This article was first published by Business Day on 7 January 2025
It has been noted that whatever the original purpose of an organisation, especially governmental departments and agencies, its own survival and expansion will emerge as its de facto primary goal. Often, the drive to grow is not purely internal. Certainly, the leaders of most organisations benefit personally from departmental growth, if only from the higher salaries and prestige associated with greater responsibility. But outside constituents can also benefit from the increased size and scope of an organisation’s services, especially if it results in enhancements to their own revenue or regulatory advantages.
To prevent governmental departments and agencies from growing beyond their optimal configurations requires a continuous investment in monitoring and political forbearance. One must also have insight into what those optimal configurations are – and why.
Not all governmental functions are equal, either in importance or justification. A big difference between a government’s treasury and its central bank is that there is no clear need for the central bank to exist. Those of us who recognise the importance of core governmental services must also concede the need to raise revenue to fund those services. The quibble is over the size and scope of those services. But to recognise the importance of money as the ultimate facilitator of trade in our society does not lead us to accept that a central bank is necessary to supply that money.
Throughout history much of our troubles have been caused by governments presuming to offer services that are better supplied in the private and free marketplace. In the realm of fiscal policy, there will always be arguments over how the money is spent or not spent, but it is extremely difficult to argue that a government should spend no money. In contrast, central banks are a relatively recent contrivance, emerging from charters to mint a standardised currency and to supply liquidity to accredited financial institutions. The current manifestation of central banks as issuers of fiat money is a testament, not to their competence and efficacy as managers of currency issue, but rather to the opposite.
In our oldest written texts, it was common to find silver and gold referenced as money. They had already emerged as the most marketable commodities, and over subsequent millennia have survived the trials of commerce and the random insults of history. Only in the past century have governments had the wherewithal and sufficient public trust to engineer the transition from commodity money to de facto fiat money. And those transitions were neither natural nor smooth, with central banks and government departments “failing up” and acquiring new powers to correct their previous mistakes.
The current world reserve currency, the US dollar, was birthed from gold in a manner that might be described as a cesarean section. Up until the 1930s, the dollar was a unit of account defined as a weight of precious metal, initially silver and then gold. Americans had grown accustomed to the convenience of bank notes, both privately and governmentally issued, in their daily transactions – but gold was still the base money.
In 1933, the US Federal Reserve was only 20 years old. But the states of the currency and banking system were such that President Franklin Roosevelt, shortly after taking power, declared the ownership of gold bullion by US residents to be illegal and that all bullion must be exchanged for Federal Reserve notes. Only foreign central banks were allowed to exchange their dollars for gold. Subsequently, the dollar was devalued in terms of gold by over 40 percent, marking a massive transfer of wealth from those holding dollar-denominated assets to those holding hard assets. Much was rendered unto Caesar – and unto his friends. A slow inflation over the next 30 years accelerated in the 1960s triggering the complete severance of the dollar from gold in 1971 and setting it adrift as a fiat currency.
Fiat currencies have facilitated extraordinary levels of profligacy among both governments and the special interests that influence them. Credit-fueled booms and busts have come to bear an eerie resemblance to “pump and dump” schemes in which the politically favored benefit on the way up and taxpayers pay on the way down. The speculative fervor surrounding Bitcoin makes it ripe for similar abuse. As governments purchase Bitcoin for strategic reserves, they bid up the price as large holders swap out of Bitcoin for hard assets such as the government’s gold and real estate.
Rather than expanding the power of central banks into digital currencies and assets, a renewed case could be made for the separation of currency and state. Much of the value of digital currencies derives from the historically conditioned expectation of governmental and central bank incompetence and malfeasance.
For any government that just had to have its own national currency, all it had to do was to stabilise the value of that currency relative to gold. But even that has proved to be too much for them. And central banks are still too young to be given the keys to a digital currency.
