Should we all worry about the outlook for the mighty American dollar? That is a question that many economists and market traders have pondered as economic pressures have grown. But in recent weeks Virginia’s politicians have been discussing it with renewed zeal. Last month Bob Marshall, a local Republican, submitted a bill to the local assembly calling on the state to study whether it should create its own “metallic-based” currency.
This was not because Virginia is seething with secessionist impulses (dozens of different, local currencies used to circulate in America in the 19th century before the Federal system came into play). Instead, what sparked the bill is fear. “Unprecedented monetary policy actions taken by the Federal Reserve … have raised concern over the risk of dollar debasement,” the bill declares, noting that “foreign threats to the United States in the form of sophisticated cyberattacks have begun to target banks and financial institutions … with the aim of undermining consumer confidence and seriously disrupting the functioning of our nation’s economy.” Hence the need to create a back-up, “trustworthy” monetary unit to “restore confidence and civil order” – just in case disaster strikes in the form of hyperinflation or those Chinese-cum-Iranian cyber geeks.
What should we make of this? Most mainstream economists and policy makers would undoubtedly scoff. Indeed, when the bill was first introduced a couple of weeks ago, the main paper in Richmond, Virginia, complained that Marshall had created “unintentional hilarity”, and might turn the state into the butt of jokes on the popular Saturday Night Live television show. There have been plenty of anti-establishment, doomsday theories floating around America before – indeed, this streak is so well ingrained that Barnes & Noble sells a “survivalist” magazine offering tips on how to flee an urban mob or bury food, and thus survive the catastrophe that will hit America “with mathamatical (sic) certainty”. And since the idea of a state adopting its own gold-backed currency flies in the face of modern orthodoxy, it might seem doubly easy to ignore this move as just the latest workings of the “loony fringe”.
But that would be a mistake. Ten days ago, the Virginia Senate did eventually strike the bill down. But only after an earlier vote in the Virginia House had actually backed the bill, by 65 votes to 32. And, if nothing else, Marshall’s move was a powerful symbol of the times. For it highlighted a question that is becoming increasingly crucial, does the public have real faith in the pillars of finance? Or is that trust looking more fragile, as Washington politicians squabble apace?
In truth, it is hard to tell. Five years ago, when banks such as Lehman Brothers collapsed, it was clear that faith in the system was crumbling fast. A full-blown panic was afoot in the markets and there were numerous runs on banks (and shadow banks). But these days, the most visible financial metrics suggest that this panic has disappeared: the dollar is strengthening, banks are functioning well and the stock markets have boomed. Most notably still, even though politicians in America keep squabbling about how to cut the debt, the yield on treasuries is rock-bottom low – suggesting high levels of trust that Uncle Sam will repay those bonds.
But while that seems reassuring, what is less clear is whether that trust is truly robust – or could suddenly evaporate again. As Alan Blinder, the Princeton economics professor points out in an excellent new book, one consequence of the crisis is that many ordinary Americans are deeply mystified by the workings of finance; indeed, he fears that many are also grappling with a sense of “inchoate rage” about the seemingly fickle nature of policy making and politicians. And the confusion – and anger – does not simply revolve around the banks. The more that the country plunges into uncharted policy territory with quantitative easing, the more that the sense of confusion spreads from the banks to the central banks as well. Little wonder, then, that sales of gold have been soaring; or, for that matter, that polls suggest a notably high level of popular support for the ideas of men such as Ron Paul who want to abolish the Fed. In a world where policy makers have failed to explain how finance works – and people saw the system almost collapse a mere five years ago – there is a search for answers.
So guffaw at the Virginia bill if you like. And if you want an additional chuckle, you might also note that a dozen other state assemblies, in places such as North and South Carolina, have discussed similar ideas; indeed, Utah has a gold and silver depository which is trying to back debit cards with gold. But whether you love or hate this idea, last week’s events in Richmond will certainly not end this debate about trust; not in a world where the economic pressures keep mounting – and policy makers in Washington are struggling to explain to a mystified and angry public how their economic policies are working. Or not.