Judy Shelton at the Commonwealth Club
Yesterday I attended a talk by Judy Shelton at the Commonwealth Club in San Francisco on the general topic of creating a stable international monetary system. Her talk was quite entertaining, and she certainly dropped a lot of names, indicating first name familiarity with Milton Friedman and Alan Greenspan. Her most interesting points concerned the benefits and possibilities of stabilizing the international monetary system by the return of a currency system at least partially linked to gold. She gave two arguments in favor of this. First, that currently the wide fluctuations in exchange rate are largely caused by speculation, and that a huge derivatives market exists to second guess these fluctuations. Second, that the lack of a stable monetary system makes it easy to print money which eventually will have to be absorbed by inflation.
One of the objections to a gold standard is that given the expansion of the world economy there simply isn’t enough gold to make it happen. The entire supply of gold every mined fits in about two olympic swimming pools, and the rate of mining has slowed down. The problem is that this amount times the price of gold is a fraction of the currency in circulation. Judy made the good point that it’s not necessary to back currency 1:1 with gold. For example, cash doesn’t exist 1:1 with money, because we only need cash some of the time, and suitcases of the stuff are a hassle really unless your in the mob. In the same way gold is in principle a nuisance to have around, so the issue is not that we need gold for each dollar, but you need to feel comfortable that you could redeem your money for gold if you so wanted, just as you currently feel comfortable that you could in principle get all your money out of the bank in cash. Based on that you could have a gold standard with only about 1-2% gold backing. Again, what makes it work is the legal discipline that a given ratio of gold to money is maintained, constraining the expansion of cash. The one puzzle with that is that it can still be abused. If a country pays lip service to this, but still prints too much money, there can still be a run on the currency and it would run out of money.
She also suggested that pegging the currencies to one another (say $-Euro-rmb-yen) would be a good step towards this, with the gold convertability added later. While various people such as French president Nicolas Sarkozy support this idea in principle, she wasn’t too optmistic that it would happen any time soon, given that the current theme seems to have more and more stimulus spending.
