Embracing Stable Money Today


December 21, 2012

(This item originally appeared in Forbes.com on December 21, 2012.)

http://www.forbes.com/sites/nathanlewis/2012/12/21/40-years-of-floating-money-40-years-of-the-average-worker-getting-poorer/


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 money-tweaking tricks.

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 currencies today.

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 domestic level.

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 and euro.

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.