From political fringes to mainstream economic debate
In his article (in German) (English Google translated version) Von Thomas Jacob, of the Property and Freedom Society (run by Mises Institute people) proposed a gold backed Swiss Franc. You can also listen to Coben Centre Radio interview (direct link to mp3 in the article) on the subject or you can listen to Jim Rickards interview on Kingworld News.
According to Von Thomas Jacob, each gold franc would contain 0,1 grams of gold so they would be relatively inexpensive considering today’s gold prices and yet offer a known measure of value in terms of gold. Coins could be minted by any private company provided it has Swiss government’s licence. The company could stamp its own logo on revers of the coins while avers would be designed by the government. This would make sure that the coin would be both recognizable and cheap to produce. It would also increase security, as companies would try to create elaborate designs that are hard to counterfeit.
On March 8th 2011 the initiative was submitted to Swiss Parliament for debate as part of “Healthy Currency” campaign sponsored by politicians from the right-wing SVP (Swiss People’s Party). Switzerland’s direct democracy approach to all major legislative changes, would than require the bill to pass a national referendum. Only then could it be written into law.
Consequences of gold backing of the Swiss Franc
Gold-backed Swiss Franc is not meant to replace the current Franc but rather be an alternative to it. Since both currencies would be legal tender people/creditors would probably hoard the gold-backed currency and spend the current, paper one. This would most likely cause a rapid devaluation of current Swiss Franc which might threaten to destabilize the currency in the short run. It the long run it would put pressure on exporters since they would have to lower their prices and innovate to remain competitive on the global market. However, at the same time it would create an opportunity to lower input costs for imports and to some extend on labor costs.
Gold Franc would cause perpetual deflation and in fact this is exactly how a free market operates in an economic landscape with sound money as a currency. Just to make things clear – deflation is the preferred state of a growing economy. It’s just that it’s very difficult to borrow money and do unproductive things with it, which is exactly what every government does. So it’s the government that sees deflation as its worst enemy not the consumer.
One big problem with the Von Thomas Jacob’s proposition IMHO is lack of any detail on gold-backing of currency in forms other than coins. What about digital deposits and paper banknotes? Who would store the metal required to back it up? I support GoldBlog’s view that without those details this is just a right-wing politicians’ tool to get people’s votes – nothing more.
The other problem that I see with this proposition is the gold standard really doesn’t solve the problem of government’s tendency to borrow too much money. In fact it makes consequences of doing so worse. We know from history that if governments can borrow, they will. If the currency is backed by a commodity, the money cannot easily be printed but the government can still default by periodic and sharp devaluations. This process is often so rapid and puts such a great strain on society that the social fabric tears apart leading to social instability, riots and sometimes even wars.
It is undeniable that a government does not produce any new wealth. By definition, it only governs the wealth that already exists in the economy. So if a public institution is unable to create any wealth, than it is unable to pay any additional money above the nominal value of the loan i.e. it is not able to earn money to any pay interest on the loan and so it just simply should not have the right to borrow any money. Period.
It is fundamental to note that the only way a government can get any money at all is by theft… ehm, I mean taxes:
- Direct tax (like income tax, capital gains tax)
- Indirect tax (like VAT, customs duty, excise duty)
- Hidden tax (like Inflation)
It’s bad enough that the government forces us with a threat of imprisonment to pay those taxes. It’s even worse that we have no guarantees on the scope and quality of government services. But that we should also pay the interest on the loan that by definition won’t create any new wealth for the society is simply beyond me.
The thing that makes the government’s economic oppression possible are legal tender laws (and of course the monopoly on the use of force) that forbid people to transact and pay their debts in the currency of their choosing. Gold standard is a perfectly valid solution provided there is no state control over money supply and people use any currency they like without the state coercing them to use its own currency. Essentially what I’m saying is that the state should be run exactly like the Church, like a charity. People would voluntarily pay whatever amount they think is fair for the services that the state provides.
Radical? Sure, but please prove to me that there is a more ethical, more free market and most importantly more effective way of paying for the services that the government provides. There isn’t. Slavery i.e state coercion is not efficient – history says so.
Just to reiterate my point here. Gold Franc initiative is a first step in the right direction. However, without a true economic and social debate over what governments can and can’t do in terms of their budgets, gold-backed currency just wouldn’t work on its own. Remember, in the long run it is we the people who tell the government what to do, not the other way around.