Economic Policy, Gold Standard, Global Currency and Sustainability

The massive move to unbridled consumption began in the developed countries before 1971 and resulted in the decoupling of the US dollar from the gold standard. According to Mike Sheldock (MISH) in his article Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited and Hugo Salinas Price’s article The gold standard: generator and protector of jobs, the Bretton Woods Agreements of 1944 held that the US currency was the standard currency based on the concept that, at any time, if any country had an excess of US currency, they could demand an exchange of Gold from the US Reserves. Accordingly, every country would at least make the attempt to maintain a trade balance. In 1971, Nixon declared that the US would abandon this agreement and no longer pay back demands for gold at any price because they had already accumulated substantial debt through the printing of US currency to pay for their growing needs, essentially giving themselves credit that was backed up, until then, by their gold reserves.

Prior to 1971, as a result of US money being backed by gold, all other countries followed the US dollar. The US had an obligation to try not to allow themselves to get too far out of alignment. However, as the US continued to allow their trade deficit to grow, being the only country with the right to print US currency, they eventually found themselves with a substantial trade deficit. So much US currency was in the hands of other countries that they could not be able to pay it back in Gold without bankrupting or substantially depleting their gold reserves. As a result the US dollar was sharply devalued against gold and the price of gold has continued to rise ever since.

By abandoning the gold standard, the US opened the doors to printing as much money as they wanted giving themselves unlimited credit and an unlimited trade deficit. Now that severe trade imbalances are showing up everywhere, it is becoming more and more difficult to reconcile accounts without extreme devaluation of certain currencies and getting hold of trade imbalances.

What Mike Sheldock and others are advocating is a return to the gold standard. The problem with the gold standard is that it would still be essentially controlled by one country and the temptation for that country to print money would still be more than it could bare. Would he advocate that standard if Chinese currency was the central currency? Probably not.

Gold in fact, is nothing more than a mineral, no more meaningful than any other mineral except in the meaning that has been ascribed to it by mere mortals. The solution, in my perspective is not returning to the gold standard, but rather, a solution that was proposed by Russia and China during the financial crisis of 2008, (i.e. to move to a Global Currency), as I also suggested in an earlier article Global Economics, the G20 and a call from the past.

Some might argue that the problems in Greece, Portugal, Spain and Italy are as a result of their inability to fluctuate their currency against the Euro. I would suggest that their former ability to fluctuate currency caused a negative trajectory that finally became apparent after taking on the Euro as their standard.  Now, as a result of not being able to fluctuate their currency, they are having to address internal issues that exist long before the current crisis. However, that will eventually be straightened out. True it will require painful austerity measures to make the necessary social adjustments but after having done so, they will resume their course of living more sustainably.

Similarly, others would argue that the trade imbalance in China is because they won’t allow their currency to fluctuate against the US dollar. To some degree this is true. However, the introduction of an international currency would cause this problem to disappear altogether because a day’s work is a day’s work, irrespective of where it is done. The simple fact is that growing unemployment is as a result of unrealistic expectations on the part of some citizens in some parts of the world expecting that they can be better off than the rest of the world forever without equivalent productivity. It’s simply not a reasonable assumption. China’s growth in wealth is actually a good thing for the US because it implies that the process of equalization is beginning. It’s not that I would want anyone to suffer. Rather, in order for all of us to prosper, we need to prosper together and to do that, we have to be on more equal footing. The suffering in some parts of the world is simply unjust. The wealth that is being gained by a few very rich in the world is also unjust.

Imposition of a Global Currency would be a painful proposition and not something that should be done over night. I would propose that a timeline be set whereby the gold standard would be re-introduced for an agreed period, that all currencies be allowed to fluctuate within that period to allow for reasonable adjustments to the current trade imbalances, and with the understanding that after that agreed period, a global currency would be introduced.

Once there is a global monetary policy that recognizes currency based on human productive value, all of the nonsense trading, the artificial value of Gold, the unbridled credit given by the US to itself, and the unreasonable expectations of countries, disappear entirely. This would also bring about a more sustainable level of growth based on true exchange of value for value. Everyone would need to learn to live on a more level playing field. Also much of the world’s no-value trading (i.e. the forex) would become a thing of the past, taking away a tool that has allowed the rich to get richer and forcing traders who are providing no real value to anyone to something more valuable.

A radical thought perhaps but one that I believe will take the world much closer to solving some of it’s financial woes.

 

Until Next time,

Garth Schmalenberg

Please feel free to share this article with other by e-mail or by other means.

Comments are closed.