Shelton: Why Can’t We Just Have Money That Works?

Amidst political and economic tension over a potential US debt default, the gold spot price continues near record nominal highs. However, instead of focusing on the gold price – and fretting over a paper currency – Judy Shelton, author and senior fellow at the Atlas Economic Research, asks: “why can’t we just have money that works?”

Shelton envisions a new gold standard that would curb spending by requiring governments to figure out where money will come from before taking on additional expenditures. She would like to see real economic growth – led by entrepreneurship – encouraged, instead of the sort of artificial asset price inflation that has resulted from loose monetary policy.

From The Weekly Standard:

“The dollar’s prominent role in global financial affairs makes it the most vital nonmilitary instrument of American power; it figures in 85 percent of foreign-exchange transactions, and dollar assets account for roughly two-thirds of the reserve assets of industrialized and developing countries. Of course, not everyone appreciates all those perks going to the United States—even when they realize that a diminishing dollar hurts the value of their own portfolios.

“Still, this much is true for those who hold dollars, both U.S. citizens and central bankers around the world. Whether it’s the cash distributed to community banks by the Federal Reserve or the trillions in Treasury obligations peddled at home and abroad—it’s all U.S. government IOUs. Everyone who holds dollars is hurt when the U.S. government debases its currency.

“People take dollars in the expectation they will be able to use them in the future to obtain something of comparable worth. They place their faith not so much in the ‘credit of the U.S. government’ as in the eventual capacity of America’s economy to yield productive output. As government-issued claims against our country’s future output accumulate, there is a hollowing-out effect, with financial capital drawn away from the real economy. Real economic growth happens when private investors take their chances on innovative entrepreneurs—not when they are induced to purchase ‘safe’ government securities.

“Since the resources needed to pay for current government expenditures are not available, the government is laying claim to future revenues. The notion of money as a claim on tangible assets is thus rendered abstract. Defining the value of money becomes a matter of government dictate. That’s why it’s called fiat money, from the Latin for ‘Let it be done.’”

Perhaps the era of the US dollar’s exclusive dominance is, in fact, done. If so, Shelton points to Nobel Prize winner Robert Mundell — the economist who provided groundwork for the euro — for a potential path forward. Mundell has suggested that an improved global monetary system could be achieved by tying together the US dollar, euro, and gold. You can read more details in Judy Shelton’s Weekly Standard piece on fixing the dollar before it’s too late.


Rocky Vega,
The Daily Reckoning