Venezuelan President Hugo Chavez (pictured left)sought Arab support Tuesday for a proposed oil-backed currency to challenge the U.S. dollar in his latest swipe at Washington's dominance in global financial affairs. It's highly unlikely Chavez will gain any serious momentum for his "petro-currency" proposal at a summit of South American and Arab League leaders, but it represented another attempt to undercut the dollar's standing as the world's leading commercial currency. China has struck deals-most recently this week with Argentina-to conduct trade in currencies other than the dollar. Iran has proposed replacing the dollar with the euro or other currencies to set worldwide oil prices. Chavez plans to visit both Iran and China following the one-day Qatar gathering, whose agenda focuses on trade issues but also touches on Arab worries about rival Iran's growing influence in Latin America. – Associated Press
Dominant Social Theme: Anything is better than a fiat dollar.
Free-Market Analysis: Actually, anything is NOT better than a fiat dollar. A formal oil-based dollar would be a historical oddity. Don't take our word for it; the market has rejected such a standard and will surely continue to reject it. (We don't make the rules, the "invisible hand" does – though Chavez probably wouldn't recognize an invisible hand if it bopped him in the face.)
What are some other ideas that won't fly? A currency basket backing paper money with a collective of fiat-paper money is not going to work so well either. In fact, any backing of paper money by something other than gold and silver is not going to have much of a chance long-term. We can say that because we have studied history and understand that societies grounded in gold and silver did better financially than those that were not.
That was why, yesterday, we were happy to point out a glimmer of common sense – from a monetary standpoint – when the Russians (and maybe the Chinese) called for a quasi-gold standard. We added that the proposal might eventually evolve into a real money-metals standard.
But for any of you (any more) who are tempted to write letters to us explaining that we ought not to endorse an IMF basket of currencies that includes an element of gold – well, WE'RE ALREADY THERE as the kids would say.
In fact, we didn't think it was necessary to go through the process of explaining what a money metals standard really is, and how you get to one – it's kinda academic after all – but since there now seems to be as many ways to replace the dollar as there are world leaders, we will briefly present as best we can an academic and historical perspective on free-market money.
First of all, free-market money arises from the MARKETPLACE. It is not foisted on a grateful world by a bunch of brilliant bureaucrats in expensive clothes sitting around conference tables for a few days.
Second, free-market money historically has included both gold and silver – not just gold. That's so that if the people at the top fool around with the gold or with the silver, the ratio between the two metals gets out of wack and the common folk know it right away. That is why many market-based money standards throughout history used both gold and silver. Gold was the bankers' money because it was rare and portable. Silver was the people's money because it was less of each. The United States in its republican days recognized both gold and silver – and that was a natural and historically relevant way to create a money standard.
Third, a market-based gold and silver standard (including or excluding PRIVATE fractional reserve banking) arises out of monetary competition that took place over tens of thousands of years. Other standards rose and fell during this time including salt, sugar, rocks, beads, etc. But the gold and silver monetary standard survived and prospered and gained acceptance around the world because it was the most stable and wealth-enhancing standard.
Now in today's world, filled with very sophisticated people, it has become fashionable to say that gold and silver are relics of less civilized eras. But this is just not true. The facile arguments made for paper money have been around for thousands of years. Smooth-talking, well-educated people have always suggested that they be allowed to print (one way or another) all the money that society needs and do away with that nasty and inconvenient link to an asset. And always, those really smart people have grown very wealthy while the money they promoted eventually shriveled into nothingness. Which is what is going on today.
We are glad to see this sudden interest in money creation. After all, money, we have been assured, is a boring subject, not the stuff for debates. And if it is to be debated at all, then it ought to be debated by those among us who have gone to Harvard or are Rhodes Scholars, and have had careers in central banking, etc. But facts are stubborn things. A gold and silver money standard worked throughout history. America was founded on it – and prospered on it. There is plenty of history to show that this sort of standard is what markets select when they are left alone.
We are not sure if a new monetary standard will be announced following the upcoming G20 meeting. But maybe the meeting's communiqué might hint at such thing. In any event, we are sure that anything that comes out of such meeting will not be market-based. How could it be? And anything with which the International Monetary Fund is involved is bound to be questionable. The conversation itself, however, is startling. It shows how far central banking control has faded and how tarnished the fiat brand really is.
No, we don't expect miracles. Proposals such as the Russians have made are very small steps forward. But progress is progress. We are glad the conversation has started. Maybe it will prepare people for a day when the system simply can't sustain itself any longer – and a market-based money metals system returns by default. We don't wish that sort of chaos on anyone. But we would welcome the result.