Fixing the Dollar Now: Why US Money Lost Its Authority and How We can Restore It, Judy Shelton’s new monograph, recently released by Atlas Network, argues a strategy for getting the US back to a reliable currency and away from the doom of debasement. For those not quite ready to start reading FreeBanking.org on a regular basis, Shelton’s book provides introduction and insight about what money is (or ought to be) and how we came to the current situation.
Starting with the constitution of the United States, we read about how George Washington wanted the federal money to be sound as opposed to the debased currencies of several individual states. Slowly, as with other constitutional verities, this concept was altered out of economic necessity — gold and silver markets continued evolving — as well as political expediency, as seen in the Great Depression to facilitate Keynesian stimulus.
Shelton repeatedly casts problems of inflation in terms of morality. In Shelton’s view, the current monetary arrangement constitutes an ongoing and growing breach of trust between the people’s money and the people. She writes, “Money is the language of commerce… Money allows us to establish priorities and meet obligations day by day” (44-46). I interpret this to mean that to allow money to fluctuate is no different than to let a liar get away with continual equivocation and false promises — it diminishes the ability of people to be honest with themselves and each other. Shelton proposes a handful of reforms that would move us toward a more honest dollar — a dollar more in line with the real economy.
How to do this? Shelton suggests a strategy that would “encumber” 18% of the federal government’s gold horde over the next five years. Each year, a fraction of this percentage would be available for redemption as an alternative option to a dollar return on new Treasury instruments. These instruments, called “Treasury Trust Bonds”, like the Treasury’s TIPS bonds, would be inflation-protected against dollar devaluation, but instead of using a greater number of inflated dollars as a hedge against inflation, these new instruments would use gold. Persons buying these treasury notes could receive their bond payouts in either federal reserve notes or the face-value specified amount of gold.
Shelton sees this as an accountability measure — the government risks giving up a greater amount of gold if it inflates the currency. Additionally, according to Shelton, this market process will generate price information about the real conversion rate between dollars and gold. Those who follow the dollar-gold ratio may wonder how different this will be than the current spot-market in gold. Currently, the high price of gold is seen by some as a safe harbor against market fluctuations—not a valuation of the gold-as-money itself. As Shelton writes, this is not itself a good situation as it indicates people would rather have their money in a holding pool than investing it in productive activities.
Now, I wonder if the US isn’t in such bad fiscal condition that it simply would not do this because of the expected loss from trading away the gold — both the immediate giving up of the gold and the further devaluation of the dollar from the reduction of gold backing, not to mention the poor signal about dollar value an increased dollar-gold ratio would send. The signal itself might send the markets tumbling.
Reiterating this point, a true fiscal commitment to reform would have to be made in tandem to Shelton’s proposed gold-convertibility. We need both. Her proposal goes against the grain of the last century of monetary policy. She says the government should start obligating itself to debts denominated in gold. But, as she notes in her history of monetary policy, the U.S. government has stemmed previous bouts of monetary instability by refusing to convert dollars into gold — first for citizens, then for foreign nations. Being accountable to gold is anathema to modern macro policy.
Shelton also mentions other possibilities including changing the Fed’s decision-making structure and goals, including a deliberative practice of incorporating gold movements into the open market activity decisions. She also proposes the more radical idea of allowing multiple, competing private currencies.
From a moderate reform perspective, which I believe is the only perspective that can win out, all of these could be made in a limited, testing way — in fact, we can’t expect a wholesale abandonment of the current policy set. It would seem politically prudent for the Paul Ryans of the Congress to offer a less daring plan to those who are less daring. Yet still a big enough signal could be generated by the experiment to start tipping us in the direction of bolder reforms. Driving out bad policy with good in a marginal, insidious manner. Gresham’s law judo-flipped.
While we don’t want a firesale in U.S. gold, it might be a wise maneuver to subsequently try a couple more moderate solutions based on the same concept. Why not allow limited issue (say in the form of commercial paper) of an instrument that is composed of gold and other commodities? Why not oil? The Treasury could issue instruments like the kind Shelton advocates, only instead the alternative payback mechanism would be private issues of commodity-based commercial paper — a form of real money. In this manner, the government would find itself more constrained by the real economy.
Shelton notes that our relationships with foreign countries hang in the balance. A movement toward gold might ease our relations with the Chinese. Shelton sees the U.S. position as principally important, as for the last half-century it has been the standard for other currencies — in lieu of a global gold standard. If we move to a gold standard (even incrementally), Shelton believes the others would surely follow.