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SUNDAY SPECTATOR
March 18, 2012
Hare-brained scheme
Let's not call this "A Modest Proposal." Poor Jonathan Swift has been turning in his grave like a vernepator from the inflated use of that essay title. Writers do not always recall what he was proposing in 1729: that the Irish could solve both their overpopulation problem, and their food shortage, by eating their babies. And yes, he was being droll.So that when someone uses that title to flag some glib, happy-faced suggestion, a reader must conclude that he is either more droll than Swift (an impossibility), or uneducated. Let me instead call what follows a "hare-brained scheme," by way of indicating to gentle reader that I know I'm not a monetary economist, that I've never once been governor of a central bank, or even an acting deputy finance minister. The best I could say, is that the topic so much interested me in the past, that I wrestled with some fairly heavy books on it, and experienced moments of weakly flashing light. The subject of "monetary policy" is, at its heart, something like the Higgs boson in particle physics. Which is to say, a tiny item at the boundary between something and nothing; a little jiggle of excitation that confers mass on everything else. Money can be nothing or everything, depending upon one's point of view. People believe in money, and to the degree they believe, it continues to exist. But if you have ever looked at a banknote for some trillions of Zimbabwean dollars, you will know that this belief can become infinitesimally slight. In my column for Wednesday, I found risible the bankrupt Icelanders' proposal to adopt the Canadian loonie is a "hard currency," when we ourselves need a hard currency. Through compound inflation, our dollar is now worth a little less than five cents in the remarkably stable purchasing power of just one century ago. (In other words, a $20 bill is really a $1 bill, and a loonie is really a nickel.) Moreover, its current value depends entirely on faith-based paper transactions, which will deliver a Zimbabwean hyperinflation the moment we lose our debt-ridden nerve. As I wrote Wednesday, "we should ourselves be seeking the ground upon which a new international trading currency can be founded - some new gold standard or equivalent that can provide both a store of wealth, and a trading benchmark, beyond the reach of politicians' inflationary impulses." Now, the simplest thing in the world would be to restore the old gold standard. Our dollar, just before the First World War (when the modern world went to hell), weighed in at about 24 troy grains (five for the 120-grain British sovereign which Ottawa also minted). We thus once had, and could in practice restore, a gold-specie dollar that would currently trade for about 82 of our rubbish loonies. Gentle reader should discern the problem immediately. The speculators have driven the price of gold up to more than four times its purchasing power in 1913. That should be a warning to those who think gold is an entirely safe investment: it would fall through several floors in a stable economic order. While I'd love to have a freely trading, restored gold dollar for the sheer glitter of it, my hare-brained scheme is less naive. Let us make our government instead charter a private currency bank, quite separate from our deeply compromised Bank of Canada, whose whole purpose is to maintain an utterly stable dollar at purchasing power parity to "24 troy grains of gold in 1913." That is, a dollar that would trade for about 20 current loonies, and rising (at the rate of inflation). Let that new institution be chartered, moreover, as a full-reserve bank, along the lines Friedrich Hayek proposed, in his works on the denationalization of money in the 1970s. The Bank of Amsterdam and other prominent European banks were full-reserve, in precious metals, before the 19th century; ours would instead hold a basket of actual commodity contracts (on gold, oil, wheat, soybeans, diamonds, elephant tusks, whatever) whose unit value would be kept constant through daily commodities trading, because the bank's very existence would depend on it. Hayek filled books with what such a bank could do. But one thing it obviously could not, is offer interest on deposits. Indeed, it would charge fees for keeping depositors' money genuinely safe. But its chief function would be to provide an international unit of account and exchange, which could be used in actual transactions. Such a bank could be copied in other countries, and kept honest by the competition. The use of stable, fixed currencies would by nature spread for their convenience in world trade, and eventually a gold and silver coinage might even be restored at roughly traditional exchange levels. But more significantly, the means would now be available for the gradual defeat of two great evils: currency speculation (on which men like George Soros get rich), and consumer credit (which creates money ahead of any corresponding increase in productivity). My hare-brained purpose here is only to plant a thought: that it would be possible to establish a sound economic order, gradually over time, and without untoward deflationary risks, if the politicians could be made to allow it. David Warren
© Ottawa Citizen
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