Gold Standard or Bust
Fixing the dollar before it’s too late
Aug 1, 2011, Vol. 16, No. 43 • By JUDY SHELTON
As the truth-or-dare battle over raising the debt ceiling moves toward a resolution of some sort, we are witnessing a unique political moment, with attention finally riveted on our nation’s fiscal future. We are about to learn whether there is such a thing as fiscal responsibility in a democracy where 45 percent of households don’t pay income taxes. Or whether any sense of moral obligation still attaches to paying your own way as a citizen. Chronic budget deficits are evidence of endemic political cowardice when it comes to reconciling government revenues with government expenditures. And our elected officials keep choosing the coward’s way: They “fund” excessive spending through borrowing.
So now that we’ve got some, should we short the euro?
Government borrowing is a convenient ploy for putting off financial inevitability for another generation—except for one huge problem. You can’t have sound money if you don’t have sound finances. If we fail to get a handle on government expenses under our current dire circumstances, the dollar is doomed.
Now some folks around the world might be happy enough about that. The dollar has been at the core of global finance since the end of World War II, as the preferred global currency for trade and capital transactions. One major benefit: It has enabled America to more easily borrow. Debt obligations issued by the U.S. government offer built-in appeal as the repository for dollars accumulated by foreigners. If you are China, say, and you sell much more to Americans than they buy from you, where better to stow that future purchasing power than in risk-free Treasury bonds issued by the United States? The dollar’s prominent role in global financial affairs makes it the most vital nonmilitary instrument of American power; it figures in 85 percent of foreign-exchange transactions, and dollar assets account for roughly two-thirds of the reserve assets of industrialized and developing countries. Of course, not everyone appreciates all those perks going to the United States—even when they realize that a diminishing dollar hurts the value of their own portfolios.
Still, this much is true for those who hold dollars, both U.S. citizens and central bankers around the world. Whether it’s the cash distributed to community banks by the Federal Reserve or the trillions in Treasury obligations peddled at home and abroad—it’s all U.S. government IOUs. Everyone who holds dollars is hurt when the U.S. government debases its currency.
People take dollars in the expectation they will be able to use them in the future to obtain something of comparable worth. They place their faith not so much in the “credit of the U.S. government” as in the eventual capacity of America’s economy to yield productive output. As government-issued claims against our country’s future output accumulate, there is a hollowing-out effect, with financial capital drawn away from the real economy. Real economic growth happens when private investors take their chances on innovative entrepreneurs—not when they are induced to purchase “safe” government securities.
Since the resources needed to pay for current government expenditures are not available, the government is laying claim to future revenues. The notion of money as a claim on tangible assets is thus rendered abstract. Defining the value of money becomes a matter of government dictate. That’s why it’s called fiat money, from the Latin for “Let it be done.”
Fear of losing the dollar as a meaningful unit of account has lately forged a curious confluence of interest among unlikely parties. There are those, mostly U.S. citizens, who use the dollar because it is America’s official legal tender; among these people, we hear increased protests against the Federal Reserve’s abuse of its powers to debase the currency. Then there are those who rely on the dollar as the world’s reserve currency; within this conglomeration of global players there are decidedly mixed feelings about the continued monetary hegemony of the United States.
This makes for an unexpected coalition for monetary reform. The decline of the dollar is linking the economic anxieties of Americans—on Main Street and Wall Street—with profound concern elsewhere in the world over whether America will continue to exercise global leadership. And while these seemingly disparate factions may not readily perceive it, within their mutual monetary angst may also be discovered a shared agenda for saving the dollar.