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This
was on Nov. 3. A general uproar ensued, with the dollar exchange
rate weak- ening and the price of gold surging. And when, last
Monday, the president of the World Bank suggested, almost
diffidently, that there might be a place for gold in today’s
international monetary arrangements, you could hear a pin drop.
Let
the economists gasp: The classical gold standard, the one that was
in place from 1880 to 1914, is what the world needs now. In its
utility, economy and ele- gance, there has never been a monetary
system like it.
It
was simplicity itself. National currencies were backed by gold. If
you didn’t like the currency you could exchange it for shiny coins
(money was "sound" if it rang when dropped on a counter).
Borders were open and money was footloose. It went where it was
treated well. In gold-standard countries, government budgets were
mainly balanced. Central banks had the single public function of
exchanging gold for paper or paper for gold. The public decided
which it wanted.
"You
can’t go back", today’s central bankers are wont to
protest, before adding, "And you shouldn’t, anyway".
They seem to forget that we are forever going back (and forth, too),
because nothing about money is really new. "Quantitative easing", a k a money-printing, is as old as the hills.
Draftsmen of the United States Consti- tution, well recalling the
overproduction of the Continental paper dollar, defined money as
'coin'. "To coin money" and "regulate the
value thereof" was a Congres- sional power they joined in the
same constitutional phrase with that of fixing "the standard of
weights and measures." For most of the next 200 years, the
dollar was, in fact, defined as a weight of metal. The pure paper
era did not begin until 1971.
The
Federal Reserve was created in 1913 — by coincidence, the final
full year of the original gold standard. (Less functional variants
followed in the 1920s and ’40s; no longer could just anybody
demand gold for paper, or paper for gold.) At the outset, the Fed
was a gold standard central bank. It could not have conjured money
even if it had wanted to, as the value of the dollar was fixed under
law as one 20.67th of an ounce of gold.
Neither
was the Fed concerned with managing the national economy. Fast
forward 65 years or so, to the late 1970s, and the Fed would have
been unrecognizable to the men who voted it into existence. It was
now held responsible for ensuring full employment and stable prices
alike.
If
only they gave it some thought, though, the economists — nothing
if not smart — would fairly jump at the chance for counter duty.
For a convertible currency is a sophisticated, self-contained
information system. By choosing to hold it, or instead the gold that
stands behind it, the people tell the central bank if it has issued
too much money or too little. It’s democracy in money, rather than
mandarin rule.
Today,
it’s the mandarins at the Federal Reserve who decide what interest
rate to impose, and what volume of currency to conjure. |