Monetary Madness

China, Russia, et al. are talking about shifting their monetary reserves out of U.S. dollars. Gold has hit $1,000 per ounce, even though wholesale and retail prices exhibit a deflationary bias. The United Nations has called for a new world currency to replace the dollar. What's going on?

All of these phenomena are early death throes of Federal Reserve notes. I balk at saying "the U.S. dollar," because a "dollar" is still defined in law as a certain quantity of silver or gold, whereas the U.S. currency that now circulates here and around the globe consists of nothing more than scraps of paper (actually, a linen-cotton compound)--a "fiat currency." (Technically, Federal Reserve notes aren't even money. Historically, "money" denoted coinage of metals prized in the commercial marketplace; therefore, only a currency redeemable in those metals is a genuine money substitutes. Federal Reserve notes are fakes, nothing more than legalized counterfeits of true money substitutes.)

Whether Federal Reserve notes survive--that is, whether they continue to retain purchasing power and function as money--for a few more years or a few more decades is unknowable. In fact, the Federal Reserve note could strengthen against other currencies if the powers-that-be would trigger another financial crisis like last year's. (Isn't that a wretched option?) Inevitably, though, Federal Reserve notes will become worthless, just as every other fiat currency in world history eventually ends up worth nothing more than what they are--little scraps of material.

You may hear some politicians and commentators complain about the Chinese and others as they rebel against the dollar's status as the world reserve currency. You may say that the Chinese have no business stating that our government needs to stop its spendthrift, debt-bingeing ways. The fact of the matter, though, is that the Chinese have a right to speak out on these issues. After all, the Chinese are joined to us at the financial hip. They hold reserves of over two trillion Federal Reserve notes, and close to one trillion of Treasury debt.

Put yourself in their shoes: If we held that much of a foreign currency, and we could see that the government of that country was in the process of debauching that currency by having its central bank flood the financial system with newly created reserves while the government's debt was exploding as a result of reckless, runaway spending, wouldn't you worry? Wouldn't you be tempted to feel resentful and indignant?

It is vital to realize that neither the Chinese nor the Russians nor any other foreign nation has put us in this predicament. Our fiscal/monetary crisis is 100 percent homegrown. President Obama's request for Congress to raise the debt ceiling higher than 12.1 trillion Federal Reserve notes is the result of Uncle Sam's undisciplined spending, not anything that foreigners have done.

The Federal Reserve note will eventually cease to function as the world's reserve currency. The buck served as the globe's monetary anchor back when it was "as good as gold," but once our country embarked on the typical democratic excess of chronic deficit spending, President Nixon "closed the gold window" (that is, defaulted on our solemn pledge to redeem Federal Reserve notes for gold on demand) in 1971, and the long-term depreciation of the Federal Reserve note has accelerated since then.

The world could use a solid, dependable reserve currency. Many international businesses have performed brilliantly, only to be stuck with surprise losses due to fluctuations in exchange rates between currencies. Can there be such a currency?

Yes. In fact, the world had one before World War I. It was gold. Each country minted its own gold coins. The functionality of the gold coin standard was that regardless of whose portrait or which national symbol decorated the coin's surface, an ounce of gold was always an ounce of gold, regardless of where in the world it ended up.

Alas, we are in no position, I fear, to return to a gold standard now. Gold is honest money, and honest money will be rejected wherever politicians engage in the fiscal folly of spending more than the revenue they collect. The rule of thumb seems to be that the world's leaders want a reserve currency with the benefits of a gold standard, but only on the condition that the currency isn't gold!

The worst possible development at this juncture would be for the world's governments to grant the United Nations the authority to develop its own global currency. As imperfect as is the current system of competing, depreciating, national-fiat currencies, at least individuals and businesses can seek refuge in the least bad of the lot. To eliminate those options by the imposition of a monopolistic global fiat currency would be to make financial hostages of the whole world's population to the U.N. bureaucracy.

This brings to mind the famous statement attributed to Mayer Rothschild (1744-1812), the founder of the immensely powerful Rothschild banking family: "Let me issue and control a nation's money and I care not who writes the laws."

To give the United Nations control over the world's currency would mark the end of liberty. The fact that such a fearsome possibility is even being raised is the fault of our country's political leaders. They are the ones who have brought us to this sad state of affairs.

-- Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and contributing scholar with The Center for Vision & Values at Grove City College.