January 8, 2007 – The above title is from a very insightful article about the international monetary system that appeared in the January 5th edition of London’s Financial Times newspaper. The full title is “Digital gold and a flawed global order”, so being the founder of GoldMoney and having been awarded three US patents for the invention of digital gold currency, this article naturally caught my attention.
It was written by Ben Steil, who is identified as the director of international economics at the Council on Foreign Relations. He is also reported to be the co-author of Financial Statecraft, which is a book I intend to read given what he wrote for the FT. And what was that?
Well, in a nutshell, he and I seem to have a similar view of the weaknesses of the present international monetary system. But we also share another view. Though he seems less certain than I about the merits of digital gold, he does identify it as a viable alternative for what now constitutes the international monetary system.
Steil begins with a critical review of today’s love affair with floating exchange rates, which though accepted as dogma now “would have been considered monstrous by most of the economics profession up until the last three decades of the 20th century, prior to which money accepted across borders had generally been gold, or claims on gold, for about 2,500 years. Even John Maynard Keynes, the arch-slayer of the last remnants of commodity money, was an adamant supporter of fixed exchange rates.”
He then goes on to explain that “Floating exchange rates have proved a source of tremendous periodic instability, yielding repeated currency crises in countries whose currencies are not acceptable for international transactions, but which build up imbalances in their national balance sheets through their imports of dollar capital.” It was these imbalances that ignited the ‘Asian contagion’ in 1997 as well as the Argentine peso crisis a few years later. In fact, it is these imbalances that have started dozens of currency crises in countries around the world since the gold standard was abandoned in 1971.
Of particular importance is the following statement, which identifies the consequence of these imbalances: “Monetary nationalists, who believe it natural that every country should have its own paper currency and not waste resources hoarding gold or hard currency reserves, must eventually demand capital controls.” To illustrate this point, Stiel notes that “this is precisely the path the Argentine government has been following since abandoning its dollar currency board in 2002.” But almost any country today can be used as an example.
Governments are using their national currency as a tool to pursue what they perceive to be their own self-interest, and I see the most extreme example to be the United States. Given that the dollar is the world’s reserve currency, the US government has a responsibility to ensure that the dollar meets the essential requirements of international money, just as gold did admirably before it was succeeded by the dollar.
In my view two attributes are paramount. First, any global money must serve as a neutral tool in commerce. The money cannot give one country an advantage over others because commerce – indeed, all economic activity – needs a level playing field to flourish. Second, it must be sound money, which means the unit of account needs to be unchanging. Just as a meter or a yard are known and accepted globally as a measure of length, money too needs to be an unchanging unit of measure. If these qualities are not achieved, international trade and commerce suffers as a result, which adversely affects everyone.
Because the dollar has not achieved these qualities, global economic activity is well below its potential. It is therefore not surprising that growth rates of countries today are well below those rates achieved during the period when the classical gold standard reigned supreme, as gold unquestionably meets the two essential needs for global money. But inferior global money is also a source of another concern – recurring instability.
“It was well understood before the Bretton Woods era that monetary nationalism would fundamentally change the way capital flows naturally operate, making of a benign economic force one that would necessarily wreak havoc with flexible exchange rates. The global monetary order that has emerged since the 1970s is now globalisation’s greatest source of vulnerability.”
While I am an advocate of increasing globalization and the beneficial economic activity that results as the opportunities for trade and commerce grow, globalization should be achieved without impairing national sovereignty. Some see this goal to be conflicted, and that one cannot be achieved without the other. I disagree. When gold is used as global money, its inherent non-national neutrality ensures a level playing field in commerce.
So what is Steil’s conclusion? “…the status of internationally accepted money is not heaven-bestowed and there is no way effectively to insure against the unwinding of “global imbalances” should China, with nearly $1,000bn (£509bn) of reserves, and other reserve-rich central banks come to fear the unbearable lightness of their fiat holdings. Digitised commodity money may then be in store for us. Gold banks already exist that allow clients to make and receive digital gold payments – a form of electronic money, backed by gold in storage – around the globe.The business has grown significantly in recent years, in tandem with the dollar’s decline.
As radical and implausible as it may sound, digitising the earth’s 2,500-year experiment with commodity money may ultimately prove far more sustainable than our recent 35-year experiment with monetary sovereignty.”
Radical and implausible? I don’t think so. As the article says, digital gold is already growing “significantly”, and none too soon.