The more I study about money policy, the more I am convinced that nobody has a very good grasp of it, including Wall Street experts, people at the Fed, high-ups in the Treasury Dept., other administration members, and members of Congress.
For example, Bear Stearns Chief Economist David Malpass contends in this WSJ article that government has no business letting the market set the value of its currency, which is the current US policy. He argues that government “policy makers have absolute control over” factors that ultimately determine the value of the US Dollar.
Malpass admits that others have argued that the market is the appropriate place for values to be set. He says that it’s not the value of a currency against other currencies that is problematic, but rather its strength or weakness in relationship to gold. For example, it’s not the USD’s declining value against the Euro that is our problem today, but the USD’s declining value against gold. This, contends Malpass, is what precipitates inflation, while too much strength against gold precipitates deflation.
While this observation is not unimportant, perhaps Malpass’ most important point is his suggestion, made almost in passing, that “the more likely problem is too much power” wielded by central banks. Anything these banks do results in dramatic shifts in currency values. Despite his contention that too much centralized power is a significant problem, Malpass oddly argues that the central bank should exert even more power. Isn't that a little bit like people squirting fire extinguishers in an attempt to combat a flood?
Perhaps we’re too locked into thinking of money as a national thing. Imagine a more decentralized, market based, monetary system that is governed by interface rules, rather than having governments actually making money. Too scary, you say? Too much like the wild, wild, West? That’s what some people in former Eastern Bloc countries thought when Communism went down the tubes. To be sure, the transition created many problems. But few in those nations today would be willing to return to Communism. Unlike the abrupt end of Communist regimes, it would be possible to manage a smooth transition to a market based monetary system.
It would, of course, be illegal for anyone to make money out of nothing, the way the government does today. (Why is it that we allow governments to do so many things that would be completely illegal and immoral for anyone else to do?) Your money would be at least as safe as it is today, and would arguably be much safer. The “more likely problem” of too much centralized power would no longer plague us, so currency values and the economic conditions would become more stable. That’s what decentralization does.
Nobody today seriously even talks about stuff like this. It’s so outside of the scope of most people’s thinking that it is unimaginable. Certainly those that benefit from the existing power structure have no reason to consider other options. Government control of currency has resulted in a great deal of mischief. But we’re more comfortable with the devil we know than with the potential for increased liberty.