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Editorial: Nancy Pelosi and the Role of Money

The U.S. House of Representatives and the U.S. Senate have each proposed their own coronavirus-response legislation. Broadly speaking, the Senate bill is supply-side, focusing on relief for corporations, and the House bill is demand-side, focusing on relief for the public.

Speaker Nancy Pelosi's proposal, called the Take Responsibility for Workers and Families Act, would  give each American $1,500 (though there are restrictions on payouts for those making more than $75,000 annually). To enact these payouts, the bill calls for the creation of a digitalized dollar. Forbes reports,

The bill establishes a digital dollar, which it defines as 'a balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal Reserve Bank or ... an electronic unit of value, redeemable by an eligible financial institution (as determined by the Board of Governors of the Federal Reserve System).' Additionally, a digital dollar wallet is identified as 'a digital wallet or account, maintained by a Federal reserve bank on behalf of any person, that represents holdings in an electronic device or service that is used to store digital dollars that may be tied to a digital or physical identity.' ...
The Federal Reserve banks themselves would also make available a digital dollar wallet to any U.S. person eligible for the payments as well. Additionally, the U.S. Postal Service would aim to help unbanked individuals and/or those without proper ID to establish their identity be provided a digital dollar account, and would set up ATMs for customers to access their funds.

In considering this proposal, it is important that we understand the nature of money: It is a utility that represents tangible goods and services. It would be inefficient for a farmer to trade eggs for a stapler from Office Depot, but these parties are able to transact because money serves as their common denominator.

Money used to be denominated in gold or silver. This was only natural: People did not trust that if they accepted fiat currency, i.e. money not backed by precious metals, they would be able to purchase another person's goods or services in the future. In other words, they would be stuck with worthless, unusable banknotes.

The U.S. Constitution carefully established the relationship between money and value. Article One, Section Ten notes, "No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts." The U.S. government followed these words to the letter, producing only metallic coinage until the Civil War (except for a short period during the War of 1812, when it issued bond-like paper currency).

In 1861, the U.S. government started issuing legal-tender notes, i.e. fiat currency that traded for a discount relative to gold dollars. The Treasury also cranked out demand notes and gold certificates, paper money that was redeemable for metallic dollars at par. Silver certificates -- paper money redeemable for silver dollars -- were introduced near the turn of the century.

The key is that paper money (aside from legal-tender dollars, which were worth less than metallic dollars until they were effectively pegged to gold in 1879) represented tangible value. A farmer trusted that if he received a $20 gold certificate for a shipment of eggs, he would be able to use that note for home improvements. Undergirding the farmer's confidence was the 0.96 ounce of gold that backed the $20 gold certificate.

Image result for $20 gold certificate
1882 $20 Gold Certificate (Numismatic News) 

There was functionally no inflation in the 19th century, but the linkage between money and value started to deteriorate after the turn of the century. While some ascribe the death of money to the creation of the Federal Reserve System, in its early years, the Fed actually created dollars backed by gold. Series of 1928 Federal Reserve notes read: "Redeemable in gold on demand at the United States Treasury or lawful money at any Federal Reserve Bank."

It was not until 1933, when Franklin Delano Roosevelt delinked the dollar from gold and abrogated gold dollar-based contracts, that the value of the dollar started to plunge. By 1950, the dollar was worth only 54% of what is was worth in 1933. Roosevelt, however, allowed for the "gold window," wherein foreign governments could exchange their dollars for gold.

The collapse of the dollar as an exchange for value was furthered by Lyndon Johnson's cancellation of the silver standard in the 1960s and Richard Nixon's nullification of the gold window. By 1974, the dollar was worth 63% of what it was worth in 1964, and by 1984, the dollar had lost 70% of the value it held in 1964.

The cumulative effect of Roosevelt, Johnson, and Nixon's policies is obvious: After seeing no slippage between 1800 and 1900, the dollar lost more than 95% of its value between 1900 and 2000.


Today, "money" is paper with no inherent value. However, the U.S. dollar retains functional value because it can be easily converted for goods and services from providers worldwide.

Providers are willing to accept dollars because they, in turn, can convert the dollars for the goods and services of others. This relationship is predicated in the globe's trust that the U.S. government will not produce additional money in the absence of a concurrent increase in goods and services, maintaining a careful relationship between supply and demand.

Now, the House wants to increase the money supply without an increase in national production -- all with a few clicks on a keyboard. They want these dollars to be born digitally, issued digitally, and held digitally, and there would be no clear linkage between these dollars and tangible goods and services. Worse yet, it is unclear whether the production of these digital dollars would end with the coronavirus pandemic.

It is not surprising that there has been a massive rally in the price of gold, the ultimate store of value. The yellow metal is now worth $1,623 an ounce at the time of writing, up from $1,378 a year ago. In other words, the value of a dollar has plunged from 0.073% of an ounce to 0.062% in 12 months.

Goldman Sachs predicts that the price of an ounce of gold will reach $1,800 in the next twelve months, declaring, "We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policy makers act to accommodate shocks such as the one being experienced now."



A digital dollar would only allow for the continued debasement of our currency. What America needs is a policy that would solidify the dollar as a mechanism for exchanging and retaining value over the long term. The farmer who accepts $20 for eggs now should be confident that his $20 will buy an equivalent amount of home-improvement supplies in 20 years.

Stable money was the norm in the 19th century. There is no reason that our 21st-century policymakers -- who have second-to-none advanced degrees and complicated computer models -- cannot figure it out.