We hear so much about the daunting challenges this nation faces: entitlement commitments, climate change, terrorism, debt. Yet one major realm of our public affairs appears to be settled and not subject to judgments of unsustainability and calls for reform.
This is the monetary system. The basic questions of how the monetary system should be organized—Should the dollar be officially defined in some way or not? Should it flex or be fixed to foreign exchange?—have little purchase in our political-economic discourse. It is assumed that our major monetary institutions, the Federal Reserve and the United States Treasury, filled as they are with expert staff and assisted by the vast economics profession, pursue their duties in whatever prudent way they see fit, the market responds as it does, and the system largely works. We have imperative tasks in this world, but fundamental reform of the monetary system is not one of them.
It was not always this way. During the early and middle part of the twentieth century, the monetary system was the focus of intensive activity in the direction of reformulation and the upending of the status quo. Whether the dollar should continue to have an official redemption option in gold, how much gold the Treasury should have on hand, and whether the dollar should adopt flexible exchange rates were questions that occasioned an enormous amount of attention, argument, proposals, and calls for action from the 1920s through the 1960s. As debate raged, there were several fundamental changes to the monetary system. Chief among these were President Franklin D. Roosevelt’s raising of the official gold price to $35 in 1933–34 (while outlawing the private ownership of gold), President Richard M. Nixon’s suspension of gold payments, and the rise of flexible exchange rates in 1971–73.
Since the early 1970s, there have been plenty of grumbles about the value of the dollar, the imperiousness of the Federal Reserve, and inequities in the financial system. Yet it remains difficult to name any substantial trend in recent discourse that includes a call for reexamination or reform of the monetary system. There are scarcely any voices, at least of an official variety, insisting on an inquiry into the mission of current monetary institutions, much less for their replacement or elimination. Indeed, it is generally held that suggestions that the monetary system be reformed, in particular that we should look into a return to a gold standard or fixed rates, are ipso facto peripheral, the stuff of “cranks.”
This makes for a lack of symmetry. The general attitude toward major public institutions and common goods (the fiscal situation, the environment, college, the healthcare system, etc.) is that they are in crisis and policy needs to be rethought in a fundamental way. When it comes to the monetary system, however, the status quo is seen as perfectly manageable, improvable by tweaks.
For its part, the public at large clearly harbors dissatisfaction about the monetary system, which, if recognized and taken seriously, would make us wonder why reform is not on the agenda. When it comes to the Federal Reserve, for example, it never musters 50-percent approval ratings in polls, while Ron Paul’s 2009 book End the Fed was a bestseller. International Monetary Fund (IMF) meetings, wherever they are held around the globe, routinely attract protesters. Classic currency hedges such as gold sustain dramatic rises in price coincident with official monetary activism, such as gold’s doubling over the long “quantitative easing” period in the United States after 2008.
The public appears to have an implicit understanding, a vision, of what the monetary system should look like, and this vision diverges rather seriously from what we have de facto. In a paper written for economist Arthur B. Laffer’s economic consultancy of November 2018, I detailed this implicit public vision as follows:
In the first place, there is this central attribute of the modern monetary system: floating exchange rates. There is not substantial evidence that any more than limited constituencies have ever favored a permanent regime of floating rates. These limited constituencies include governments bent on devaluing their own debt payments, currency-traders, and uncompetitive exporters. Generally the majority of the population in any country prefers a currency that holds its value in the obvious practical ways, including against goods and services domestically offered for sale and foreign exchange. It would appear that the monetary order implies fixed rates of exchange, yet the monetary system is arranged for floating rates.
A second mark of the current monetary system is its bureaucratic thickness. Central banks typically are staffed to the gills and have the following powers: to determine the level of, and to hold, required reserves of virtually all banks in the country; to be the chief banking regulator; to have the (often exercised) option to buy and sell a variety of financial assets, including private ones; and to offer unlimited lender-of-last-resort funds at emergency rates. In addition, Treasury and Commerce departments, along with international entities such as the eurozone and the International Monetary Fund, have facilities to influence exchange rates and the management of currencies. It is again unclear if any of this bureaucratic thickening corresponds to a widespread preference within the population that there be such a thing.
