4 Oct
Posted in: Blog
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Our Greek Tragedy

For hard money enthusiasts, what is happening today in Greece and throughout the continent of Europe is nothing short of a modern day tragedy.  The peaceful and vibrant Western Europe that emerged following the war is descending into anarchy as EU Member countries experience something yet unprecedented in the long history of the continent: the bankruptcy of a common currency, the euro.

Leaders of fellow EU nations claim that they will not allow Greece to declare bankruptcy under any circumstances.  To do so would be a tremendous blow against their monetary union.  Yet this is the same official stance that’s been held for years among European authorities.  In the meantime, national finances have only grown direr, and today Greece is joined by Italy, Spain, and Portugal.  Even France has had their credit downgraded.  It seems almost certain that the EU will experience a form of bankruptcy, which the euro may or may not survive.  To keep Greece and the other countries solvent, Europe must either continue to monetize debt and in the process dilute its currency, which would ultimately end in certain calamity; or, strategically default, thus severely relinquishing economic power to her creditors.  Both of these choices are devastating.

The silver lining for Europe is that there may be a third option: to drastically revise and curtail its social welfare programs, the very institutional distinctions of the modern Europe state.  This would involve making tough decisions now regarding entitlements and domestic spending, and drastically reducing the size and scope of European government. Implicit in such a decision is coming to terms with basic, common sense economic principles, which its leaders have stubbornly chose to deny and disregard for generations.  If Europe embraces the common sense approach in an attempt to avoid economic meltdown, Europe should also consider re-implementing “hard” money, i.e. gold, as a common currency.

Long before the euro, Europe had common currency in gold.  From 1750-1870, Europe was on the classical gold standard; and from 1870-1914, Europe was on the gold exchange standard.  Why is a gold standard preferable to fiat (i.e. “paper”) currencies?  Many reasons, including that a gold standard by its very nature more closely calibrates the interests of neighbor nations and people.  It removes from government the potency to corrupt currency markets, and thus prevents the spawn of such corruption – destabilizing market crashes.  It makes it very hard for a nation to declare bankruptcy because it facilitates good bookkeeping practices.

I argue that Europe is not going to lose a common currency if and when it loses the euro, at least not in the economic sense.  Instead, Europe would lose a currency that has been used as political chips by European leaders.  Gold was and still could be a truly common currency, which simultaneously limits and checks the size of government by forcing it to adopt honest accounting standards.  A gold standard prevents cheating and defrauding by virtue of the fact that gold is rare and (extremely) uneconomical to manufacture.  The same cannot be said of paper money.   To raise funds under a gold standard, governments must raise taxes or float bonds to the public.  Fiat money allows governments to purchase their own debt with manufactured money.  In a sense, the euro does not prevent cheating by governments like gold did.  No, it was much too modern for any kind of metal, or what John Maynard Keynes referred to as a “barbarous relic.”  The euro is 20th century “managed currency,” who managers claim, in no uncertain terms, the ability to reduce unemployment by government counterfeiting.

There are very solid philosophical grounds on which to reject fiat currencies as the ideal medium of exchange.  It might sound boring, but accounting is serious business. The information contained in financial data is irreplaceable, and it used by everyone in society from the individual to the family to the federal government.  Poisoning the unit of account (i.e. the euro) through currency debasement causes widespread economic dislocation, unemployment, violent swings in asset prices, and overall chaos.  Yet this knowledge, known well by their forebears, is something that European governments have chosen to willfully ignore for generations.

Consider: Gold has been the world’s currency for 5,000 years, or longer.  It was the money of the industrial revolution.  Its record at maintaining value is undisputed.  It contributed mightily to peacekeeping efforts in Europe from 1750-1914.  Gold forces government to be honest in its financing.  Most fundamentally, it preserves the integrity of the monetary unit and facilitates honest and meaningful financial accounting.  While there are practical problems of keeping an international gold standard, many of these shortcomings are well understood and straightforward to correct, particularly when compared against the problems engendered by fiat currencies.

It seems to me that something is especially tragic when it is wholly avoidable.  We Americans should take head.  Europe’s economic hubris is our own.

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1 Comment

  • Not only does a monetary system based on the gold standard keep the government honest, it also prevents excessive spending on entitlement programs: two realities the liberals in America and Europe will never accept. As long as we keep spending money we don’t have we can never go back to the gold standard. Reform the programs, cut the spending, shrink the government, and give the people sound money and trust.