Is the euro paper gold?

Unlike paper money--fiat currencies created and issued by governments--the historic superiority of hard money--specie-backed, whether issued privately or by governments--is manifested in the imposed fiscal discipline. James Madison and other founding fathers of the US did not put the new country on a gold and silver standard because they were certain that specie-backed money was superior to paper money. Rather, they understood that until strong political institutional arrangements could be established to impose fiscal discipline, the country could not take the risks inherent in paper money. Benjamin Franklin had forecast that the new governmental structure would survive until people learned that they could vote themselves some of other people's money. That is, he wisely counseled that politicians who would routinely face voters will be inclined to "bring home the bacon." Promising constituents some benefits to be paid for with other people's money comes naturally to anyone aspiring to seek office as a "representative of the people." At one time, school children learning about the early twentieth century were taught William Jennings Bryant's memorable "Cross of Gold" speech lamenting the fact that politicians could not create more gold-backed-dollars to pass out to farmers in order to ease the financial strains resulting from low or falling crop prices. A true gold standard effectively imposes fiscal discipline--and politicians don't like that, which is why political leaders who support a gold standard are quite rare. With this reality in mind, we are now witnessing early, begrudging, fiscal, regulatory, and other structural reforms (including labor laws and environmental regulations) occurring in stagnant and slow-growing countries in the "euro zone" of western and central Europe. Without a national fiat currency and a monopoly central bank to create money under pressure from elected politicians, there is no apparent "easy way out" of the economic doldrums. Some close observers of political and economic developments in Europe--notably, Jesus Huerta de Soto--argue that the political pressures for essential economic reforms are already resulting in actions by governments to liberalize labor and environmental laws and to restructure tax systems. At best, this is a hypothesis currently being tested by election cycles in Europe. The views of Huerta de Soto are worth taking seriously because he is a well-known advocate of "Austrian Economics" in Spain and has long been a supporter of true gold standards. At first glance, a defense of the euro by a gold-standard advocate would seem to be heresy, at best. However, Huerta de Soto argues that not all fiat currencies are equal--at least with regard to the institutional setting. The crucial question is: "In what way is the euro different from the US dollar, Canadian dollar, Japanese yen, or British pound?" The obvious answer is that these other fiat, monopoly currencies exist in political and fiscal regimes consisting of one parliament and one ministry of finance (or Treasury department). In contrast, the euro is faced with numerous parliaments and ministries of finance, diverse tax systems, and public appetites for income redistribution that range from very generous to much more parsimonious. Elected politicians in some countries face much more incentive to promise to 'bring home the bacon' than in others. In fact, voters in countries with less generous welfare systems are likely to punish domestic politicians who seem overly tolerant of the 'spend-thrift' ways of politicians in other countries. The political test of the "paper gold" hypothesis will play out in 2015 as several national elections--beginning with Greece--can be viewed as essentially referendums on the euro. The partisans of the political debates will try to educate voters about the costs of leaving the euro and returning to a national currency, versus the costs of continuing in the euro zone and swallowing an over-due dose of fiscal castor oil. In the process, we will learn whether the political and institutional setting of the euro make it a superior type of fiat currency.

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Jerry L. Jordan, PhD

Jerry L. Jordan is a Senior Fellow with the Fraser Institute and an Adjunct Scholar with the Cato Institute. He was President of the Federal Reserve Bank of Cleveland, a member of President Reagan’s Council of Economic Advisors, Dean and Professor of Economics at the University of New Mexico, and Chief Economist for two commercial banks. He has also served as Sr. Vice President and Director of Research at the Federal Reserve Bank of St. Louis and as a consultant to the Deutsche Bundesbank in Frankfurt, W. Germany.

Jordan earned his Ph.D. in Economics at the University of California, Los Angeles and his B.A. in Economics at California State University, Northridge. He holds honorary doctorates from Denison University, Capital University and Universidad Francisco Marroquin.