Washington DC news blogs are replete with mentions of cryptocurrencies and a strategic bitcoin reserve. Meanwhile, Project 2025 called for a return to the gold standard and soaring gold prices are bringing back bugs and enthusiasts.
This focus is partly a reaction to the economic turmoil of the pandemic and its inflationary wake along with longstanding anti-government views in parts of American society. It also reflects the huge lobbying and campaign financing of cryptocurrency backers.
Economic debates about rules versus discretion have long raged, with proponents of relatively automatic rules-based approaches often wishing to rein in fiat money and the Federal Reserve. But the ideas advanced about bitcoin and gold are hardly in America’s interest. Fiat money, whatever its imperfections, is here to stay.
Little sense in a strategic bitcoin reserve
Blockchain technology may be highly useful. A strategic bitcoin reserve, however, makes little sense, other than potentially enriching bitcoin holders. It is ironic that the cause célèbre of bitcoin, with roots as an anti-government symbol, is now a government-endorsed reserve.
Bitcoin is not a proper hedge against inflation. Rampant price fluctuations in bitcoin belie the properties of a store of value. It is a tool of criminals and money launderers, hardly warranting the government’s imprimatur. Cyber hacking presents immense dangers to holders. It’s bad for the environment.
The US holds the Strategic Petroleum Reserve and foreign exchange reserves. They serve clear purposes. The SPRO was created to avoid supply disruptions and energy price spikes, given energy’s outsized role in economic life. Foreign exchange markets intermediate global trade and capital flows, and reserves can counter disorderly conditions that would otherwise upset international financial stability.
Some argue a bitcoin reserve would strengthen the dollar’s global role. It’s clear why stablecoins pegged to the dollar would strengthen the buck’s global role. But it seems counterintuitive that the US creating a non-dollar reserve would strengthen the currency’s reserve status.
The US holds over 200,000 seized bitcoin. Some tout those as a reserve’s initial capital. The seized assets, however, are subject to long, complex legal processes to establish their criminal origin, after which they are auctioned off and the proceeds are used to finance the strained budget. Purchasing more bitcoin for a reserve would require Congressional approval and add to US financing requirements.
Focus on official gold role is misguided
The resurgent gold focus also relates to the search for greater post-pandemic price stability, aspirations for binding the Fed’s hands, plus the recent jump in gold prices associated with central bank gold purchases, especially China.
The literature on the gold standard’s pros and cons is well established. While the gold standard may have delivered longer-term price stability, it was also associated with large volatility in prices and output, often not meeting the needs of a growing economy. As William Jennings Bryan railed in 1896: ‘You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.’
Gold has played no official role in the international monetary system since the early 1970s. Even were the US interested in returning gold to an official role, other countries will have no interest in reverting to a system subordinating domestic economic objectives, notably jobs and growth, to an external discipline. Or as G7 finance ministers put it in 2013: ‘We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.’
Idea of gold-backed digital currency is fantastical
Project 2025 shows that the desire to return to the gold standard also has everything to do with curbing the Fed, calling for eliminating the dual mandate and focusing only on price stability, limiting Fed asset purchases and its lender-of-last resort function, and examining alternatives to the Fed.
But the aspirations for gold go far beyond Project 2025. Some have suggested that a gold-backed digital currency, using distributed ledger technology, could be a ‘game-changer’ for the Brics group and an alternative to the dollar for global settlements. Others are making related arguments about a Brics currency being as good as gold.
Such thinking is implausible and fantastical. Aside from some global South countries holding a shared desire for a non-dollar alternative, Brics countries are vastly disparate, have hugely different interests and lack common financial infrastructure. Nor would a Brics gold-related currency necessarily achieve stability – absent a disciplining anchor, volatility could simply shift from local currency in dollars to the local currency in gold.
The aspiration for a non-dollar alternative is reminiscent of Valéry Giscard d’Estaing’s lamentations in the mid-1960s about the dollar’s ‘exorbitant privilege’. But 60 years later, dollar dominance remains well entrenched.
Meanwhile, the US continues to hold over 260m ounces of gold, sitting in Fort Knox and vaults. Selling it in a responsible fashion could generate considerable resources for paying down US debt. But the allure of gold in some quarters, and undoubtedly with the opposition of gold-producing firms, means Fort Knox will continue to cost American taxpayers while the gold gathers real, not fairy, dust.
America faces economic challenges. The Fed can do a better job. But the need for a bitcoin reserve or promoting an official role for gold is hardly the answer.
Mark Sobel is US Chair of OMFIF.
