A STANDARD FOR MONEY

This brings us at last to the monetary standard. For thousands of years, the reference point provided by gold has been the equivalent of Polaris in the world of everyday commerce. Think of each star in the sky as a different commodity or item to be "priced" in the market. This star over here is a loaf of bread of a certain weight and quality. This star is a quart of milk. This star is the dental work required to fill a tooth. Another is an hour of a carpenter's time. As is readily apparent, the number of goods and services to be priced in the world of commerce constitute a galaxy. Unless civilization can agree upon one star in that galaxy, against which all other stars can be referenced, civilization could not progress much beyond the bartering of a jungle or desert commune. Imagine having a stall of apples for sale in the market with a list of all the goods or services that the seller would accept in exchange: One orange, eight slices of bread, half a quart of milk, 1/100th of a tooth filling, etc. It would be difficult enough to barter goods in this fashion. Think of how difficult it would be to draft contracts for the exchange of future goods. Happily, many thousands of years ago, soon after the dawn of civilization, mankind fixed on precious metals as the standards for pricing. Thus, the merchant will sell one loaf of bread for 1/100th of an ounce of gold or 100 loaves for an ounce, or a Cadillac for 100 ounces. Gold money will change for smaller money in order to make smaller transactions, one ounce for twenty of silver, or 6000 of copper. But it all starts with Polaris. For all these thousands of years, almost all contracts have been made with gold as the reference point. "Dollars" or "yen" or "francs" or "marks" have served as "symbols" of gold. The term is that of Marx, who joined the other classical economists in asserting that the responsibility of government was to keep the paper symbols of gold in circulation exactly equal to the amount of gold for which they would substitute. As long as this one task was achieved by government, the monetary standard would remain constant. This would be the case no matter how many contracts were drawn by public or private transactors using gold as the unit of account.

Unlike Polaris, which seems fixed immutably in the heavens, gold does have a slight wobble to it that shows up over the millennia. That is, at times it is discovered in greater amounts than usual, as in the California gold rush, but the variation over centuries is much smaller than the next closest candidate for money, which has been silver. As in the comparison with golf, where yards have prevailed over meters, gold has competed against silver as the best Polaris and has won decisively. It has the smallest wobble, which has made it more valuable than all other commodities as a monetary vehicle. The advantages of a small wobble to merchants who must contract to exchange goods across time and space is self-evident. A national paper currency that has held its value against gold for a long period of time gives that country's merchants the greatest advantage, in that they do not have to spend resources insuring against the wobble. Against the galaxy of prices in a national market, to have one serve as the unvarying reference point for present and future trade is as important as the North Star is to transport. Each day in the world marketplace, hundreds of billions of decisions are made around the monetary unit of account. One shopper with a cart in a supermarket will make several dozen in an hour.

When President Nixon in August 1971 made the decision to devalue the dollar against gold, to $42 from $35 per ounce, he repudiated the national debt by 20% and made inevitable the general rise in prices that rippled through the galaxy of all prices. This was bad enough, but it still left an unreliable fixed point in the dollar realm. The nation still had a standard of measure, suspect though it was. In 1973, Nixon went the next step and -- with gold now at $140 per ounce -- "floated the dollar." This meant the nation's Polaris would now drift in the sky. All Americans would have to spend considerably more time and energy in calculating prices in relation to their wages, savings, and their present and future needs. And because the dollar had supplanted Britain's pound sterling as the Polaris of choice in the commercial firmament, when Nixon floated the dollar,3 all other currencies in the world set up larger or smaller orbits of change around it. The national monetary standard had declined, and so had the international monetary standard.

The floating of the dollar caused financial tremors throughout the world, but its one great contribution, made unwittingly, was the collapse of the communist experiments in the USSR and China. The communist experiments relied on the fixed reference point provided by the dollar. Which is to say the central planners needed a stable unit of account against which they could calculate wages, prices and capital allocation. As long as the dollar was tied to gold and the ruble defined in terms of the dollar, these calculations could be made. When the dollar floated, the markets of the West were capable of managing the chaos, but the central planners in Moscow and Beijing were lost. The price relationships that had originally been set in 1928 no longer were close to reality as domestic and international prices widely diverged.4 Had Marx been alive at the time, he would surely have advised the Kremlin to cut loose from the floating dollar and fix to gold, in which case the West well may have lost the Cold War. To put it another way, market capitalism without a Polaris is less efficient than a command economy with one.