A third central characteristic of the current monetary system is its lack of definition, including any aspiration to have a definition. Currencies, in general, do not strive to define themselves in gold or against a basket of goods and services, aside from some talk of inflation-targeting. Monetary authorities rarely eschew discretion in favor of rules. Exceptions are found in those currencies prone to runs that fix themselves to major fiat currencies, for example the Chinese RMB and its fix to the dollar. As the counter-examples suggest, people maintain skepticism about the lack of definition in currencies, withholding it only from major monetary hegemons. Indeed, currency definition is now required in an economy (China’s) that is one of the largest in the world.
Overall, the monetary order deriving from the mass of monetary assumptions and preferences on the part of the global public appears to be quite at variance with the accompanying monetary system. It appears that the public wants and expects money to be stable in value, not manipulated or controlled by inside players, and defined in widely acceptable and commonsense ways. The monetary system, nonetheless, exhibits few characteristics corresponding to these expectations.
In distinguishing between the monetary order and the monetary system, I draw upon the work of economist Robert A. Mundell (the 1999 economics Nobel Prize winner), who introduced the concept in the 1970s. The monetary order is the kind of monetary system a society implicitly indicates it would like to have; the monetary system is whatever formal monetary arrangements there actually are (the Federal Reserve, floating rates, and so forth). The sum of mores, habits, aspirations, and common sense pertinent to monetary affairs in a society represents the monetary order; the system is the extant monetary apparatus. It is dangerous, Mundell believed, for the monetary system to stray too far from the underlying monetary order. Such things are liable to decouple a society from its political-economic institutions—what political science calls a legitimation crisis.
Mundell derived his distinction between the monetary order and the monetary system from a reading of Montesquieu, whose eighteenth-century Spirit of the Laws detailed the importance of the legal code’s responsiveness and connection to the mentality of the people under the sovereign power.
Another possibility is that the monetary order will, by its own devices, overwhelm and replace the monetary system with something more fitting, without announcement, a formal reform process, or much noticeable upheaval. The cryptocurrency phenomenon is a pointer in this direction. The historical price chart of Bitcoin since its inception in 2009 looks like that of gold over the latter decades of the twentieth century: first a tenuous stability, then a phenomenal increase in price, then a collapse, then a new chastened stability at a low price. Again, this is perfectly descriptive of the movements of gold against the dollar in 1950–2000.
The current director of the IMF, Christine Lagarde, has said that she sees cryptocurrencies as “shaking the system,” while cautioning that “we don’t want innovation that would shake the system so much that we would lose the stability we need.” There is, in other words, the beginning of a sense within official monetary leadership that the status quo—of the gap between the monetary order and the monetary system—is becoming exposed as such by means of organic processes of the marketplace and the acted-upon preferences of millions of economic agents.
The appeals to expertise and professionalism that have characterized the self-justification of the monetary system over the past generation are unlikely to match the monetary expectations and preferences of a public succeeding in initiating monetary reform on its own. Change is coming to the monetary system. Enlightened leadership would recognize change as necessary, help to initiate it, and see that it is managed well.
An essential step in such an endeavor would be to take seriously the “closed” questions of fixed exchange rates, a definition in gold, and the necessity of strong central banking institutions and international authorities. To the degree that these questions are closed on account of a variance between professional and popular opinion, it should be understood that popular opinion may win out, over the long term, by revolutionizing monetary institutions from below via the likes of cryptocurrencies. In the 1970s, Mundell’s Montesquieuian arguments outlined the dangers that monetary grandees courted in arrogating their system as the system. A generation and a half later, for official monetary arrangements to have a future, they have to make a rapprochement with the popular will about what money is, how it is to be defined, and who can create, use, and own it.