Dr. Haymond referred to the dollar as, “The cleanest dirty shirt,” in a comment on my last post (note the shameless plug). I think he is correct, and I have heard him use similar terminology before to refer to a variety of policies and institutions in our imperfect world. We may not have the best possible system, but, compared to the rest, it is still pretty great. Even though the dollar is one of the world’s best currencies and will likely retain its position as the world’s reserve, that does not make it the best possible currency. Today, I want to focus on a problem with fiat currency and present an alternative.

In order to come up with a better system, we need to first discuss the characteristics of quality money. Money should be durable, divisible, scarce, and transportable. If money is not durable, it cannot be exchanged from person to person over and over without losing its usefulness. If money is not divisible, it would be a terrible unit of account and means of exchange. If a currency is not scarce, currency could be created at home and flood the market causing massive inflation. If money is not easily transportable, the market for two-wheeled carts would be overwhelmed (and we would limit our options in regards to who we may trade with)! For a deeper dive into money, check out chapter 11 of Dr. Haymond’s FREE economics textbook (after reading the book, feel free to wrestle with the idea of whether or not the book was truly “free”).

Fiat currencies, like the US dollar, are not inherently scarce. Sure, it would be very difficult for me to make convincing fakes. Just look at a dollar, and try to figure out how to produce a fake (please do not attempt to produce counterfeits)! On top of the difficulty, it is illegal and immoral to create fake currency. However, the Federal Reserve is not similarly limited. With relative ease, the Fed can radically increase or decrease the money supply through a variety of means. Therefore, the dollar fails the scarcity test.

The gold standard, or some version of it, is a more stable way to manage a currency because it makes currency scarce. Without too much modification, you could enhance such a rule by tying the value of the dollar to a basket of precious metals, protecting it from a sudden influx of gold from our future missions to Mars or any such unpredictable outcome. However, the desire for stability does not drive my desire for a gold standard for the US dollar. No, my desire for such a rule rests in my understanding of the human person.

The nature of man causes concern when I think about fiat currency. Human knowledge only stretches so far. We know that God created man in his image and gave him dominion over the earth. Man is to rule and subdue the earth; by doing so, man brings out the world’s full potential. However, even though man’s mandate is impressive, we need to remember that he was created. Because we are the created, we know that we have limits. God knows all things. Man does not. His ways are above ours and His thoughts above our thoughts. In addition to our created limits, we learn in Genesis three that man is fallen, and this is made clear many times in scripture. Now, man must operate within his created limitations and his fallen nature. All told, we are created by God to do good things, but we have limits due to our finite nature and our sinfulness.

Due to our limits, handing over the reigns of currency to a central power makes me nervous. In an attempt to make things better, a group of imperfect people with incomplete knowledge have been given great power over a currency. Instead of leaving the value of our dollar up to the market, we have entrusted it into the hands of a few. This is not because those who designed the system are idiots who want to cause problems. On the contrary, those who stripped the nation of the gold standard were trying to fix problems. The gold standard fell apart as central bankers attempted to pull the US out of the Great Depression. Unfortunately, those who entrusted new power into the Fed’s hands believed that man did not have the same limits I do. Thomas Sowell writes about the unconstrained vision of the human person in his book, A Conflict of Visions. The unconstrained vision states that man is perfectible and essentially limitless. Given enough time and resources, man can solve any problem. Those who want to keep the Fed in direct control* of the money supply would tend to agree with this proposition. Many believe that the world’s foremost economic thinkers should be able to figure out the perfect combination of currency, interest rates, and required reserves to keep the economy rolling in all circumstances. I disagree. For the aforementioned reasons, I think man is limited and cannot “solve” the problem of the economy. By handing control of a currency’s scarcity to a group of experts, we have attempted to control forces outside of the human ability to manipulate and fully comprehend or predict. This cannot and will not end well.

I’m uncertain that a gold standard is the perfect solution. However, I do believe that human limitations make our current situation inherently unstable. By fixing the dollar’s value to a set amount of gold (or a handful of precious metals), we can take a step closer to providing a clean shirt instead of the cleanest dirty shirt.

*I say here direct control, because the Fed would still have some abilities to affect the money supply even if the dollar’s value was tied to a certain weight of gold. However, this post was not meant to exhaustively explain the Fed’s toolkit. Instead, I hoped to remind readers of human limitations and make a case for greater restrictions on government power in light of these limitations.