MONEY AND MORALITY

The chaos produced by the floating dollar was and remains immense. Just as we would expect more airplane crashes if there were no North Star by which to pinpoint latitude and longitude, the absence of a U.S. fixed "symbol" of gold caused more financial crashes in the years since 1973 than the world has ever before experienced. We speak not only of the collapse of financial institutions and enterprises in the absence of a fixed monetary standard, but also of the collapse of households and families by the tens, perhaps hundreds of millions. In the absence of a monetary standard to fix the value of contracts between people, the linkages between debtors and creditors were loosened and so were the linkages between effort and reward. As the value of money would change, debtors would lose in a deflation, creditors would lose in an inflation. Ordinary citizens, without any way of knowing which way the value would turn, might adapt to an inflationary environment after suffering losses, only to then be hit with a deflation, suffering further losses. The most powerful and influential men of wealth could play the speculative swings and become wealthier in the process, at the expense of ordinary people. Worse, they might use their influence with government bureaucrats in the central bank to cause the inflation/deflation swings according to schedule. The Mexican peso crisis that still engages our attention reveals for all to see the corruption of the international financial institutions -- the International Monetary Fund having evolved into the darkest of all. When the floating began, how easy it was for the currency traders at the giant money-center banks in New York and London to infiltrate the IMF, to profit at the expense of the poorest people on earth. For the past two decades, the IMF has roamed the earth like a black whale, feasting on the poor, developing nations, while the scavenger fish accompany it to feed themselves.

In this way, the bonds of trust are broken between a people and their government, and those at the bottom of the wealth ladder find the only way to get ahead is to cheat and steal from those who have cheated and stolen from them through their influence in the halls of political power. We are well aware of the disintegration of morality in the Germany of the 1920s, when the life savings of all ordinary citizens were wiped out in the hyperinflation caused by the Versailles Treaty -- a treaty designed to crush the abilities of Germany to wage war again. Hitler's fascism emerged out of this poisoned well. At the other end of the political spectrum, Mao Tse-tung led the successful communist revolution of China in 1949 with his pledge to restore the integrity of the Chinese currency. It had completely collapsed in the post-war inflation under the mismanagement of the ruling establishment, which abandoned the mainland and settled in what is now Taiwan. So too, with the floating of the dollar since 1971, ordinary Americans found themselves increasingly alarmed at the general decline of traditional values in our society. This reflects the decline in value of all contracts between individuals -- the galaxy of contracts that comprise the bonds of civilization. If a government does not keep its vows to its people, the bonds that knit together families and communities inevitably loosen as well. The breakdown of morality that intensely occupies the attention of the Religious Right -- divorce, illegitimacy, abortion, crime -- is the inevitable consequence of the devaluation of the international unit of account. If a man is as good as his word, what of a government's? Which is not to say that a monetary unit fixed to gold will drive out immorality. It will only remove those negative influences on society that flow from the injustice of broken monetary promises. A poor man who saves his money to educate his children, only to find his savings wiped out by a government that cheats its creditors, will more likely have outrage and revenge in his heart than the man whose savings is intact when his children's needs are to be met.

It was a deep insight that led Mundell in 1969 to predict: "The world is moving toward a floating regime. The experience will be so painful that by 1980 it will begin moving back to fixity." The election of Ronald Reagan in 1980 began that movement back toward fixity. The years since have covered most of the ground of that movement. There is still a short distance to cover, but the last steps are the most difficult. As we approach the Polaris that Mundell saw dimly, but alone, 25 years ago, the advocates of a gold Polaris have essentially won all the arguments against the floaters, but they disagree among themselves on what shape the golden Polaris should take. Allies of 25 years in this battle are now raging against each other, debating the final steps. It is going to be a system that will last a century, which means it has to be correct on the first try.