I think that the great Bill Kristol is wrong in his call for a “modernized international gold standard” — whatever that might look like — as part of a program to end the U.S. dollar’s status as the world’s reserve currency. A couple of things:
First, the dollar’s status as a reserve currency is not inherently related to the question of an international gold standard. Whether we have fiat dollars, dollars backed by gold, or dollars backed by something else, nations that hold large foreign-currency reserves may or may not choose to hold as many dollars tomorrow as they hold today. Large institutional investors, be they sovereign-wealth funds or other top-tier players, may wish to hold something backed by gold, in which case they have an obvious alternative: gold. (Or gold-related securities.) Dollars are freely traded on global exchanges; gold is freely traded on global exchanges; there is never any question about the value of a dollar vis á vis gold. Yes, the value of the dollar fluctuates, and so does the value of gold. There is no inherent economic advantage in uniting those fluctuations; the main attraction of the gold standard is its alleged power to cause governments to conduct their fiscal affairs intelligently and honestly. Alas, it does not.
The question of what a “modernized international gold standard” would look like is worth asking, inasmuch as expecting a motley selection of self-interested sovereign nations to adhere to a rigid international standard that does not serve their political goals has some precedent — the euro’s deficit rules, the Kyoto Protocols, etc. — and that precedent suggests this: Ain’t never gonna happen. All standards are gameable by sovereign states. Gold standards do not deliver on their promised benefits, and create problems of their own.
I also think Mr. Kristol is wrong when he writes: “It’s the dollar’s status as a reserve currency that has allowed the U.S. government to amass huge debts, debts which the legislatively imposed debt ceiling has been unsuccessful in limiting.” There are lots of countries that manage to amass massive debts without issuing a currency that serves as a world reserve.
The dollar probably will continue to act as the world’s preferred reserve currency, with that position diminishing slowly over time as attractive alternatives prove their mettle (if not their metal). Likewise, U.S. Treasuries probably will continue to be the standard of safety, with that position eroding over time as well. Those are not necessarily bad things or good things. What would be a bad thing is a sudden run on dollars and Treasury bonds, a financial black swan emerging from our troubled accounts. But, if anything, large dollar holdings by China and other governments give them an incentive to help prevent or ameliorate such an event. Hu is long the dollar, after all. Awful long.
In general, I think we put too much weight on things like Chinese dollar reserves, or the fact that the global oil trade is conducted in dollars, and the like. Our real economic problems are far simpler: We spend too much, borrow too much, carry too much debt, have a poorly structured tax system and an overextended national-defense presence, are governed by a Congress of children, and refuse to believe that the laws of supply and demand apply to U.S. dollars and U.S. Treasury bonds.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.