Questions have been raised:
Why the “gram of gold”?
Discussion: When the Unit of Accounting is, itself, a “policy instrument” there is no independent element for the voting public to look at, to rely upon, and specifically the buyers of US Treasury bonds should know they are being promised something in the future that is more than just “a policy instrument” of value.
Quote from Isaac Newton
“Gentlemen, in applied mathematics you must describe your unit.” He instructed the Royal government.
Newton fixed the gold content of the British coinage, which is unchanged today although in 1931 the “paper pound” (GBP) became the UK government’s accounting unit and domestic legal tender.
[Newton citation from Isabel Patterson, The God of the Machine (1943), who was making a similar claim about unreliable “paper” (policy instrument) money.]
The gram of gold is a unit of mass (weight; density) and the Unit of Accounting would be just referencing something from the physical universe. “Gram” as a Unit happens to be convenient as the name of a measurement, and in financial affairs, “traditional” in the sense of gold having been so long used as money (along with silver). Social conservatives may insist on “troy ounce” and apothecaries measure, but those “names” are subject to “re-definition” moreso than the designation of mass in the Systeme International.
Why Not a Tabular Standard, with a diversified group of commodities?
Discussion: Proposals for a tabular standard have been around since Stanley Jevons and Simon Newcomb, and have never been taken seriously by the world of finance, or governments. Perhaps tabular standards are the “most rational” method of establishing a Unit of Accounting. I particularly like the Greenfield Fama Hall (GFH) commodity concept, which Greenfield and Yeager analyzed. The best part would be the government would not issue any of the “currency,” which might be created by banks for that Unit of Accounting, privately as credit (deposits).
When the government “defines” a Unit of Accounting for itself, which it uses in the bond market, then the private sector will create deposit accounts and private loans in the same Unit of Accounting. This is just “monkey see, monkey do” anthropology. The banks would also have assets denominated upon maturity in that Unit of Accounting, so their new credit liabilities would be “backed” sufficiently to promote “confidence.”
- When the “dollar” is just a “policy variable,” there is no basis for long-term confidence in it. No financial planner can tell a client, “you will have ‘X-value’ in the future.”
- Who knows?
- Its value is a “policy variable,” and policy can change.
If the payments system can already accommodate Visa and Mastercard, with FX transactions seamlessly executed, different Units of Accounting are already not any serious problem for a modern economy (and probably not for more primitive systems, where traders are very wary and alert). Local pricing would probably always be done in traditional, familiar customary (“dollar, euro, yen, yuan”) units and labor wage rates would optimally be local also to match the local pricing practices. Tourists don’t seem to have many problems with the payments system if they carry plastic.
So, “Why the Gram of Gold” and it is because it is a Unit that can serve for Accounting, and be independent from any government policy.
Why Not Fix the Dollar-price of gold?
Discussion: The fixed weight definition of “dollar” from 1900 was 1.5046 grams of gold, until F.D.R. debased it and Nixon abolished it in 1971 (it was a “policy instrument”).
Fixing the amount of gold defining ‘One Dollar’ is not technically different from defining dollars in terms of a composite of other commodity prices, as in a tabular standard, but a single tangible referent is “more concrete” in people’s minds, which begs the question: “Why not just use the weight of the metal to which the government’s Unit of Accounting is supposed to refer?”
The answer is that “defining” the “dollar” as something else leaves it as just a “policy instrument” with a value that can change with new policies. [Politicians and crony capitalists want the “flexibility” of that option.]
- What kind of “confidence” is that supposed to inspire? Does the motto on the paper money say “In God We Trust” because we cannot trust the money itself, or the government that issues it? [motto was first used in 1862 on paper currency; the Greenbacks; “god” instead of “gold” or silver to be trusted]
[When will another president, like F.D.R. and Nixon, decide to break the promised, fixed XAUUSD exchange rate?]
My favorite acronym: F.R.A.U.D.= Federal Reserve Accounting Unit Dollar.
The Optimal Currency Area for Capital Markets is the World as a Whole
To step outside the question of whether a government should have a monopoly of some currency area, what might be an “optimal” currency area? Some things are traded mostly locally, and others are traded mostly globally. It might be useful to have a world-wide, single Unit of Accounting for capital assets and corporate balance sheets, particularly if the company has multinational operations.
The existing system of “national currencies” drives the current strength of the U.S. Dollar. But that is accidental.
