David R. Henderson  

The Dollar as Anchor

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Who Knows Macro?... Pinker's Genome...

Lots of people lately have been talking about how lousy the dollar is as a store of value. I'll repeat the offer I made in a recent book review in Regulation, in response to an economist's claim that government had made money "completely worthless by printing pictures of dead presidents on it." I wrote that if you agree with the author:

then please contact the publisher for my address and send me all of your bills with pictures of dead presidents on them, especially the ones with pictures of Ulysses S. Grant. (I will even accept the ones with pictures of Benjamin Franklin, although he was not a president.) In return, I will send you an equal weight of blank paper. I promise.

Clearly, the U.S. dollar is worth quite a bit, especially compared to some other paper currencies. Evidence that the dollar is quite a good store of value compared to some alternatives comes from a recent op/ed by GMU Ph.D. student Pedro P. Romero. Writes Mr. Romero:

Dollarization put an end to the vicious cycle by burying the sucre. It was the most egalitarian policy that Ecuador has adopted in the last few decades, because it was the marginalized who suffered most from inflation and devaluation. Even so, it received a skeptical reception. At the time, IMF head Michel Camdessus said, "Dollarization was not, I must be frank, the kind of policy we would have recommended at this stage to Ecuador." Paul Krugman compared it to witchcraft and thought it would leave the economy dead. Sebastian Edwards of UCLA said, "Ecuador has so many problems that if dollarization works, it would just be a coincidence."
Nine years later, one cannot dismiss the survival of dollarization as coincidence. Dollarization has provided Ecuador with the longest period of a stable, fully convertible currency in a century. Its foremost result has been that inflation has dropped to single digits and remained there for the first time since 1972. The stability that dollarization has provided has also helped the economy grow an average of 4.3 percent a year in real terms, fostering a drop in the poverty rate from 56 percent of the population in 1999 to 35 percent in 2008. As a result, dollarization has been popular, with polls showing that more than three-quarters of Ecuadorians approve of it.

HT to Dan Klein


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COMMENTS (5 to date)
Bob Murphy writes:

Well, OK, you're right that it is going overboard when people say the dollar is worthless, but even so I think the critics were right when they warned that taking us off gold would lead to a rapid loss in purchasing power. If you can't remember exactly when Nixon did that, all you need to jog your memory is glance at the CPI chart.

Also, notice the rhetorical device you are using: You are disproving the critics of U.S. fiat money by pointing out that other fiat moneys are worse. But that's like the right-wing warhawk who poohs poohs whiny liberals when they talk about George Bush's record on torture and civil liberties. ("Why don't you move to Iran then!")

One other thing: As a store of value, you are wrong: Blank pieces of paper are better than green pieces with US presidents on them. I.e. every year, the dollar-price of blank paper typically rises, I would guess.

David R. Henderson writes:

Bob,
All good points. Touche.
David

Bob Knaus writes:

Complaining that the dollar is not good as a store of value is like complaining that a sieve is not good at storing water. Of course not! It's not designed to. The dollar is a good and useful thing, but it slowly leaks value, because it is supposed to.

The Fed's target inflation rate of 2% (or whatever it is lately) is the price we pay for the convenience of having a monetary system. Sometimes it will be more, sometimes less. What we want is a reasonably predictable loss of value, a controlled leak so to speak.

How different is this from the 2% transaction fee that we all know is part of the convenience of using charge cards? Would you go back to a cash-only payment system, because of the "loss of value" implied? I didn't think so.

There is no "loss of value" in our present monetary system. Consider it an "exchange of value" instead, where the inflation rate represents the economy-wide average value that we place on the convenience of having dollars.

If this doesn't fit your personal value paradigm, feel free to exchange your dollars for TIPS.

Gary Rogers writes:

I am not ready to start sending you my dollars as completely worthless, but I will say that the first 20 years of my retirement is close to worthless because it is a fixed amount based on the value of the dollar at the time. I remember being happy back then that I was fully vested in pensions from large blue chip companies that would help when retirement came. Now I am 60 years old and the fixed amount that this will bring is almost nothing compared to other retirement income. It should be the largest component because it has been invested the longest. The fixed amount pensions were based on the gold-backed dollar but this had to change with the inflation during and after the 70’s. The CPI chart in the earlier comment tells it all.

Roger Nelson writes:

Hmm...I'll make YOU a deal.

For every piece of blank writing paper you send me, I'll send you a stock certificate from a favorite icon of free-marketeering, Lehman Brothers.

Pure free-market ideology isn't worth the paper it's printed on.


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