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Peter Crabb: Idaho legislator's proposal to abolish Fed wouldn't solve currency problems

You can hear the voices shouting, “drop the anchor and secure the vessel” But to many, our economy has lost its anchor and is adrift at sea. Our dollar needs a golden anchor.

In a Capitol rally Monday, Athol Republican Phil Hart and others advocated for an end to the Federal Reserve system and a return to a precious metals monetary standard. Hart plans to introduce a bill this session similar to an earlier proposal whereby we could use Idaho-manufactured silver bars and medallions for state fees and taxes.

A metal-based currency standard gets good arguments these days. Many economists agree with Hart that our economic and financial problems are the result of an unanchored currency. We borrow and spend too much because we have fiat currency – money with no intrinsic value, or anchor.

Economist Judy Shelton has written frequently for The Wall Street Journal and other publications criticizing the Fed as communists and socialist planners, saying we are doomed if we rely on their ability to manage the supply and demand for money.

Shelton continues, however, to recommend that a panel of "experts" get together and decide how our currency should be anchored. But how would these experts and planners be any different than the current Fed policymakers? What is the right anchor?

Even if we do come up with a good anchor, what stops future government officials or policymakers from debasing the currency – changing the anchor – when it benefits them to do so?

Kings have debased their currency for centuries. The international monetary system in place for most of the 20th century, the Bretton Woods system, obligated the member countries to maintain the exchange rate of their currencies within a fixed value in terms of gold. When this was no longer beneficial to the United States, as the government spent more and more on the Vietnam War and new entitlement programs, we simply abandoned the system that was to designed to secure our monetary policy.

The financial market action during the past financial crisis sustains the argument that we have amore flexible system than any gold standard. When stock and corporate bond markets got into trouble, people moved their money to short-term dollar and Yen securities. When the Euro looked better, their money went there.

Yes, the value of gold also rose during the financial crisis. But this may only be true because there are more dollars around to buy it with – all that cash as to go somewhere. The rising price of gold does not mean it is a better form of money.

The basic argument for a gold standard is that it would control government - you can't print more money if you don't have the gold. This is true, but it rests on the assumption, and contains the implication, that people will always want gold, or always ‘treasure’ its value.

Even if greater gold production is good for Idaho mine operators, many Idahoans don't want gold, or 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.

You may say there are many. If I don't like the dollar I can change it to the yen or the euro. But these are also fiat currencies and are not legal tender in the United States. Consumers can’t use these pieces of paper even if policymakers in Japan or Europe do a better job at managing them than we are doing ourselves.

Hart is correct - we will have a more efficient and effective system if we abolish the Federal Reserve’s monopoly power over money. But we need not abolish the Federal Reserve. The benefits of the system may appeal to both businesses and consumers.

Banks that choose to join the Federal Reserve System should be free to do so. In addition to the money transfer services the Fed provides member banks, fractional-reserve banking improves banks’ ability to act as a financial intermediaries, and thus, it benefits consumers.

As stated by the Federal Reserve in its publication The Fed Today, “If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money.” Those households saving a large portion of their income would also spend an inordinate amount of time seeking out borrowers for their funds.

Hart’s proposal is consistent with our current laws. The U.S. Constitution currently provides for only metallic-based currency. Article 1 Section 10 reads “No State shallmake any Thing but gold and silver Coin a Tender in Payment of Debts.” Without a constitutional amendment the state of Idaho cannot do much more than establish gold and silver as legal tender.

The state of Idaho could compete with the Fed by starting its own bank. The Bank of North Dakota is the only state-owned bank in U.S. and has operated since 1919 without much fanfare. Such a strategy does not, however, prevent future problems at the state level just like those we see with the Fed at the national level today.

Absent changes to the law or competition from state-owned banks, we are simply going to see investors move to better money. In time, countries that don’t borrow as much as we borrow and don’t rapidly increase the supply of their currency are going to benefit from increased investment.

Hopefully, the Fed will wake up to this fact soon and secure our vessel with higher interest rates and the consequently lower inflation.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.