To the Tea Partiers: End imperialism, take the money back

The response to the European debt crisis has been described by some leading economists at a private meeting organized by the Witherspoon Institute recently as nothing more than giving more to drink to an alcoholic. There is no plan in place to break the habit. Thankfully, we in the United States can learn from Europe’s lessons and harness a popular movement to elect legislators who will bring change. But the change we need is a principled change. Yes, the state has developed too much control over the nation’s economic life and the more fundamental institutions, as General Motors and Citigroup help illustrate. But the way to bring about meaningful change is to demand that legislators embrace the principles of good government, subsidiarity chief among them. In fiscal policy, this comes down to cutting spending and reducing taxes.

Monetary policy, however, needs to be reformed more radically because it has changed more radically. Monetary policy — the management of money by the state —changed substantially when the state took it over entirely. Initially goods were traded; coins later made commerce more practical, and their value as precious metals ensured their trustworthiness. This remained a private transaction until the state began to issue and manage money, while private money remained in circulation. Coins, however, can be melted down, their weight altered, etc., and so they became less reliable.

The state then monopolized the control of money, backed up mostly by gold, so that the total worth of the money in circulation was related to the total worth of the nation’s gold reserves. Private money was no longer allowed. When the Western nations needed to raise money—beginning with England to finance the First World War—they decoupled their currencies from gold and gave the control of the money supply to central banks. The world entered the era of “fiat money,” money whose value is not fixed by any objective standard. The state gained total control of the money supply and increased or decreased it at will.

Anyone who values the principle of subsidiarity should question a system that leaves individuals, families, and businesses subject to decisions made for them and without the participation to which they are entitled as the rightful actors of commerce. In “Venezuela’s Monetary Mayhem” (WSJ, 18-V-2010), Mary Anastasia O’Grady reminds how fiat currencies can be used by the state—in this case Venezuela—to harm the common good.

To solve this problem, Messrs. Fieler and Bell have bodly suggested (“The Gold Standard: The Case for Another Look,” WSJ, May 7, 2010), the state could do two things: return to guaranteeing the currency with physical assets priced by the market, and let private money compete with state money. This would allow the market to counter the power of the Central Bank, they argue; and while I leave the necessary details of the economics for others to elaborate, Fieler and Bell get the principles right.

Subsidiarity is not the only principle in play in economic or public life, but it is a critical one. It is deeply embedded in the American Experiment. The American Founders understood the flaws of the human condition and worked out practical arrangements to avoid the concentration of power in one person or institution. As for its impact in other countries, the principled and unilateral cessation of the fiat dollar would significantly diminish the dominance of the United States in world affairs. Currently the United States is able to borrow money at lower real rates of interest than the developing world, giving it a considerable economic advantage.

America ought to lead the world to money backed up by assets priced by the market, and approve the use of private money to compete with state money. Under these conditions fiscal and monetary policy—with its successes and failures—would more properly reflect the state role of serving the needs of the other pillars of society. It would also send the right signal to the rest of the world: that America does not seek to adversely influence those economies by the unilateral and self-serving effects that a fiat currency has on less developed countries. And this is the kind of behavior that moves individuals to act more honorably in commerce here and abroad: A fitting goal for the XXI Century.

Luis Tellez is president the Witherspoon Institute and founding director of the American Principles Project.