The euro debt crisis in Europe has presented Germany
with a unique opportunity to lead the world away from monetary destruction and
its consequences of economic chaos, social unrest, and unfathomable human
suffering. The cause of the euro debt crisis is the misconstruction of the euro
that allows all members of the European Monetary Union (EMU), currently 17
sovereign nations, to print euros and force them on all other members. Dr.
Philipp Bagus of King Juan Carlos University in Madrid has diagnosed this situation
as a tragedy of the commons in his aptly named book The Tragedy of the
Euro. Germany is on the verge of seeing its capital base
plundered from the inevitable dynamics of this tragedy of the commons. It
should leave the EMU, reinstate the deutsche mark (DM), and anchor it to gold.
The Structure of the European Monetary Union
The European System of Central Banks (ESCB) consists
of one central bank, the European Central Bank (ECB), and the national central
banks of the EMU, all of which are still extant within their own sovereign
nations. Although the ECB is prohibited by treaty from monetizing the debt of
its sovereign members via outright purchases of their debt, it has interpreted
this limitation on its power not to include lending euros to the national central banks taking
the very same sovereign debt as collateral. Of course this is simply a backdoor
method to circumvent the very limitation that was insisted on when the more
responsible members such as Germany joined the European Monetary Union.
Corruption of the European Central Bank into an
Engine of Inflation
When the ECB was first formed around the turn of the
new millennium, the bond markets assumed that it would be operated along the
lines of the German central bank, the Bundesbank, which ran probably the least
inflationary monetary system in the developed world. However, they also assumed
that the EMU would not allow one of its members to default on its sovereign
debt. Therefore, the interest rate for many members of the EMU fell to German
levels. Unfortunately, many nations in the EMU did not use this lower interest
rate as an opportunity to reduce their budgets; rather, many simply borrowed
more. Thus was born the euro debt crisis, when it became clear to the bond
market that debt repayment by many members of the EMU was questionable.
Interest rates for these nations soared.
Over the past few years the European Union itself has
established several bailout funds, but the situation has not been resolved. In
fact, things are even worse, for it now appears that even larger members of the
EMU succumbed to the debt orgy and may need a bailout to avoid default. Thus we
have arrived at the point predicted by Dr. Bagus in which the euro has been
plundered by multiple parties and the pot is empty. The ECB and many sovereign
members of the EMU want unlimited bond buying of sovereign debt by the ECB.
Only Germany opposes this plan, but it is the lone voice against this new bout
of monetary inflation.
The Historical Context of German Antipathy to
Monetary Inflation
In 1923 Germany experienced one of the world's worst
cases of hyperinflation and the worst ever for an industrialized nation. The
reichsmark was destroyed by its own central bank, plunging the German people
into misery and desperation. Now, after only a dozen years of relative monetary
discipline, the euro faces the same fate as country after country demands to be
bailed out of its mounting debts by unlimited printing of money by the ECB.
Because Germany is part of the EMU, it must accept these newly printed euros.
This threatened monetary inflation of unlimited amounts has shaken German
bankers to the core. It is the nightmare scenario that they feared when,
against their better judgment, the German politicians agreed to give up their
beloved deutsche mark and place the economic fate of the nation in the hands of
a committee of foreigners not as concerned about monetary inflation. But
Germany can put a stop to this destruction and save the world while it saves
itself. It can leave the EMU, reinstate the deutsche mark, and tie it to gold.
A Golden Deutsche Mark Is Possible and Desirable
Despite the haughty pronouncements of EU officials,
there is nothing that can stop a sovereign country from leaving the EMU and
adopting a different monetary system. The most likely scenario would be a
one-for-one redenomination of German banks' euro-denominated accounts for
deutsche marks. Thereafter, the DM would float freely in currency markets in
the same way as British pounds and American dollars. The Bundesbank would be responsible
for monetary policy just as it was before Germany joined the EMU. By leaving
the EMU Germany would insulate itself from the consequences of the euro as a
tragedy of the commons; i.e., monetary inflation by third parties would end,
Germany would not experience higher prices due to the actions of third parties,
and the capital-destroying transfers of wealth would end.
Yet Germany should go one step further. It should
anchor the DM to gold. Germany is the world's fourth-largest economy, behind
only the United States, China, and Japan. Furthermore, Germany owns more of the
world's gold than any other entity except the United States, more than either
China or Japan and more than any other European country. A prerequisite to
market acceptance of any gold money would be confidence in the integrity of the
sponsoring institution. Not only is the Bundesbank known for its integrity and
reverence for stable money; Germany itself has a worldwide reputation for the
rule of law, advanced financial architecture, and a stable political system.
For these reasons, Germany would prove to the world that a gold-backed money is
not only possible but desirable. Expect a cascade of similar pronouncements
once Germany's trading partners realize the importance of settling international
financial transactions in the best money available — which initially at least
would be a golden DM.
Germany Should Seize the Moment!
Of course the beneficial consequences of tying money
to gold go beyond ending price inflation and capital-destroying wealth
transfers. We can expect all the beneficial consequences of a return to limited
government, for government could no longer fund itself through the unholy
alliance with an inflationary central bank that creates fiat money in order to
monetize government's profligate spending. The people would no longer be so
subservient to government, pleading and begging for special interests at the expense
of the rest of society, for government would be forced to go to the people for
approval to increase its budget. The list of benefits goes on and on. Suffice
it to say that it all begins with truly sound money, money anchored in gold.
Germany can lead the way and earn the just respect of a grateful world. It is
in the right place at the right moment in history. It should seize the moment!
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