Opposition in the United States to a central bank empowered to issue currency is not new. Twice before in the nation’s comparatively short history it was created and abolished. Presidents and thinkers, including Thomas Jefferson, James Madison, Andrew Jackson, Abraham Lincoln, Otto von Bismarck, James Garfield, William McKinley, Theodore Roosevelt, John Hylan (Mayor of New York 1918-1925), Woodrow Wilson, and even Thomas Edison warned us about the consequences of giving a central bank the power to issue currency; Dwight Eisenhower worried about the potential for lopsided influence of the military industrial complex, and John Kennedy, without mentioning names, made it clear that he abhorred secret societies, oaths, and proceedings. On that note, it’s worth remembering that the Fed’s present incarnation was conceived in 1910, during a very secret meeting attended by Nelson Aldrich, A. Piatt Andrew, Henry Davidson, Arthur Shelton, Frank Vanderlip and Paul Warburg, a German immigrant, in Jekyll Island, Georgia. Incidentally, Lincoln, Garfield, McKinley, and Kennedy were assassinated, and Jackson and Roosevelt narrowly survived assassination attempts. Even Donald Trump, possibly for unrelated reasons, has so far survived not one but two assassination attempts. So, the record shows a progression, no doubt coincidental, from opposition to central banks, to rejection of “secret societies, oaths and proceedings”, to attempted and actual presidential assassinations.
The Constitution and the Fed
One thing is to have a bank of last resort that regulates, supervises and insures entities under its jurisdiction. Quite another is to bestow on it license to create and control the nation’s money supply at will, either from thin air or by whatever schemes it may from time to time concoct. That is anathema to the intent of the Founding Fathers, reaffirmed by the Supreme Court. Article I, Section 8, Clause 5 of the Constitution gives Congress the exclusive power of coinage.
Beliefs
There are those who believe that the primary beneficiaries of the Fed are the largest banks and the Federal Government itself, which is able to tap the former’s ability to create money as a supplemental form of revenue. They also point out the dramatic decline in the value of the dollar since the Fed was established in 1913; that over time it’s been granted ever more leeway in how it inflates the money supply; that when it buys Federal debt it does so with money created out of thin air; that arbitrarily, or nearly so, it sets the federal funds rate at whatever rate it sees fit; that it intervenes in currency and other markets; and that Congress has practically abrogated its responsibility and authority to rein it in. More importantly, they say, the Fed underwrites the Executive’s ability to bypass Congress to wage wars at its discretion by perpetually increasing the public debt. Case in point, the last time the United States Congress formally declared war was in 1942, against Hungary, Bulgaria, and Romania, today’s allies.
The Fed is Just a Tool
The Fed is not the problem per se. Rather, it’s the Federal Government’s lack of fiscal discipline, precisely what Thomas Jefferson so vehemently opposed. Worse, the trend has metastasized to nearly every country in the world, complete with national central banks, steep inequality, growing deficits, “defense” outlays, and sovereign debt. Accordingly, it would be ludicrous for the U.S. to unilaterally dismantle that which nurtures its national security shield – the military-industrial complex that worried Eisenhower – if no one else follows suit.
The Impossible Gold Standard
Currently no universal mechanism exists to compel national governments to live within their means. In the U.S., the gold standard was supposed to do just that from the late-19th century until 1933, when President Franklin Roosevelt confiscated all privately held gold. The gold standard proved unpopular, and ultimately failed, because it prevented the government from waging wars at will and addressing emergencies like the Great Depression. The Breton-Woods agreement of 1944 recreated a watered-down gold standard of sorts. Under its terms, the dollar was pegged to the price of gold and all other currencies were pegged to the dollar. That came to a screeching halt in 1971, when Richard Nixon ended the dollar’s convertibility into gold. He did so because other countries, particularly France under Charles De Gaulle, were redeeming paper dollars for bullion, a trend that threatened to leave the U.S. without gold reserves. Nixon’s action highlighted an obvious limitation to a gold standard: since the supply of gold is limited, nations who hoard it preclude others from doing the same to support their currencies. Nixon abruptly made the dollar a fiat currency – backed by nothing. However, the greenback’s acceptability was artificially inflated when Saudi Arabia agreed to price oil in dollars exclusively. The need for dollars to pay for oil, an indispensable commodity, created infinite demand for it. That effectively opened the floodgates to permanent deficit spending and mushrooming debt.
Declining Growth
The Congressional Budget Office’s 2024 Long-Term Budget Outlook estimates that “The state of the U.S. economy in coming decades will affect the federal government’s budget deficits and debt… Among the factors incorporated in the agency’s long-term economic forecast are the effects of projected deficits on private investment and the effects of marginal tax rates on the supply of labor and private saving. In CBO’s extended baseline projections, the growth of real potential GDP slows, falling from an annual average rate of 2.1 percent over the 2024-2034 period to an average of 1.6 percent over the 2045-2054 period.” In contrast, the International Monetary Fund projects China’s growth to slow to 3.3% by 2029 due to an ageing population and slower expansion productivity. Even this conservative projection is almost three times faster than the U.S., and India and other countries are growing even faster. In other words, unless something radical is done, and fast, the U.S. will lose its economic and military competitiveness.
