Fiat Currency: What Are You Going To Replace It With?
Fiat currency makes me nervous. As we saw almost two weeks ago, it is hopelessly vulnerable to manipulation. Too much money leads to inflation, too little to depression. In consequence, the global economy is forced to walk something of a tight rope guided only by frequently blundering central bankers.
There is, therefore, an understandable push to deprive inept appointees of the power of life and death over the economy and return to a currency backed by something. This might mean gold, or basket of metals, or something else entirely: the point, as I understand it, is to be able to swap your bits of paper for something else with intrinsic value so that the minute the government starts looking a bit shifty, you can, so to speak, cash in your chips.
Unfortunately, this makes me nervous, too. Possibly more so. Before the M.D.s in the Ricochet community start diagnosing me with something which explains my flightiness, allow me briefly to make a case against a gold standard, since this seems like the most favored option of those I have mentioned above:
- It derives much of its intrinsic value from cosmetic and industrial demand. Roughly 50% of gold is used for jewelry, and a further 10% in industry. A gold standard would therefore link currency value to fashion. Imagine if either gold became less desirable as a component of jewelry, causing the price of gold to decline steeply, or gold was discovered to be integral to, say, commercially viable nuclear fusion, causing the price to increase steeply. Both eventualities would play havoc with international trade unless the price of gold was set by the government and its movements strictly monitored and controlled (this precaution would, it seems to me, rather defeat the point of having a gold-backed currency in the first place).
- It is a volatile commodity. A related point to (1), but different. In the last 10 years the price of gold has increased by 440%. Some of this may be due to increased demand for jewelry by the new middle class in Asia and the depreciation of the U.S. dollar, but much of it has come from fears about the worth of other currencies. If the dollar had been seen even a quarter of this increase, exports would have surely dwindled massively. If you want a recent case in point look at Switzerland, which recently had to peg the CHF to the Euro because currency traders considered it a safe haven and were destroying its export-based industries - imagine how much worse this would have been if the CHF were backed by gold.
- The government still has the whip hand. I have never been able to understand why mainstream libertarians (if that isn't an oxymoron) want the federal government to have a monopoly on the issuance of currency. History has shown, I think we can agree, that governments are useless at being in charge of currency; why, therefore, tolerate its involvement at all? Hayek wanted to let banks issue their own currencies, so people could choose in which currency they wanted to transact their business. Why gold rather than this?
I'm sure that there are many counter-arguments to the points I have just made. Perhaps they don't apply to the same degree to other non-fiat currency options which others prefer. Let me have it, Ricochet.