Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon. I live in National Landing Va 22202

Econ 101: Retail Central Bank Digital Currency (CBDC)

The history of money is long and fascinating. Even the currency most frequently used in the United States has a rich history. Money makes possible the specialization and trade upon which our great wealth depends. Through its long history of development and evolution, money has serviced two key functions. It provides the standard unit for pricing traded goods and services so that their values can be meaningfully compared (it’s the unit of account) and it is the common asset in which payments are made (it’s the medium of exchange or payment).

Medium of Payment–Money

When you hire the neighborhood boy to mow your lawn, you probably first agree on a price (the number of dollars) This is the unit of account function of money, which is indispensable for the functioning of markets.  You could agree to trade with the neighborhood boy a nice lunch with lemonade in exchange for his mowing your lawn. But paying him $15 in Federal Reserve Notes has the advantage that he can exchange it for your lunch, or he can buy his lunch at Wendy’s or anything else of his choice.

Obviously, markets can’t really function if each item or service is priced in a different money unit (dollars, Euro, rubles, bitcoin, etc.). The Continental Congress of the United States authorized the issuance of a new currency, the US dollar, on July 6, 1785. Following the ratification of the Constitution of the United States, the new Congress established the United States dollar as the official currency of the United States in the Coinage Act of 1792. The Act also established the United States Mint, which produced and circulated coins with a fix amount of gold or silver (later only gold). “History of the United States dollar”  

As the result of the changing relative price of silver for gold, the bimetal gold/silver standard was replaced with the single metal standard of gold. The dollar was redefined in 1900 as “twenty-five and eight-tenths grains of gold nine-tenths fine,… and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard.” Fast forwarding through WWI and WWII and the creation of the Bretton Woods Institutions and the failure of the US to adhere to the requirements of the gold standard, the US “closed its gold window” and proceeded with varying degrees of success to manage the supply of its currency so as to preserve its purchasing power.

Over this long history many private actors (banks) created dollars. There are in fact thousands of private producers of dollars (Chase dollars, B of A dollars, etc.) Glossing over the details, it was a one currency system–the US dollar–because each bank’s currency could be redeemed for gold at  fix price or, after the creation of our central bank in 1913, for a deposit at a Federal Reserve Bank. This is obvious when you pay with Federal Reserve Notes, which are direct obligations of our central bank. Originally each note was identified by the Federal Reserve Bank that issued it–there were twelve of them–but even that distinction has been eliminated. Few people even noticed the difference. But most of our dollar money supply (M1: Federal Reserve Notes in circulation plus demand deposits at banks) is privately produced by banks and exists in digital form as accounting records with each of our banks.

Means of Payment

Our money–US dollars (or Euros or bitcoin)–is quite distinct from the various ways in which you can pay it–payment technologies. Cash payments–the transfer of Federal Reserve Notes from me to you–are hand delivered. But most payments are made by digitally transferring an amount of dollars from my bank account to yours. Such digital payments have the obvious advantage of enabling you to pay someone across town, across the country or even across the world (if they accept your currency) plus the safety of keeping your money in the bank pending such payments.  It’s not recommended that you send cash in the mail. The key insight is to understand how my dollar balance in my bank gets to your account at your bank and why your bank is willing to accept it. The quick answer is that your bank will not generally accept a claim on my bank but will record my payment because it receives an increase in its deposits at a Federal Reserve Bank of that amount.

In the old days I wrote a check that authorized my bank (after the check was deposited by you at your bank, which sent it to my bank) to debit my balance with the indicated amount and to transfer that amount from its balance at the Fed to your bank’s account at the Fed. SWIFT performs this payment instruction/authorization function for cross border payments (i.e., those involving two central banks). Today I issue this instruction directly to my bank electronically on the internet or my smart phone. The “dollars” are one currency no matter who creates and issues them because whoever receives them can redeem them for balances at the central bank (or in the old days for gold).

Visa, Master Card and American Express credit cards provide payments on my behalf by lending me the money before I actually make the payment from my bank account to the credit provider at the end of the month. The loan to me involved in such payments, increases the cost of this type of payment.

