Embracing Stable Money Today
December 21, 2012
(This item originally appeared in Forbes.com on December 21, 2012.)
The reason we have floating currencies today is to enable economic
management via currency manipulation. Central banks attempt to guide
macroeconomic factors like unemployment, economic growth, interest
rates, inflation and so forth by jiggering the currency.
This idea is very old, and was expressed in many forms by the
Mercantilist writers of the 1600-1780 period. The other idea,
equally ancient, is the Classical ideal of a currency that is as
stable, predictable, and free of human influence as possible. This
is typically represented by a value link of some sort, either to
gold, or perhaps another major international currency.
A country that adopts a value link, such as a currency board system,
gives up any ambitions to manage the economy with Mercantilist
Virtually all economists today will claim that the Mercantilist
option is the only one that is acceptable. Indeed, all the major
currencies such as the dollar, euro and British pound are managed on
this basis, with a policy committee that attempts to manage economic
conditions with monetary means. There are no gold standard
However, this apparent supremacy of Mercantilist techniques is a bit
of an illusion. The fact of the matter is, most countries in the
world today have some variant of a Classical approach. They give up
monetary management, and have some form of value peg.
For the time being, this has meant a link to a major international
currency, such as the dollar or euro. If a country adopted a gold
standard system today, the result would be violent swings in
exchange rates with other, floating currencies. This is because
gold’s value is stable, and the floating currencies’ values are
unstable. For now, stability of exchange rates has taken priority.
However, the goal is still a Classical focus on stability,
predictability, and freedom from human intervention, at least at the
The countries of the eurozone, for example, agreed some time ago to
abandon all forms of domestic money manipulation. The euro itself is
of course a floating currency, but no one country – not even Germany
or France – has very much influence on the ECB.
Virtually all of Eastern Europe, besides Russia, has also adopted
either the euro itself or some form of close euro peg, once again
abandoning any domestic money-manipulation strategy. Even Russia,
although it has a nominally independent central bank and currency,
in practice keeps the ruble in a close relationship with the dollar
China has had some form of a dollar peg since 1950. Today, it is
something of a crawling peg, but China too does not have significant
currency independence or much latitude for domestic money jiggering.
In Africa, fourteen countries use a euro currency board, and another
three countries use another form of euro peg. These governments have
also embraced the Classical ideal of Stable Money, free of
(domestic) human intervention.
A handful of countries in the Caribbean use the dollar itself, a
currency board link or another form of peg, including the British
Virgin Islands, Turks and Caicos, Bonair, Saint Eustatis and Saba,
Bermuda, the Bahamas, Barbados, Aruba and Belize.
Panama, Ecuador, El Salvador, East Timor, the Federates States of
Micronesia and the Marshall Islandss are dollarized. Zimbabwe is
effectively dollarized. The Gulf States of the Middle East and
Malaysia also have a dollar peg, as does Hong Kong, Macau and,
surprisingly, Venezuela and Lebanon.
This does not include those countries which, like Russia, seemingly
have a floating currency, but one which, in practice, the government
tries to keep within a close band with major currencies. This would
include most of the governments of Asia. Some countries, such as
Cambodia and Uruguay, don’t have an official dollar link but the
dollar is preferred in commerce over the local fiat junk.
It turns out that most of the governments in the world have some
sort of stable-value policy, in this way also giving up most, if not
all, of any ambitions to manage their economies with
money-jiggering. They learned this mostly from hard experience:
their own, home-grown money-jiggerers tend to be worse even than
those at the Fed and ECB.
There’s nothing particularly unusual about a Classical stable-money
policy, even today. The main difference is a small handful of major
international currencies. In the past, they were linked to gold,
just as dozens of countries link today to the dollar or euro.
The results were wonderful. From the beginning of the Industrial
Revolution in the 1770s to 1971, the world enjoyed steady upward
progress, although at times marred by wars and a Great Depression.
Since 1971, even by the U.S. government’s own rose-colored
statistics, the median full-time male worker made the same or less
than he did in 1970. With a little less statistical buffing and
polishing, the story would not be so happy. Over
forty years of floating fiat currencies, the average American
worker has been getting poorer.