The perverse effects of the world dollar standard.
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2. Or, America could take the lead in reforming the official reserve currency system based on the dollar. Such a monetary reform program would entail a careful windup, by agreement, of the world dollar standard. At the same time America would reestablish by statute a dollar convertible to gold, i.e., a dollar defined in law as a weight unit of gold. Gold would replace the dollar as the world’s reserve currency.
The reform would, first and foremost, establish a tested, non-national, neutral monetary standard as the basis of a stable dollar — one which reasonable sovereign trading partners could accept. Gold would become the international settlements currency and thus would replace the dollar as the basis of world trade and finance. Inasmuch as monetary history shows that no unstable national currency can permanently serve as the crucial world reserve currency, it follows that neither can an unstable basket of national currencies, nor can a fiction such as the SDR — the reserve asset created by the International Monetary Fund to supplement member countries’ reserves.
But we are left with the question: what does the evidence of American history suggest as the basis for a stable dollar?
The stability of the U.S. dollar has varied widely in its history. This variation is explained by two factors: the monetary standard chosen for the dollar, and whether other countries have simultaneously used cash and securities payable in dollars as their own reserves, even as their monetary standard itself (i.e., official reserve currencies in place of gold).
The United States has alternated between two kinds of standard money: inconvertible paper money and some precious metal (first silver, then gold). The dollar was an inconvertible paper money during and after the Revolutionary War (1776–92), the War of 1812 (1812–17), the Civil War and Reconstruction (1862–79), and again from 1971 to the present. The dollar was effectively defined as a weight of silver (and gold) in 1792–1812 and 1817–34, and as a weight of gold in 1834–61 and 1879–1971. The minted gold eagle, set equal to 10 dollars, and subsidiaries thereof, was provided for in the Coinage Act of 1792. The dollar was not used by foreign monetary authorities as an official monetary reserve asset before 1913, but the dollar has been an official “reserve currency” for many countries since World War I (along with the pound sterling). The dollar has been the primary official reserve currency for most countries since 1944.
Applying two criteria divides the monetary history of the United States into distinct phases. We can compare the stability of these monetary regimes by examining the variation in the Consumer Price Index (as reconstructed back to 1800) by two simple measures: long-term CPI stability (measured by the annual average change from beginning to end of the period of each monetary standard) and short-term CPI volatility (measured by the standard deviation of annual CPI changes during the period).
Weighting these criteria equally, the classical gold standard from 1879–1914 was the most stable of all U.S. monetary regimes (as this table shows).
After the failures of several generations of unhinged paper currencies, pegged and floating exchange rates, America should embrace a stable monetary system tested in the laboratory of human history — the cornerstone of which the elites have rejected for a century. It is now time to restore that cornerstone — the true gold standard, shorn of the economic pathology of official reserve currencies. Now is the time to restore the American monetary standard authorized by the Founders in the Constitution — Article I, Sections 8 and 10. Now is the historical moment for America to take the lead and again give the world a real money, the Founders’ gold dollar of the Coinage Act of 1792. What the Founders learned from the paper money inflation of the Revolution, the recent past has taught us again. America and the world need a monetary standard which, unlike the paper-credit dollar, cannot be created at zero marginal cost with which to dispossess the -prudent and to subsidize the U.S. government and insolvent financial institutions at near zero interest rates.
For America to establish the gold standard would provide the least imperfect monetary solution to the problems of a century of financial disorder — engendered over and over by central bank-manipulated paper money, official reserve currencies, and floating-pegged exchange rates. Only a stable dollar, a dollar defined by statute as a weight unit of gold, can pin down the long-term price level, restoring the incentive to save and ruling out extreme inflation and deflation. Such a dollar convertible to gold would reopen the road to confidence in the long-term value of the U.S. monetary standard. This is the durable road to econom-ic growth and prosperity — financed by increased long-term savings, increased long-term investment, and rising demand for labor at rising real wages.
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