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GOLD OR CARBON?
A crucial question for the world’s future
Frans C. Verhagen
An OPED article
Submitted to the New York Times
November 16, 2010
In last Sunday’s Week in Review James Grant, the editor of Grant’s Interest Rate Observer and author of “Money of the Mind” argues for the return to the gold standard. He concludes his OPED article entitled “In Go(l)d We Trust” with its subtitle “How to Make the Dollar Sound Again” that if the classical gold standard “cannot be teleported into the 21st century, there would be plenty of scope for adaptation and, perhaps, improvement.”
His brief for a gold standard did not come out of thin air. On November 3, World Bank’s president Robert Zoellick had launched his query in the Financial Times of how gold could be a referent for a future international monetary system. On November 10 National Public Radio featured a discussion about gold where, among others, republican strategist Jeffrey Bell, a Reagan Administration Treasury Administration official engaged in exploring the gold standard at that time, seems to confidentially briefing republican 2012 candidates on the introduction of the gold standard. There will have been other voices about the return of the gold standard during this month of heightened emphasis on an international monetary system that does not work.
This discussion of a monetary standard is very important, because its resolution will be a major determinant of the world’s future. This may not seem not to be the case in the minds of most people, including politicians and pundits. They do not seem to realize that this under-evaluated, under-researched and an often ignored international system, as a glue, binds together monetary, financial, economic and commercial systems. It is also, like a lubricant. which makes those systems run smoothly. It is also like the foundation of a house—it may not be very visible, but it does make the house either stable or not. The international monetary system can be finally be considered a linchpin. Without its proper functioning the other global systems are not able to function properly.
Mr. Grant thinks of the return to gold as a way to make the dollar sound again. The dollar can be made sound again when it stops being the world’s major reserve currency and becomes a national currency which like other national currencies would be anchored in a proper monetary standard. As long as it maintains its reserve function and is used as a de facto international currency, it will not be not healthy, either for the US—deficit spending and grave global financial imbalances are two of its consequences—and especially for the international monetary system as a whole. A way out of this predicament of the Triffin dilemma—a national currency functioning as a world currency—is the transition of the US dollar (and the other reserve currencies) into the IMF’s Special Drawing Rights (SDRs) as a temporary step to a fully effective international monetary system, i.e. a carbon-based international monetary system.
The International Institute for Monetary Transformation believes that such effective international monetary system is to be carbon-based that is to be used to confront the 21st century’s greatest challenge. The system is to combat the impending catastrophe of climate change by advancing low carbon and climate-resilient development. It is to be based upon a carbon standard that would be expressed in a specific amount of tonnes of CO2e per person, determined by the GHG emissions target set by the IPCC. The unit of account of the standard would be the Tierra, Spanish for Earth. This standard would determine the decarbonization level of an economy which in turn would determine the health of its economy and the strength of its currency.
The consequence of this carbon standard like a gold standard would make national currencies convertible and the value of their currencies would be determined by their relationship to the Tierra. The Tierra would become a means of international exchange and a bankable store of value if nations were decide to originate a world currency. In either case the introduction of the carbon-based monetary standard would remove the need for the global reserve system which now costs non-reserve currency countries billions of dollars in low-interest bonds that could be better invested in local economies. While a gold standard does not deal directly with the century’s largest challenge of climate change, the carbon standard pushes societies to very seriously deal with climate change because the value of their currencies depend upon it.
Two features of the carbon-based monetary architecture need special mention here. First, nations will have to start balancing their carbon/ecological imbalances via their balance of payments, because the carbon-based international monetary system is based upon the value of climate justice, which rests upon the historical fact of the cumulative emissions of industrialize nations. Thus, both the settling of financial and ecological imbalances become one of most challenging tasks of governments.
Secondly, there would be a global monetary authority or federal World Central Bank made up of representatives of the present and emerging regional monetary unions. This Bank would administer the Tierra system, monitor and regulate financial flows and create liquidity. The latter authority is most important in order to respond to the financing needs for climate and development programs and, more widely, for the sustainable consumption and production patterns that are emerging in opposition to the western model of consumption societies. It is to be noted that the sole authority to create money would be brought back to the public sector in the member states whose fiscal policies would be monitored. Privately-owned banking systems would become utilities.
The G20 Seoul Summit did not tackle the monetary standard question in its 40+ pages of its communiqué and its annexes, though one of its participants, World Bank president Zoellick, had brought it up about two weeks before. Instead, the Summit continued haggling about financial imbalances of surplus and deficit countries without, at least publicly, acknowledging the elephant in the room, i.e. the non-system of the international monetary relations which is called criminal by Nobel Prize winning economist Robert Mundell. It also did not see the baby elephant in the room of a US dollar that cannot continue to function as a de facto international currency. In the mean time global climate changes will be inundating coastal areas, where over half of humankind lives, at the end of century on account of the rise of the ocean waters by 3-6 feet if no radical measures are taken. The authors of Superfreakonomics described how engineers are engaged in humongous geo-engineering projects to be used in a climate emergency. Should humanity, particularly social scientists, not use reason and vision to use a less costly, dangerous, undemocratic way? A carbon-based international monetary system is a far sounder approach than the geo-engineering one. It would use James Hansen’s Fee & Dividend system and abandon the cap-and-trade carbon reduction method which is not fast, formidable and fair enough.
The Tierra Land 2025 scenario which is available as an appendix to an invited article at http://conference.unitar.org/yale/environment-sustainable-development presents a plausible social process by which this transformed, i.e. carbon-based international monetary system can emerge within the next 15 years. It considers the Rio 2012 Earth Summit to be the watershed event that would start this transformational process by placing premium importance on the role of a transformed international monetary system as part of its global governance and green economies themes. The present and future discussions about a gold and carbon monetary standard are also considered a precipitant for the consideration of this carbon-based system. Part of that discussion is the important voice of Maurice Strong, Secretary General of both the 1992 and 1972 UN Conferences on the Environment who believes that the Tierra Fee & Dividend system is an “innovative proposal for a new international monetary system based on carbon…. seems to be very promising particularly in light of the stalemate in post-Kyoto prospects.”
Frans C. Verhagen, M.Div., M.I.A., Ph.D. is a sustainability sociologist with the International Institute for Monetary Transformation and author of the forthcoming book THE TIERRA FEE AND DIVIDEND SYSTEM: Using a transformed international monetary system to combat climate change and advance low carbon and climate resilient development.