The execution of the interbank portion of my payments have become increasingly efficient over time but can still take several days because the Federal Reserve Banks do not operate in the evening or on weekends. When our central bank launches FedNow next year it will allow the continuous processing of payments between banks 24/7.

The front end of the payment process, i.e., my initiation of a payment to you, for example, has also benefited from software improvements. Unlike bitcoin, Ethereum, or Ripple, which are currencies, Zelle, Venmo, PayPal, etc. are payment technologies rather than money. They are means for paying US dollars (or other currencies) from me to you. Venmo, for example can be thought of as the payment service part of a bank. It can hold money for you and can transfer it to others (who must also have a Venmo account) but Venmo cannot make loans with your money. Thus, people without bank accounts can use Venmo as if it were a bank account.

The Federal Reserve and other central banks are investigating whether they should also provide the service to the public of paying dollars with so called Central Bank Digital Currency (CBDC). The Federal Reserve defines a CBDC “as a digital liability of the Federal Reserve that is widely available to the general public.” “Money and payments–Fed report”  CBDCs would be a direct claim on the central bank like Federal Reserve notes (cash) but would be held and transferred digitally like your bank deposits. If the Fed goes forward with introducing CBDCs, they would almost certainly be what are called retail CBDCs. Rather than opening accounts at the Fed directly, we would each do so through a bank. We would sign up with and deal with a bank to hold the Fed’s CBDCs. The Fed has no existing capacity to deal directly with each of us in the way that our banks do. The balance of this note will explore how such CBDC would compare with, say, Venmo balances and payments and whether they are worth the trouble.

All digital money is recorded on electronic ledgers, either distributed as with a block chain used by bitcoin, or centrally maintained as with our bank accounts. As block chains are slow and expensive to verify, they would not be used for CBDCs. Just in case you didn’t know, when you walk into your bank and deposit cash, they don’t put it in the value for you. They record the value of the cash you delivered in our account with the bank, and they return the cash to the Fed for a credit to your bank’s Fed account or invest or lend it to someone else (after having converted it into a balance in their Fed account). It is both useful and interesting (to us economists at least) to walk through how my deposit at my bank is transferred to you (your account at your bank).

Taking Venmo as the example of existing digital payment technology, your deposit of dollars to your Venmo account would be digitally transferred from your bank account to your account on Venmo’s ledger. Your bank would transfer the same amount to Venmo’s deposit account with its bank (in the name of PayPal, which owns Venmo) in the usual interbank transfer manner. All (double entry) financial ledgers have a liability side (your deposit with the bank — what the bank owes you) and an asset side (the cash you deposited or the balance in your bank’s fed account for the money you had transferred to it). The ledger shows what the bank owes (liabilities) and the assets it holds with which to pay out what it owes (assets).

All digital money, whether your bank deposit or Venmo or bitcoin, must provide for an on ramp into and off ramp out of the digital system, i.e., for the process of paying cash in to acquire the digital money and of drawing it out as cash. Interestingly, Kenya has had a version of Venmo payments for several decades already. Kenya’s M-Pesa The ownership and use of cell phones (not necessarily smart phones) is very widespread in Kenya, while bank accounts are far more limited. Thus, people paid for phone airtime by the hour by paying cash to street venders selling such service. This became the on ramp for the unbanked to fund their M-Pesa mobile money accounts.

If you have money in your Venmo account (a positive balance), you can issue a payment instruction via your Venmo wallet directly to the friend you are paying. You can also instruct Venmo to take that the money simultaneously from your bank account. You can do all of this on your smart phone while waiting for your drink at a local bar. If your friend doesn’t have a Venmo account, Venmo will instruct her on how to set up one in order to receive your payment. If you give Venmo a day or two to complete the payment, it is free. If you want it delivered immediately (within a few minutes) there is a small fee. When the payment is complete, your balance at Venmo (or your bank) will have been reduced by the amount of the payment and your friend’s balance with Venmo will have been increased by the same amount. She can leave the money there or move it to her bank account (on her cell phone) if she has one. The money will “exist” as an accounting record somewhere. These “dollars” are accepted from wherever they come (from whoever produced them) because they are claims on, or are converted into deposits at, a Federal Reserve Bank.

