The True Gold Standard (Second Edition)
Key Writings: Hanke on the Gold Standard
It is an honor and great pleasure to deliver a few remarks on Prof. Timberlake’s profound book, Constitutional Money (Cambridge University Press, 2013). At 90 years of age, Dick is still at the top of his game. Why? I think the secret lies in what Winston Churchill said when he returned from the Boer War: “there is nothing more exhilarating than to be shot at without result.”
Dick knows all about Churchill’s feelings of exhilaration — literally. As recounted in his autobiography — They Never Saw Me, Then — Dick was a member of the 388th Bomb Group during the Second World War. The 388th was based in England. For his part, Dick flew his B-17 over the channel into Germany on bombing runs 26 times in 1944. Well, the Germans wounded Dick three times, but they never took him out — fortunately.
Since then, Dick has produced a steady stream of scholarly books and papers, in which he has gotten down into the plumbing of money and banking. He has been a target of many academic hacks — without result. This must have been exhilarating, too.
Now, let’s turn to Constitutional Money. First, allow me to say that I second the endorsement of my friend, the great economist Professor Leland Yeager. As Prof. Yeager, who is only a couple years Dick’s junior, noted on the book’s dust jacket: “Timberlake writes smoothly, with flashes of brilliant phrasing and an attractive mix of short and moderately long sentences.”
The American people might be surprised to learn that for the past 20 years a handful of lobbyists and lawmakers—mostly from states with mining and metal-processing interests—have been pushing a proposal to take away dollar bills, and force the public to use metal coins instead.
The most recent attempt is the Currency Optimization, Innovation and National Savings (Coins) Act, sponsored by Sen. Tom Harkin (D., Iowa). This proposed law would prohibit the issuance of dollar bills after five years and replace them with dollar coins. The otherwise obscure piece of legislation was recently catapulted into the spotlight when Coins Act co-sponsor, Sen. John McCain (R., Ariz.) made the somewhat dubious claim that switching to a dollar coin would mean higher-denomination tips for strippers.
The more serious Coins Act proponents have seized on the continuing budget battle in Congress, arguing that the legislation would save billions supposedly being wasted on the replacement of worn-out dollar bills. They've latched on to a 2011 Government Accountability Office study that projects a multibillion-dollar "net benefit" from the switch to dollar coins.
If you buy the GAO's analysis, which is based on questionable assumptions, you might conclude that switching to a dollar coin would improve the federal government's bottom line. But for all the GAO's calculations, the report's findings are negated by its admission that the public is unlikely to accept the change unless they are literally given no choice—which, of course, is precisely the point of the Coins Act.
For academics, the term "troubled currency" might be a term of art. But for people who are faced with such a currency, they know a troubled currency when they see one. Today, this is the case for millions of people around the world — most notably in Iran, North Korea, Argentina, Venezuela, Egypt and Syria.
A troubled currency is one in which users have lost confidence. When users no longer think a currency will retain its purchasing power, they attempt to dump it for a stable foreign currency (or commodities). As the demand for the troubled currency evaporates, its value vis-á-vis stable foreign currencies collapses, and prices for goods and services sold in the troubled currency soar. As this process develops, expectations about the currency’s ability to retain its purchasing power deteriorate, and a doom loop ensues. At the extreme, doom loops can culminate in hyperinflation — an inflation rate of over 50% per month. This, however, is rare. Indeed, there have only been 56 cases of hyperinflation.
Following North Korean supreme leader Kim Jong-il’s death in December 2011, many around the world had high hopes that his successor (and son), Kim Jong-un, would launch economic and political reforms. Unfortunately, in the year and a half since he assumed power, the new supreme leader has not delivered on his advertised economic reforms, and misery continues to grip all but those in North Korea’s communist ruling class.
During the past few months, North Korea has been the subject of outsized news coverage. The recent peacocking by the Supreme Leader – from domestic martial law policies to tests of the country’s nuclear weapons capabilities – has successfully distracted the media from North Korea’s economic woes.
Indeed, behind the saber-rattling, the missile tests, and the basketball games with Dennis Rodman, is an economic story – one with important geopolitical implications, not only for North Korea, but also for China.
Money matters – it’s a maxim of Prof. Milton Friedman that I repeat often in my columns. Since the Northern Rock bank run of 2007 – the “opening shot” of the financial crisis – the money supply, broadly measured, in the United States, Great Britain, and the Eurozone has taken a beating. Recently, in the United States, money supply growth has started to rebound, but only slightly. In the U.K. and the Eurozone, things are much worse. This is cause for concern, because the quantity of money and nominal gross domestic product are closely related.
Not surprisingly, in the U.S., growth has been anemic, at best. In the U.K., the economy has fluctuated between stagnation and recession. And, in Europe, growth has been replaced by the Eurozone’s longest recession ever. Indeed, 9 of 17 E.U. countries that use the euro are in a recession, including France, and Eurozone unemployment sits at a record 12.1%.
When it comes to measuring the money supply, we must heed the words of Sir John Hicks, a Nobelist and high priest of economic theory: There is nothing more important than a balance sheet. These sentiments were recently echoed by my Parisian friend, former Governor of the Banque de France Jacques de Larosière, in his 17 April 2013 lecture at Sciences Po.
BY STEVE HANKE: