Transitioning Standards of Value in Fixed-Value Monetary Systems
By now I think we can agree that the absence of an official, rules-based, cooperatively managed monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth. --Paul Volcker (2014) Soft and Hard Money Approaches to Monetary Affairs Historically, there have been two basic frameworks by which a government organizes its monetary affairs. One of these--the Soft Money approach--we are quite familiar with today: a process by which a committee of government bureaucrats manages a floating fiat currency of some sort, on a day-to-day and ad hoc basis. The other format--the Hard Money approach--is typified by the Rule of Law, which is some definite and unchanging framework by which the currency is managed. Consequently, there is no need or role for a day-to-day human discretionary element, except perhaps in some of the particulars of the system's execution. Nathan Lewis is a columnist for Forbes.com and the author of Gold: the Monetary Polaris (2013). The Soft Money Approach Under the Soft Money approach, the goal of monetary policy is to maintain full employment, price stability, and moderate interest rates--and to satisfy an array of interest groups. These include voters and the political class; exporters, importers, and other commercial interests; bankers and the financial industry; agricultural and other commodity producers; creditors; and debtors of various sorts, particularly the federal government. What a wondrous tool money can seemingly be, to address all of these issues and interests. And, it has no apparent cost, or, it appears, need to bother with a parliamentary process. Thus, the "Rule of Man" is paramount, and typically unfettered in practice by any defined framework whatsoever. The Hard Money Approach In practice, there has been only one kind of law or rule that is used in the Hard Money approach: namely, a "fixed-value system" in which the value of the currency is to be the same as some defined benchmark. Although a variety of commodities have been used as a monetary base, gold and silver have long been dominant. In the late 19th century, these bimetallic systems were simplified further into monometallic systems. The value of the currency would be fixed at, for example, 23.2 troy grains of gold, or l/20.67th of a troy ounce. Fixed-Value Policies Are Very Common Today Although it may seem that the Hard Money approach to organizing monetary affairs is basically nonexistent today, many countries have adopted forms of a fixed-value system. Consequently, these countries do not attempt to address all of the myriad interests of the Soft Money enthusiasts via management of the currency. There is no meaningful discretionary element. Many governments in the world have a fixed-value policy with some major international currency. The 19 members of the eurozone have adopted a common currency over which the members and their central banks have no direct control. In effect, they have given up their domestic discretionaiy policy in favor of a form of fixed-value policy with what amounts to an external benchmark. This arrangement is not much different from dollarized countries such as Ecuador and El Salvador. In addition, there are six other states that use the euro, but are not officially part of the eurozone (Monaco, San Marino, Vatican City, Andorra, Kosovo, and Montenegro), plus four territories (Akrotiri and Dhekelia, Saint Pierre and Miquelon, French Southern and Antarctic Lands, and Saint-Barthelemy). Also, there are 27 countries that have a currency linked to the euro, often via a currency board. They include eight African countries that use the West African CFA franc, seven African countries that use the Central African CFA franc, plus Bulgaria, Denmark, and Morocco. Altogether, a total of 55 nations and autonomous territories have variants of a nondiscretionary fixed-value policy with the euro, not counting those countries where the euro is in common but informal/unofficial usage. …
Making the Transition to a New Gold Standard
Suppose for the sake of argument that we all agree to the following proposition: If we could change the monetary regime with zero switching cost, merely by snapping our fingers, we would prefer the United States to be on a gold standard. In the most general terms, a gold standard means a monetary system in which a standard mass (so many grams or ounces) of pure gold defines the unit of account, and standardized pieces of gold serve as the ultimate media of redemption. Currency notes, checks, and electronic funds transfers are all denominated in gold and are redeemable claims to gold. We then face the question: What would be the least costly way for the United States to make the transition to a new gold standard? We need to choose a low-cost method to ensure that the agreed benefits of being on the gold standard exceed the costs of switching over.Two transitional paths suggest themselves (1) let a parallel gold standard grow up alongside the current fiat dollar, and (2) set a date after which the U.S. dollar is to be meaningfully defined as so many grams of pure gold. This second, more conventional path, was followed after the suspension of the gold standard during the U.S. Civil War. It is more commonly described as establishing an effective parity stipulating so many dollars per fine troy ounce of gold. In our present situation, where Federal Reserve liabilities (book entries and currency notes) and Treasury coins constitute the basic dollar media of redemption for bonds and commercial bank liabilities, that implies converting the Federal Reserve System’s liabilities and the Treasury’s coins into gold-redeemable claims at so many grams of gold per dollar (or equivalently so many dollars per ounce of gold).We see analogs to these two transitional paths when we observe how two countries have made the transition to using the U.S. dollar. In Ecuador in 1998-2000, a parallel unofficial U.S. dollar system emerged as the annual inflation rate in the local currency rose from low to high double digits, then to triple digits. The private sector of the economy was already heavily dollarized when the plug was finally pulled on the heavily depreciated local currency unit in 2000. In El Salvador in 2001, the government chose to permanently lock in the dollar value of the currency — by switching from a dollar-pegged exchange rate to outright adoption of the U.S. dollar — while inflation was low and the local currency still dominant. In a nutshell, when the official switch to the harder currency came in Ecuador, it was an act of necessity in the midst of a hyperinflation crisis. In El Salvador it was an act of foresight, to rule out such a crisis.
Deliberative Democracy and the Resource Curse: A Nationwide Experiment in Tanzania
Oil and gas discoveries in developing countries are often associated with short-sighted economic policies and, in response, calls to insulate resource management from populist impulses. We report on a randomized experiment testing methods to overcome this apparent tension between sound resource governance and democratic politics. Soon after Tanzania’s discovery of major natural gas reserves, we invited a nationally representative sample of voters to an intensive public deliberation of policy options featuring nationally recognized experts and small-group discussions. Democratic deliberation reinforced the public’s strong preference for rapid spending of gas revenues, but also increased support for various prudential and economically orthodox measures, including independent oversight of gas revenues, limits on government borrowing, and selling gas abroad rather than subsidizing fuel at home. These effects were driven by deliberation per se, rather than a pure information treatment, and show no evidence of contamination by facilitatoror peer-effects in group deliberations. www.cgdev.org Justin Sandefur, Nancy Birdsall, James Fishkin, and Mujobu Moyo