China devalued its currency, the resignation of the Greek prime minister revived doubts about the Euro, and the markets were expecting that in a few weeks the Federal Reserve was going to begin raising the interest rates. These three strikes—connected with monetary manipulations—was followed by a large decline in the stock market. It is natural that those of us who follow economic policy will try to find connections.
Those who champion central banks and government monetary manipulation argue that their goal is to bring stability. Those of us who argue that monetary bureaucrats continue to fail, see the current scene as providing another chance to point at their failures and as another opportunity to call for sound money.
Policy experts from think tanks and the academy who oppose the current status quo will continue to push, but the battle will not be easy. Central banks have powerful defenders. In addition to the special interests who want a government “ministry of banking welfare” most people continue to see money as an instrument of the state. They do not regard money as what it should be: the most common medium of exchange, resembling more a weight and a measure than a volatile government tool.
Unlike other commodities, where prices reflect the actions of a wide variety of private sector market players, governments play a predominant role in the supply and regulation of money. But as the role of central bankers and their actions are mostly hidden from the public eye, they seldom get the scrutiny they deserve. Any private sector company who would have had such a dismal track record as stated by their objectives would see their executives indicted and already bankrupt. You do not need to be a conspiracy theorist to be suspicious by the way in which the Fed works to avoid independent scrutiny or audits.
A recent study by one of their own, Stephen D. Williamson, makes a welcome recognition that the Fed largely failed in its forecasts, and did not achieve intended goals through its “quantitative easing.” More egregious yet are the mistakes these great Fed experts made in choosing the “primary dealers” in the banking industry. The selection process of primary dealers deserves much more scrutiny than what this column allows. The cases of Bear, Sterns & Co. and Lehman Brothers are well known, but MF Global was brought in only a few months before it went bankrupt. Who paid for these mistakes? All of us who do not belong to the crowd of privileged bankers and monetary policy makers.
China’s devaluation through “easing” opened the eyes of many to the possibility of currency wars. But they are not the only bank to use that tool. Under the Federal Reserve the value of the dollar has lost over 90% of its value. After resisting for some time, the Europeans have followed suit and embarked on their own “quantitative easing.” The Euro lost 15% against the dollar this year.
Early in August, only weeks before the first structured devaluation, the IMF decided against including the Renminbi (the official currency of the People’s Republic of China) along the U.S. dollar, the Euro, the Pound, and the Yen in the category of official reserve currency. I doubt that Christine Lagarde, IMF’s managing director, got an early warning from the Chinese, but it would have certainly looked bad for the IMF if just days after including the Renminbi in its basket of the most reliable tradeable currencies, they would have had to face the devaluation. If there was an early warning, and there is a payback from the IMF, it will likely be the inclusion of the Chinese currency into this elite paper money club one year from today.
Macroeconomic indicators have not served very well as economic bad weather forecasting factors. The sound money component of the economic freedom indices compiled by the Fraser Institute and the Heritage Foundation have not been showing signs for alarm. Most developed economies score between 7 and 9 out of 10. The worst performing currencies this year include Venezuela, Argentina, Russia, and Bitcoin, the private sector alternative. Yet, less than 10 percent of the countries around the world show double-digit inflation. Google trends show no growth or slight declines in searches for sound money or inflation.
Given these trends and the collusion between monetary authorities and the leading players in the banking industry I doubt that market forces will be allowed to take control of the production of money. In the near future we will likely see more of the typical ups and downs and I only see a much more generalized race to the bottom if the Euro collapses.
Although many of the sound money champions will continue to push or prepare the ground for radical changes, such as a true gold standard with freedom to use whatever currency, most will push for intermediate steps. These can include rules for central banks that mimic the behavior of the gold standard; increased capital requirement for banks; eliminating the dual mandate and restrict the actions of central banks by contracts; and allowing the emergence of alternative currencies.
Proponents of these solutions are scattered around the academy and leading think tanks. Some also represent the alternative currencies industry. A short list of sound money troops should include those at theHoover Institution (Stanford University), which had Nobel Laureate Milton Friedman as at its most famous economic fellow, and now has at least three outstanding experts in its ranks: John Taylor, Allan H. Meltzer, and Nobel Laureate Thomas Sargent. The University of Chicago has talented economists, such as Kevin Murphy and Luigi Zingales, but they do not focus so much on monetary reforms. Grove City College, Hillsdale, and George Mason University also have numerous professors promoting sound money and constitutional money. Universities around the globe where some of the leading scholars promote sound money include the Universidad Rey Juan Carlos (Spain, under Professor Jesús Huerta de Soto), and the Universidad Francisco Marroquín (Guatemala).
Some of the larger think tanks are also increasing their efforts in the monetary arena. At Heritage Foundation, Norbert Michel plays an important role on monetary studies. Heritage’s top economist, Steve Moore, and president, Jim DeMint, decided to show strong support, attend, and speak, at the most important meeting of sound money champions this year. It is taking place at Jackson Hole and organized by the American Principles Project.
The Cato Institute recently founded the Center for Monetary and Financial Alternatives under the direction of George Selgin, one of the founders of the modern free banking school. Cato’s center was launched during the tenure of its past CEO John Allison, responsibility know relies on Peter Goettler, Cato’s new CEO who also came from the banking world (Barclays). Cato’s annual monetary conferences, under the direction of James Dorn, have kept the topic of free-markets and money in the radar screen of the Washington crowd.
Free-market think tanks and scholars as the above see sound money as an effective road to prevent an escalation of currency wars. It is also a road for progress. Dr. Judy Shelton, one of the most prominent among them, recently wrote that “having an orderly and ethical international monetary system was a tremendous boon to economic prosperity for the middle class.”
* Alejandro Antonio (Alex) Chafuen, Ph.D., has been president of Atlas Economic Research Foundation since 1991. A member of the board of advisors to The Center for Vision & Values and a trustee of Grove City College, he is also the president and founder of the Hispanic American Center of Economic Research. Dr. Chafuen serves on several boards including the Chase Foundation of Virginia, the Acton Institute, the Fraser Institute (Canada), and is an Active Honorary Member of the John Templeton Foundation.