It's been a busy session in the Idaho Legislature. But despite the many topics under debate, a popular issue from recent years appears to be off the table.
During the legislative sessions following the financial crisis of 2008-09, policymakers in Boise frequently discussed the "reckless" actions of the U.S. Federal Reserve and the likelihood of inflation. Proposals were introduced to reduce the power of the Fed in Idaho and allow for the use of commodity-based money.
The popularity of these proposals has waned because inflation has turned out to be much lower than expected, at least for now. As reported March 15 by the Bureau of Labor Statistics, the Consumer Price Index is currently rising at an annual rate of 2 percent. This national average rate of inflation is the same for the index of western cities including Boise.
The average annual growth rate of the CPI since 2007 has been 2.1 percent. Not bad, considering the average rate of inflation during the previous five years was 3 percent. Even better considering U.S. inflation has averaged nearly 4 percent since the 1940s.
So with inflation low compared with our historical experience, the call for a new monetary system is falling on deaf ears. Those challenging the Fed's control over our money should consider a different approach. The Fed needs competitors.
Economic theory and historical evidence confirm that when markets are competitive, the consumer is better off. Under current law, the Fed has monopoly power over the production of money. A more competitive market for the use of money would not only reduce the risks of inflation, but also give consumers more choices in how they conduct their business.
Today's system is one of fiat money. Fiat money is that which has no intrinsic value and is used for the exchange of goods and services and settlement of debts only because of government decree.
Some economic models show that volatility in the business cycle and financial problems like those of 2008 are the result of a fiat currency. Under such a system, governments and consumers alike borrow and spend too much, because the inflated fiat currency reduces the purchasing power of money.
In response, some say we need a commodity-based currency, like the gold standard. But commodity-based currencies do not prevent future government officials or policymakers from debasing the currency when it benefits them. Kings ruling over silver- and gold-based money have debased their currency for centuries.
The international monetary system in place for most of the 20th century obligated the member countries to maintain the exchange rate of their currencies within a fixed value in terms of gold. But when this was no longer beneficial to the United States as government spending rose, we simply abandoned the system that was designed to prevent just that.
The other problem with a gold standard is that it turns our efforts and resources toward finding more gold. Even if greater gold production is good for Idaho mine operators, many Idahoans don't want gold, silver or any other nonproductive mineral. It is too hard to store and too hard to carry around. Commodity-based money is inefficient.
When a market is inefficient, it can almost always be improved with competition. If people don't like our money, they should be able to go elsewhere. If it isn't good money, we shouldn't buy it. If I don't like what the U.S. is doing with its currency, I need an alternative.
One such alternative has popped up recently. Bitcoin is an online, peer-to-peer system for exchanging goods and services. According to some estimates, Bitcoin is the most widely used alternative currency, with the equivalent of more than $400 million in transactions.
But Bitcoin is not legal tender. This means transactions denominated in Bitcoin are not recognized by our legal system and put users at substantial risk. Anyone buying up Bitcoin today faces the same, if not more, risk as people who hold dollars.
Without major changes to our nation's laws, there won't be any better money out there. If we are concerned that inflation is going to pick up, the better choice is to not hold on to money.
This doesn't mean we should all start spending more. We just need to put our savings in assets that do better than inflation, such as stocks. As more investors move out of cash and short-term bonds, the Fed will see more inflation risks and likely raise interest rates in response.
We don't need a gold standard or alternative currencies without legal standing. We need to give the Fed some true competition.