All Currencies Are Backed By a Promise


One reason that amateur state legislatures tend to produce government by lobbyist is that the only feasible alternative available is deeply amateurish government. For example, this from North Carolina:


Cautioning that the federal dollars in your wallet could soon be little more than green paper backed by broken promises, state Rep. Glen Bradley wants North Carolina to issue its own legal tender backed by silver and gold. The Republican from Youngsville has introduced a bill that would establish a legislative commission to study his plan for a state currency.


A similar measure already passed in Utah. But this reflects, among other things, a fundamental misunderstanding of the relationship between currency and promises. It's actually a gold-backed currency that's backed by nothing but promises. When America was on the gold standard, that meant that the government promised to give you such-and-such an amount of gold in exchange for a dollar. When FDR came into office, he decided the government needed expansionary monetary policy so he changed the price of gold. Under the Bretton Woods system, similarly, the government's promise to convert dollars to gold lasted a few decades and then it went away. It's a gold standard that represents a government promise that can (and will) be broken. Fiat currency is a government that's being honest with you. It's not pretending the money is anything other than what it is.


The practical response for Americans who question the forward-looking strength of the US dollar is just to buy another currency. Europe is run almost exclusively by center-right governing coalitions right now, so you can trust your money to them. Or maybe since all Europeans are socialists by definition you'd prefer to trust your money to the Canadian or British governments. You can buy Korean won or Australian dollars or Brazilian reals. You can even go out and buy actual bars of gold. I personally have a bunch of Chinese paper money in my sock drawer left over from my trip last year and held in that form in anticipation of future RMB appreciation. You can even buy gold. But whatever you do, don't entrust your money to promises by the North Carolina state government to give you gold in the future. That's just a sucker move that's going to leave you get stuck holding the bag next time there's a budget crisis.




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Published on March 17, 2011 11:29
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