Climate Change, an Unexpected Catalyst
Climate change – unrelenting and impervious to petty disputes – may actually spawn a currency standard that might compel all governments to live within their means. Here’s why. Anthropomorphic climate change is caused by humanity’s persistent use of fossil fuels to generate electricity and power vehicles. In response, there’s a worldwide race to develop a profitable method to generate electricity from fusion. To say the least, this is an expensive undertaking available only to rich nations which can afford the research and development. Accordingly, if and when a breakthrough is finally made, the proprietary rights to the technology would likely spawn a mega cartel not unlike today’s OPEC. In the event, its owners would directly or indirectly collect on virtually every human endeavor simply because everything we do requires energy. That would include, among others, sectors such as banking, robotics, manufacturing, artificial intelligence, even healthcare. If that happens, the currency of whoever owns the rights to fusion will likely become the reserve currency of the world, a path that leads to deficits and growing debt.
Green Hydrogen, an Alternative
China has made a groundbreaking advancement. It designed and debuted a hydrogen-powered high-speed train at the 2024 trade fair in Berlin, Germany, a highly industrialized country without sizeable domestic oil and gas reserves. This seminal step in energy independence complements a 2023 Memorandum of Understanding signed by Conjuncta, a German project developer, for a green hydrogen project in Mauritania. At no point in the production/use cycle will hydrogen release greenhouse gases into the atmosphere; not only that, since the raw materials – sunlight and seawater – are free, easily accessible, practically infinite, and in the public domain, no one would likely succeed in securing exclusive rights to them. Simply, if Mauritania can mass-produce green hydrogen, so can other developing nations.
Green Hydrogen Standard, not Gold
Green hydrogen – an energy carrier, not a fuel per se – has the unique ability to produce pure water as a byproduct. That is potentially a game-changer for arid regions. For example, the water byproduct of electric hydrogen-burning plants atop mountain ranges could be collected, condensed, and used to replace the shrinking supply of water due to recurring severe drought, retreating glaciers, and stressed aquifers. In sum, hydrogen’s advantages may likely encourage a multitude of nations to emulate the Mauritania project. Should that become a widespread trend, they might collectively agree to adopt hydrogen as the world’s standard to determine the relative value of each participating currency to the corresponding nation’s per capita production of green hydrogen. This all-inclusive valuation method would replace the International Monetary Fund’s Special Drawing Right (SDR), an international reserve asset subjectively based on a basket of five privileged currencies – the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. In doing so, it would comply with Eisenhower’s wish – to create a confederation of equals, one where the weakest can “come to the conference table with same confidence as do we, protected as we are by our moral, economic, and military strength.” In this confederation, confidence would be derived from economic self-reliance.
Unlike gold, whose value is derived from someone’s ability to hoard it inertly to preclude others from doing the same, the value of hydrogen is realized only when it is consumed. That would encourage modest nations to produce as much of it as possible. Landlocked nations such as Mongolia, Bolivia or the Central African Republic might partner with others, near or far, with an adequate seashore and abundant sunshine but in need of capital infusion, to share profits from the production of the hydrogen.
Effect on Fiscal Discipline
A hydrogen standard would not infringe on any nation’s sovereignty. Thus, any national government would be free to have a central bank performing any functions it sees fit, to binge on deficit spending, and to amass as much debt as it wishes. But the value of its currency relative to others would be determined by an automatic and unappealable per capita output of green hydrogen. That would materially affect international trade because the currency of nations with a high per capita output of green hydrogen, balanced budgets and low sovereign debt should have higher purchasing power. In sum, green hydrogen, not gold, is a good candidate to become the universal determinant of fiscal discipline.
Status of the Dollar as the World’s Reserve Currency
According to the International Monetary Fund (IMF), the U.S. dollar share of global foreign exchange reserves declined from roughly 73% in 2000 to about 56% in 2020 despite the dollar’s continued appreciation during that period. That works out to 17% over twenty years, or .85% per year if measured lineally. But there are dynamics at play that may increase that. One is that more countries are scheduled to join BRICS, an organization that seeks to develop a proprietary medium of exchange for members. Then there are the unresolved and worsening tensions in the Middle East, the South China Sea/Taiwan, Ukraine, and the mushrooming accumulated debt of the United States. These factors cannot be swept under the rug. Yet, our presidential candidates are largely mum on how they intend to face the day of reckoning, when the government is either forced to pay stratospheric interest rates to attract bond buyers, or when other countries simply stop accepting dollars in payment for their goods and services. In short, if green hydrogen is ushered in, no one will enjoy the undue advantage of cornering the coveted status of the world’s reserve currency. Not the U.S., which will eventually lose it anyway, nor China.