To sensibly discuss and compare different values, a “standard” for measuring changes in relative financial values is essential: We have the SI for standards in all other fields, except accounting and finance. Measuring length or weight is standardized. Measuring “dollars” is variable. Measuring the same assets in euro, pounds, yen, or yuan is even more fuzzy.
In a world of floating exchange rates, and flexible commodity prices, to use the free market price in any currency Unit of Accounting, measured against the continuously changing “exchange rate” of a gram of gold, allows both flexible exchange rates among different Units of Accounting and a firm alternative basis for balance sheet accounting – eliminating “money policy” and exchange rate uncertainties.
- Governments, of course, should be discouraged from “fixing” their paper to the gram of gold because that would prevent any beneficial adjustments in the local labor market from flexible exchange rates. Governments should be encouraged to issue long-term bonds denominated only in kilograms of gold, not in paper Units of Accounting.
A single common Unit of Accounting in the capital markets (“gram”) would facilitate international diversification of equity ownership and remove capital movements measured in that Unit of Accounting largely from impacting floating exchange rate values, since “exchanging money” would be unnecessary when “trading” financial assets denominated in gold grams. As gold grams displaced other Units of Accounting in balance sheets, showing historical cost of assets in “gold gram” units, demand for some paper Units of Accounting might decline.
Theoretically a single world capital market based on gold-gram accounting could eliminate any transactions or exchange costs (with technology, e.g. blockchain) improving market performance. Issuing US Treasury bonds in Kilograms of fine gold would represent a dramatic innovation in the financial world, because the slow roll-over of maturing US Treasury bonds financed by the Kilogram bonds would not affect private wealth by a problematic “fixing” of a gold price for “Federal Reserve Accounting Unit Dollars.”
Since “policy Units” of Accounting can “float,” A Unit that DOES NOT CHANGE is worthy of being used as a basic “relative-measure-referent” for Balance Sheet asset values (thus my recommendation for a SI referent, to the gram of gold and introduction of US Treasury Kilogram Bonds). The depreciation of paper makes balance sheet numbers over time less and less useful.
- The chemical element, Au, will not change (object permanence), and
- The measure of its mass in SI units will not change – by policy. The SI unit of mass is not a “policy variable.” It is ideal as the name of a Unit of Accounting for quoting and measuring relative prices for other assets. Offering the Kilogram bonds would establish a reserve asset for insurance, annuities, and private debentures. They would become the asset side of private balance sheets with liabilities similarly denominated.
- The exchange prices for gold in every other Unit of Accounting are available 24/7 as public information, in real time without delay or “statistical adjustments.”
- All the historical data needed for any tax calculations would be readily at hand.
- Any change in the future relative value of gold against other real goods and services is arguably more stable and predictable than government policy. As we wrote in my essay on financial planning,
- “We might not be able to predict the exchange rate of an ounce of gold vs. a pound of beef in 25 years, but it would not be a whim of imagination. I would be more comfortable thinking about coin vs. beef than about $100 today vs. $1,000,000 in 25 years, and wondering which would be more valuable?”
Although the Unit of Accounting is used centrally in the payments system – paying our bills by exchanging bankers’ debts – the “measurement function” of allowing balance sheet assets to be “historically-valued” over time, and traded, sold, or mortgaged is also critically important. Assets can be traded, and pledged for credit. Credit is liquid; most assets are not. All such pledges are made in the name of the credit-Unit of Accounting.
The “Flexible Gear” of Bank Credit
The “credit process” in action is the “flexible gear” in the economic system that Hayek discussed in The Pure Theory of Capital (1941). “Credit-money” spends itself just the same as “asset-money.” The trick is to assure it is honored in payments (a vanishingly small cost for someone with assets, connected to the ACH or card networks). Bankers know the risks and technology to assure payments are honored.
The Units of Accounting people may locally use (“euro, yen, dollar, yuan”) are not any difficulty, because they all exchange quickly with each other in the FX markets. The Visa and Mastercard networks, and others, seamlessly make foreign exchange conversions.
For its own payments and tax collections, the US Treasury has an Exchange Stabilization Fund (31 Stat. 5117) to be used for balancing foreign exchange, and that Fund could also be used to convert “dollars” to gold grams for internal accounting. The US holdings of IMF SDRs are in that Exchange Stabilization Fund, as assets held by the US Treasury, as well as other foreign currency and “gold certificates” issued by the Federal Reserve in 1934 when all gold was nationalized by Congress under F.D.R.