Right now we have neither, and so we have risks to the economy that are simply unknown. A risk that you don't know is always worse than one you can understand. Will your bank be around tomorrow? This is no longer an idle question.
Creating a stable currency would not be hard. It's a simple matter of pricing, and there is nothing that markets do better than pricing, when they are allowed to function without interference. Take an item of real value, one that cannot be produced by the printing press. Let's say, I don't know, how about the gold standard of money?
Gold has been used as money for 5000 years or more. Let's say we go back to using gold as money. You want to sell something. OK, how many grams of gold would you accept to part with it? You want to buy something. How many grams would you give up to obtain it?
The thing is, we're used to using dollars as our standard. We think, "how many dollars is that worth?", not "how many grams?" Like visitors in another country, we'll be running the numbers through our heads, converting to dollars. At least for a while. Pretty soon we'll get the hang of it.
If we get rid of the risky fractional reserve system (perhaps following this great plan by Kotlikoff and Leamer), then we have the absolute best basis for economic prosperity. Systematic inflation becomes impossible. And deflation has no power to wreak economic havoc. Deflation becomes your friend, because deflation is simply falling prices. We only associate deflation with the end of the world because deflation has typically occurred only at the end of a credit bubble, as the harbinger of deep recession, bringing with it financial panic and high unemployment.
The problem is how the stable currency would interact with the dollar. The dollar decays like a radioactive isotope. A stable currency operating in parallel with the dollar would instantly reveal what a poor currency the dollar really is. Fewer assets would be held in dollars, and fewer transactions would be made in dollars. Both would cause a reduction in the demand for dollars, and a depreciation in the value of the dollar. Perhaps that would be viewed as an "attack" on the dollar. It's not an attack to remove lipstick from a pig. (My apologies to Mrs. Palin.)
The dollar is worth about what the paper it's printed on is worth, and to put it next to a commodity with real value simply reveals that truth.
3 comments:
Yes, dollar or other currencies are just paper, however, i still think it's the best way for the world-- imaging yone has to haul a big block of gold to buy his house, and/or one has to melt or cut the gold in order to get some change. besides, how many human resources are we talking about to just keep all the gold. and the even higher eick of prevent the boguse gold.
No, one could still use paper to stand for a certain quantity of gold. We'd still use debit cards. Few people would carry gold coins. There would be a few minor inconveniences, but these would soon be solved. Compared to the major inconveniences of inflation and bank collapse, gold is a boon to the economy.
In response to the "gold standard"....Sure it's a great idea, however as with the metric system, adoption is the issue. Very few people believe that the metric system is of less value, yet we fail to implement it. Just food for thought.
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