Just as art can lead culture, intellectuals reacting to failed policies often point the way to a new political consensus. The article in today’s Wall Street Journal, “The Case Against Floating Currencies,” by Manuel Hinds is today’s Liberty Search because it is one more indication that we are at the beginning of the end of the 40-year experiment which has given the U.S. Federal Reserve and 150 other country’s central banks control over the value of their respective currencies.
The total freedom to create money given to governments by a floating exchange rate system has failed to promote global progress, employment and to smooth business cycles, points out Hinds, who served twice as the finance minister of El Salvador and as the chief advisor to the President on the dollarization of that country in 2000-2001.
Instead, the system of floating currencies that has now existed for nearly 40 years has created a Tower of Babel of competing currencies, with no mechanism for providing price stability nor a common numeraire that is coherent with today’s global economy. It has:
1) Fragmented international monetary markets at the very time that all other markets, including financial markets, are integrating into a single global market;
2) Led to recurring bubbles and busts, including the current commodity bubble and the resulting boom in emerging market economies;
3) Encouraged countries to engage in currency wars through competitive devaluations that no country can win but that do disrupt global supply chains and introduce an element of instability and risk into international commerce;
4) Failed to perform its “most elementary promise": absorbing international imbalances, leading to political confrontations between the U.S. and China among others.
By contrast, Hinds points out that the gold standard of the 19th century kept prices relatively stable across time and across all of the countries whose currencies were convertible into gold. And it provided an automatic mechanism to correct international imbalances. The gold standard achieved this not because of any mystical property of gold itself, but because it was a system that kept central banks and governments from tampering with monetary creation.
This article is the latest from a growing number of authors from universities, think tanks and governments in the U.S., Asia and Europe that have begun to discuss the advantages of restoring gold to a pivotal role in the international monetary system and that reflect growing disenchantment with the results of the current system based as it is on an unreliable, paper dollar.
The cumulative effect is to make the discussion of gold as a monetary policy option viable. Avoiding accountability for the failure of the current system simply by ridiculing the gold standard is now an unacceptable response from those who favor floating currencies. And, that’s how progress is made toward a new political consensus.
There are few policies as central to our liberty and our pursuit of happiness than a currency that reliably maintains its value over long periods of time – a standard that the paper dollar as completely failed to meet since the dollar/gold link was broken in 1971.
So, I invite your comments and questions about this vital aspect of restoring our liberty.