It’s Time for Pro-Growth Monetary Reform
Reposted from The American
By John A. Allison and John L. Chapman
Nixon’s decision four decades ago to end the gold-exchange standard was a catastrophic error. Today, sustainable global prosperity requires the restoration of sound money.
Forty years ago, on August 15, 1971, President Nixon took to the airwaves to declare that the U.S. Treasury would no longer redeem foreign demand for gold in exchange for dollars. Because the United States was the last country with a currency defined by gold, it represented a historic decoupling of the globe’s currencies—literally the money of the entire world—from the yellow metal. For the first time in at least 2,700 years, dating to the Lydian coinage of now modern-day Turkey, gold was money nowhere in the world. And for the first time ever, the world’s monetary affairs were defined by a system of politically managed fiat currencies—that is, paper money run by governments or their central banks. Four decades on, a comparative review shows Nixon’s decision to have been a catastrophic error, and indicates the need for fundamental monetary reform.
The Importance of Money to Sustainable Economic Growth
Rather than being a source of macro-stability, central banks that manage fiat currencies are themselves the causal agents of repeated boom-and-bust business cycles. Economies grow via three interconnected phenomena, none of which would be possible without a well-functioning monetary unit: (1) the division of labor, specialization, and exchange; (2) saving and the accumulation of capital for investment; and, (3) efficient allocation of scarce resources via a system of prices and profit-and-loss.
We would all be poor if we had to produce our own food, housing, clothing, and other necessities. But as Adam Smith described, a pin factory’s specialized metal-straightening, wire-cutting, grinding, pin-head fashioning, and other operations increased the productivity of labor, output, and real wages dramatically. And for society at large, specialization and cost-lowering scale economies were not confined to single factories, but spread across industries and agriculture: the baker, the butcher, the brewer, and the cobbler all focused on productive specialties for a market wherein they exchanged with other specialists for desired goods.
Monetary policy must once again animate our national debates because the Great Recession and its ensuing torpor are the direct consequence of fiat money management by politicized central banking. Absent sound money, this division of labor with its specialized knowledge and skills could hardly be exploited because, say, a neurosurgeon would have to find a grocer who coincidentally needed brain surgery whenever the neurosurgeon wanted food.
Similarly, explosive economic progress after 1750 was propelled by the accumulation of capital, the tools and machinery that increase output and are responsible for improved living standards. Here again, a dependable money unit facilitates the saving that allows for capital accumulation: income need not be consumed immediately, but can be transferred to others to invest productively, in return for future interest. Sound money enhances the wealth-creating exchange of resources between present and future, and in doing so assists in the development of higher output capacity.
Third, by providing a common denominator for all exchange prices between goods, money facilitates trade. Think about it: without a monetary unit of account, there would be an infinite array of prices for one good against all other goods, e.g., the bread-price-of-shoes, or the book-price-of-apples. Calculation of profit and loss, upon which effective allocation of scarce resources so critically depends, would be impossible.
Sound money enhances the wealth-creating exchange of resources between present and future, and in doing so assists in development of higher output capacity. The institutional development and use of money has been as important as language, property rights, the rule of law, and entrepreneurship in the advancement of human civilization. And while everything from fish to cigarettes were tried as monetary media over time, the precious metals, and especially gold, were most effective, as they are intrinsically valuable, highly divisible, durable, uniform-in-composition, easily assayable, transportable, high value-to-bulk, and relatively stable in annual supply. In an ever-changing world of imperfection, gold has been found to be a near perfect, and certainly dependably valued, monetary unit.
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John Allison, a professor in the business school at Wake Forest University, is former chairman and CEO of BB&T Corporation, one of the largest U.S. financial services holding companies. John Chapman is chief economist at Hill & Cutler Co. and an advisor to Alhambra Investment Partners.