item would have to be absolutely homogeneous, that is, identical in quality, wherever and by whomever it was produced, so that all that was relevant in valuing and appraising it was simply its weight. It would need to be almost unimaginable to be able to do so.
Unimaginably durable in all its uses, so that unless destroyed by fire or lost in marine or aeronautic disasters, once produced it would retain its original molecular structure and never disappear from the world, outlasting dozens of generations, over a hundred generations, of its producers and users.
Combined with its natural rarity, such durability would ensure that its supply changed very slowly over time.
This secular stability of supply in turn would lend itself to a relative but not perfect steadiness of value over time that is essential to entrepreneurial calculation.
At the same time, the material of which the commodity is composed would have to be both highly divisible and malleable,
so that it would be fashioned into the various shapes that were most convenient and desirable in monetary and non-monetary uses.
It would need to retain these properties of divisibility and malleability as it was repeatedly transformed between the shapes appropriate for monetary use and those appropriate for industrial or consumption uses.
And the stock of gold has been continuously transformed back and forth, specific pieces, from jewelry and other uses to money and then back again, okay,
without being destroyed, without disappearing from the world.
It would need to be...
To permit inexpensive and convenient transportation of the currency, it is also
important that the money commodity possesses a high value to weight
ratio, a property derived from its relative scarcity.
Finally, to minimize counterfeiting, the authenticity of the commodity must be easy to
verify
by direct inspection or inexpensive tests, these qualities of easy portability, great
visibility and malleability and ready authentication are combined to endow the commodity with the
low transactions costs required for a general medium of exchange. In fact, such commodities
blending such disparate qualities do exist and more successfully used for centuries as
general media of exchange in large parts of the civilized world from ancient Greece to
of 19th Century Europe and North America, and in China and India. I am, of course, referring to gold and silver. Unfortunately, the world never received the full benefits of these money commodities because, as I mentioned, government intervention in one form or another always influenced their supply and value. In an ancient Greek work, Economica, formerly attributed to Aristotle and compiled shortly after the death of Alexander the Great,
It was stated, quote, that only a monarch and not a provincial governor or city should be concerned with the issue of currency, unquote.
This idea that it was the exclusive prerogative of the sovereign to issue currency was picked up by the Roman emperors
and passed on to the medieval kings and even informed enlightenment thought, famously repeated in the U.S. Constitution.
Congress will have the power to coin money, etc.
In the 20th century, this idea has degenerated into the belief that money is primarily a tool of government policy which should be used by central bank bureaucrats to attain statistical goals set by their vote-seeking political masters.
Private property rights and money have essentially been abolished in all but name only, as ownership of the money supply has effectively passed to the state and its central banking arm.
This is exemplified in a chilling statement made by our current Fed Chairman, Ben Bernanke, shortly before he ascended to his exalted position as, quote, the second most powerful man in the world, unquote.
In November 2002, he assured the American public that the Fed had the means to fight an imminent deflation that the Fed had conjured up to terrify the markets and public into accepting a return to inflationary policies of the 1990s that had resulted in the high-tech bubble and its recessionary aftermath, which they were trying then to escape in the early part of the millennium, 2000-2001.
that Chairman Greenspan had repeatedly denied existed.
What Bernanke proposed was inflation pure and simple, and plenty of it,
as a panacea for an economy facing a falling price level.
Bernanke makes this explicit in the following passage.
He says, quote,
The conclusion that deflation is always reversible under a fiat money system
follows from basic economic reasoning.
A little parable may prove useful.
Today, an ounce of gold sells for $300. That was 2002, more or less.
Now suppose that a modern alchemist solves his subject's oldest problem
by finding a way to produce unlimited amounts of new gold that essentially no cost.
Moreover, his invention is widely publicized and scientifically verified,
and he announces his intention to begin massive production of gold within days.
What would happen to the price of gold?
Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet.
Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention,
before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy, Bernanke continues.
Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.
But the U.S. government has a technology called a printing press, or today it's electronic equivalent, that allows it to produce as many U.S. dollars as it wishes at essentially no cost.
By increasing the number of U.S. dollars in circulation, or even credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices and dollars of those goods and services.
We conclude then that under a paper money system, a determined government can always generate higher spending and positive inflation.
In other words, in essence, Bernanke is here proposing to risk destroying the value of the U.S. dollar to prevent a small decline in the price of commodities.
What he was reacting to was the fact that prices in Japan had fallen for maybe three or four quarters in a row in the late 1990s by about one percent per year.
and he and Greenspan had set off this, or attempted to set off this frenzy of fear that the deflation was going to be upon the U.S. soon, which was just total nonsense.
So what he's proposing is that the government announce a large increase in the supply of money to set off inflationary expectations.
In other words, as soon as people expect inflation, even if none has occurred, they'll immediately begin spending.
Well, this is an essential component of hyperinflation, okay?
That is, people fear the government's going to inflate the money supply so velocity increases, meaning that they spend money more quickly.
A French economist named Charles Rist once said, the government may be the master of the money supply, but the public is the master of velocity, meaning that
the government can start an inflation, and then it can get out of control because people fear that there will be more inflation in the future,
Bernanke proposes to use that mechanism to prevent a small deflation of prices, which, by the way, is a natural result of a market economy increasing goods and services and productivity over time. We had prices naturally falling in the 19th century, and we did not have any problems. We did not have any deep recessions as a result. Now that the U.S. financial system is melting down as a result of the inflation of the currency,
The inflationary policy of the Greenspan-Bernanke Fed, which began in 2002 and ended in around 2005, Chairman Bernanke has made good on his promise and is trying every trick in the inflationist's book and even devising new ones like the temporary auction facility to prevent the downward readjustment of inflated asset prices.
But the modern monetary alchemists that man the Fed really have only one device at their disposal
and that is to create money from nothing with the stroke of a pen or rather the stroke of a keyboard
as Bernanke has admitted in instituting a new world currency based on gold
it is of utmost importance to abolish every form of government control of money
This includes central banks, legal tender laws, sales and capital gains taxes on gold and silver, and especially laws that permit banks to treat customers' demand deposits as loans from those customers, when in fact they're promising to pay those customers back immediately.
This would really spell the end of the fractional reserve banking system, which again is supported by government laws and judicial decisions.
Money must become, for the first time in human history, an exclusively market phenomenon, its supply and value governed strictly by private property rights and voluntary contract.
Do I have one more minute?
I just want to pose the following question, which occurred to me.
Why is it that we're all afraid of falling asset prices,
or we're told to be afraid of falling asset prices,
like securitized mortgages, Fannie Mae and Freddie Mac bonds.
Why is that bad?
Okay? And on the other hand, why is falling price of gasoline and of oil and of oil company stocks good? Okay?
And also a sort of subsidiary question, why is it that I recently bought a car three weeks ago and the car dealers,
I went to Volvo and I went to a number of other dealers, were more or less gloating over the fact,
I went to some foreign car dealers, gloating over the fact that GM was in such trouble.
So when GM is about to go under, for example, or is having problems, GM and Ford, it's great for the competitors, right? It's a chance to expand at the expense of one's rival.
But what do we see in the asset markets? We see banks and financial institutions urging government, urging the Fed to bail out their fiercest competitors.
Why is that? That's all because of fractional reserve banking, okay? It's different, the banking industry is different than any other industry, precisely because we have this cancer of fractional reserve banking that has really eaten away at our financial system. Okay, thank you.