There are many arguments for and against a fiat standard vs a gold standard. The necessity of monetary expansion to support the large post-war baby-boomer generation is a strong argument in favor of the former. Though, others argue that we might not have had a great depression and WWII if we had not strayed from the gold standard through the credit expansion of the roaring twenties and WWI:
However, given that we live in an imperfect world where politicians, citizens, and nations will make mistakes, a fiat standard may allow the flexibility to recover from these events relatively faster than a rigid gold standard. Credit or some form of fractional reserves has also arguably always been part of most gold standards, and technologies from double-entry accounting, the printing press, and the internet, both allow for and demand greater transmission and fluidity of the money supply.
The current system though has hurt savers and the poor, as credit has flowed to existing asset holders, bidding up assets like housing and eroding the value of currency. It might be possible to include the flexibility and high economic growth of a fiat standard while protecting savers and the poor through the adoption of a few additions to the current system.
- Central banks should be reduced to lenders of last resort. They shouldn’t be trying to control the economy through interest rates, and if they do have to bailout financial institutions for the common good, it should come with appropriate penalties.
- Punitive interest rates lent against good collateral
- Where there is insolvency, equity should be wiped out, bondholders become equity holders, and depositors should be highest in the capital structure
- Senior management should be forced to step down
- Share buybacks and corporate bonuses should be prevented until the institution is profitable again
- Second, it could be embedded in the constitution of a country, and citizens can save capital gains free in any asset which the government or central bank hold as reserves. This means in most countries they could hold gold, foreign currency, and government bonds. If the reserve is an interest-bearing asset like a bond or foreign currency bank account, the income would still be taxed, but if there is a capital appreciation through foreign currency moves or lowering interest rates, this would be tax-free to act as a check to prevent governments from devaluing currency at a rate that hurts the most vulnerable of society. It could also be stated that these reserves must be held directly and without leverage so that it wasn’t a loophole for traders or financial speculators to avoid tax.
- The first two ideas might be enough in itself to provide significant improvement to the fiat system, however, Dr. Richard Werner who coined the term “Quantitative Easing” believes that banks should be prevented from credit creation for (hard) asset purchases such as houses. Because of the limited supply of land/housing in a developed/highly populated country, credit creation simply bids up the prices of these assets, putting homeowners into more and more debt, and channeling wealth from the poor to those with assets. Credit creation for business lending (covering salaries or plants and equipment) may have a short-term inflationary effect as there is more demand for goods and services, but creates new businesses and jobs and a longer-term deflationary effect and a positive effect on real GDP, benefiting society as a whole. Mortgage lending for houses could still be possible through non-bank lenders, which lend existing money rather than newly created money as banks do. Investors would still have some impact on house prices as they would adapter to interest rates weighing their risk/yield to other investments, but there wouldn’t be a feedback effect where higher house prices lead to more credit creation which leads to higher house prices. There would also have to be some conditions placed with regards to international buyers, either excluding them or preventing recourse for foreign debts on local housing, otherwise, foreign credit creation in banks outside a nation implementing this policy might push up house prices in the absence of local credit creation. It is clear this idea is not without its uncertainties as it has not been tested in the contemporary world, still it may be something obvious that has just been overlooked in the evolution of our current monetary system.