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Option 3 Please, Maynard

How to run the world's money...

ONE of the interesting themes that I took away from attending the Kemp Foundation's Kemp Forum on Exchange Rates and the Dollar, on April 20 in Washington DC, was that there are three clear options for our world monetary future, writes Nathan Lewis at New World Economics in this article first published at Forbes.

These three options are much the same as was presented in a similar conference, held 34 years earlier, in 1983. And, they were the same three options that were on the table at Bretton Woods in 1944.

Although people might favor one option over another, nevertheless, they seem to agree that there are three main options to choose from. This is good, because it simplifies the cacophony of discussion regarding monetary issues. We don't have to discuss everything under the sun.

The three options are:

  • floating currency chaos;
  • a unified system based on some floating-fiat central bank, exemplified by the Eurozone and ECB;
  • a unified system based on gold.

By a "unified system", I mean a system in which currency exchange rates are fixed.

This is already common: most of the governments in the world fix their currencies' exchange rates to one of the major international currencies, such as the Dollar or Euro. They form "currency blocs". (A shared currency, like the Euro, is a variant on the principle.)

These currency blocs are often formed via ill-designed "currency pegs", rather than reliable currency boards, and as a consequence often fail. But nevertheless, a fixed exchange rate is the policy goal, even if it is not always achieved.

The world always had a "unified system" based on gold and silver, and then, by the late nineteenth century, based on gold alone. The whole world was one "currency bloc" based on gold. Exchange rates were fixed.

A unified system based on some central floating-fiat currency, managed by a world central bank, is much the same idea, but on the "PhD standard" rather than the "gold standard". The Euro and ECB are an example of the principle. If all the countries in the world linked their currencies to the Euro, via a currency board for example, we would have Option Two.

"Floating fiat chaos" – many currencies going up and down independently and chaotically – is our present state of affairs. It is generally regarded as problematic and destructive, which is why most governments avoid it as much as possible, preferring instead to belong to some shared currency bloc. One purpose of the Euro and Eurozone was for Europe to achieve a way to avoid this mess.

By the end of the 1930s, the world had largely descended into "floating fiat chaos". A series of devaluations during that decade led to floating currencies worldwide, and various capital controls. This was such a mess that, at a meeting at Bretton Woods, New Hampshire in 1944, the Allied governments decided that it was not acceptable for the postwar period.

The two main alternatives at Bretton Woods were the bancor proposal of John Maynard Keynes and the British delegation, and a gold-centric proposal from the Harry Dexter White and the US delegation. The bancor idea amounted to a world central bank operating a unified floating fiat currency, controlled by bureaucrats. The US alternative was a system largely based on the US Dollar, which itself had been linked to gold at $35 per ounce since 1934.

At Bretton Woods, the world's governments discarded both the pre-1940 floating fiat model, and also the bancor idea. They went with Option Three, a system based on gold. Two excellent decades followed – the best decades for world prosperity from 1914 to the present, until the Bretton Woods gold-based arrangement was accidentally blown up in 1971, giving way to Option One, floating fiat chaos.

Today, we have a number of ideas floating around, which amount to Option Two systems. One is a world currency system based on the IMF's Special Drawing Rights. Although these SDRs might not take the physical form of banknotes and coins, the world's currencies would be linked to it. It would basically be a global version of the Euro currency bloc. It would probably get pushed hard by the globalist elites in the event of a currency crisis.

But the Euro is looking rather unhealthy today. Far from being an example of a better monetary future for us all, it looks like it might not last another decade. Negative interest rates, quantitative easing, overt manipulation of government bond markets to stave off sovereign default, and no clear "exit strategy" beyond eventual failure and disappearance, hardly inspire confidence.

Even the central bankers themselves – see former Bank of England governor Mervyn King's book The End of Alchemy: Money, Banking and the Future of the Global Economy (2016), or ten-year Federal Reserve staffer Danielle DiMartino Booth's Fed Up: An Insider's Take On Why The Federal Reserve Is Bad For America (2017) – can see that the "PhD standard" is coughing up blood.

Worse than all of that, however, is the bureaucratic superstate that has accompanied the Euro currency – the European Union. The currency has served as a tool to concentrate political power – eventually, taxation and military power – at a single point, weakening existing sovereign governments and their democratic processes, and eventually rendering them obsolete historical vestiges if this process is allowed to continue much longer.

Thus, Option Two, a world floating currency and a world central bank, is thus, by all appearances, also a model of unified world government – a unified world government apparently free of democratic inconveniences (even if it retains, as the Soviet Union did, the empty ceremony of parliamentary bodies), which is to say that it is a structure for absolute tyranny. That tyranny would presumably not appear before the project is complete – it is hard to herd the masses to their eventual servitude if you spook them too early.

This leaves Option Three, a world system based on gold. Historically, this has been the money of freedom and sovereignty, liberty and independence. The Classical Gold Standard era before 1914 did not require any coercion or centralized control, but was a voluntary agreement for mutual prosperity. It also worked a lot better than any floating fiat system ever has, including the Eurozone.

Would you want to join the Eurozone today? That Titanic has already hit the iceberg; those already on the ship are trying to escape. Option Two is dead in the water for all to see.

At some point, especially if there is some sort of major crisis, we may have another get-together like the one at Bretton Woods seventy-three years ago. At that point, we will consider Option One, today's floating fiat status quo, which is even worse than the mess of the late 1930s. We will consider – briefly – Option Two, just as Keynes' bancor was considered, briefly, before being sent to the trashcan. We will look back on our decades of experience with all three options since 1914 – decades in which one system worked well, and two did not.

And then, if we still have a bit of vision and backbone, we will take Option Three, a world system based on gold.

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

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