This past week, the Senate did not quite confirm President Trump’s nominee to the Federal Reserve Board, Judy Shelton. There might be another vote in a few weeks. The opposition to the nomination, mainly from Democrats and cognoscenti in the economics establishment, centers on how wild and out-of-touch are her views in support of a monetary role for gold.
There was a time—the late twentieth century—when one could freely mock the gold standard, say it was quaint, un-modern, responsible for the Great Depression. This time is now in the past. In the third decade of the twenty-first century, it is becoming passing obvious that the current monetary system has reached, if not passed its peak. Fiat currencies issued by sovereigns and legal tender by their lights for all transactions—this era is wrapping up its historical moment. The U.S. dollar managed by the Federal Reserve: this is the instituton that within a generation or so will be quaint, un-modern, and understood as responsible for episodes like the Great Recession, the 1970s stagflation, and the march of economic inequality.
Creative destruction of the reigning monetary system is unfolding before us. Bitcoin has gone nicely nuts since it appeared Joe Biden might win the presidency, up three-fourths since October. Whatever its practical monetary virtues, Bitcoin is as well, and perhaps primarily, an index of the fate of the current monetary system, of king dollar. The more Bitcoin goes up, the more the global impression that money should go into not simply monetary alternatives, but monetary-system alternatives.
The narrow matter of whether Bitcoin works as a day-to-day currency is not the nub of it. What is central is whether the global crowd is coming to the realization that innovation in private-currency issuance is reaching a tipping point, beyond which it is unlikely that governments will be able to continue to enforce the legal-tender preference for their currencies. The price of Bitcoin on the exchanges is an outrider of this coming episode of creative destruction in the marketplace.
We have seen so much of Joseph Schumpeter’s theme—creative destruction—across the areas of business and commerce since the 1990s. Now it is becoming apparent that this most primordial and unstoppable of economic drives is coming for the monetary system. It is of course all for the better, in that creative destruction generally leads to whopping net gains in the standard of living and further possibilities in the economic domain. In this case, the gains will be especially large. In normal examples of creative destruction, some private business—that of the Sears catalogue—meets its match in a new superior private business—amazon.com. In the usual case, new private excellence supersedes previous private excellence.
In the monetary-system case, in contrast, we have a government monopoly, complete with legal means of enforcement (indicating the sub-optimality of the system), meeting its match in private innovation, the mass of cryptocurrency developments. Because a private system bids to overwhelm and replace the government system, the gains to the market and the public stand to be uniquely large. This is because generally, government initiatives are far less efficient and realistic than private ones, in the realm of business and commerce. The potential increase in real economic benefit from the creative destruction of the monetary system care of the market is enormous, perhaps the greatest of the whole information age.
And here is Judy Shelton saying look, Federal Reserve, the dollar has lost 85 percent of its value since the country went off gold in 1971. You can squeal oil shock and the best of all possible worlds and the non-inflation-accelerating rate of unemployment and no tenured economists favor the gold standard (they took a poll) and all the rest, but the basic matter is that the global public will not have it. In time, therefore, agents of the global public will creative-destruction the fiat dollar out of existence, no matter the sovereign power of the United States or anyone else.
This process is upon us, still early in its iterations. If the powers that be do not get Judy Shelton onto the Fed, the posture will be of an ostrich nuzzling its head right into that inviting sand.