How would this compare with a payment with central bank digital currency (CBDC)? While the Federal Reserve has not indicated the details of a possible CBDC, it would probably work something like this. I would ask my bank to sell me CBDCs by debiting my checking account by the indicated amount. These would be added to (credited to) my CBDC account at my bank.  My bank would transfer that amount from its general account at its Federal Reserve Bank to a segregated CBDC account at the Fed. My cell phone wallet would record (by accessing my CBDC account at my bank) this amount, and my bank would back it 100% with its CBDC account at the Fed.

Why does this matter? It matters because if my bank fails (goes into bankruptcy), the amount in the bank’s CBDC reserves at the Fed would be excluded from the bankruptcy process. They are exclusively and fully available to back my CBDC holdings. When I pay CBDC to my friend, her bank will receive them without regard for the condition of my bank.

Some of you will recognize this as the equivalent of the so-called Chicago Plan. The Chicago Plan required banks to back all checking account deposits 100% with central bank reserves. Our bank deposits today are largely backed by bank loans and investments plus a small deposit with the central bank. Such CBDC deposits would be totally free of default risk. While all CBDCs would exist on the books of the Federal Reserve, ownership by individuals would be reflected on the books of their respective banks and in their CBDC wallets.

Like the Chicago Plan, CBDCs have the potential to reduce the money multiplier (the ratio of broad money to base money–the Federal Reserve’s monetary liabilities). A shift from demand deposits to CBDC deposits at banks would reduce the funds available to banks for lending by increasing the reserves they must hold at the Fed. This could be easily compensated for by increasing base money (Federal Reserve monetary liabilities). Sudden shifts to the safer CBDCs in reaction to financial shocks, like traditional bank runs, would require central bank intervention. The Fed has also indicated that it would want any digital replacement of its currency notes to provide as much user privacy as possible (like cash) consistent with “affording the transparency necessary to deter criminal activity.”

How would this compare with a Venmo payment. From our perspective (the perspective of the payer and payee) a Venmo or CBDC payment would be executed in the same or very similar way. The difference is that the CBDC balances would be totally risk free (being relatively direct claims on the central bank) while the Venmo balances would be exposed to the risk of the failure of the bank in which Venmo keeps its assets that back our Venmo balances. It is not obvious that this is a big enough difference to make it worth undertaking.

Roe v. Wade Part II

My previous blog on Roe v. Wade argued that the laws on abortion should reflect the democratic will of the public. “Roe vs Wade” I have personally always been pro-choice but also believed that that case needed to be made democratically. Before joining the Supreme Court judge Ginsburg stated that: “Roe v. Wade sparked public opposition and academic criticism, in part, I believe, because the Court ventured too far in the change it ordered and presented an incomplete justification for its action.” “Scholarship Law, UNC.edu” She added, “Roe v. Wade, in contrast, invited no dialogue with legislators. “Ruth Bader Ginsburg-Roe vs Wade”

Conservative columnist George F. Will wrote that rather than end the debate about abortion with Roe: “Instead, it inflamed the issue and embittered our politics — because the court, by judicial fiat, abruptly ended what had been a democratic process of accommodation and compromise on abortion policy . . . .   Before the court suddenly discovered in the Constitution a virtually unlimited right to abortion, many state legislatures were doing what legislatures are supposed to do in a democracy: They were debating and revising laws to reflect changing community thinking.” “George Will on Roe”

I also argued, quoting Justice Alito, that revoking Roe would not endanger the Obergefell v. Hodges decision, which legalized same-sex marriages, the Loving v. Virginia decision, which legalized interracial marriages, the Griswold v. Connecticut decision, which ban restrictions on contraception, and several other cases. These decisions were also based (in part) on the Due Process Clause of the Fifth and Fourteenth Amendments to the Constitution.  I argued that my right to marry a man was protected by the Equal Protection Clause of the Fourteenth Amendment. A lawyer friend, Jack Nadler, has raised some interesting challenges to this assertion and clarified for us non-lawyers the fuller meaning of applying the Due Process Clause and the Equal Protection Clause of the Fourteenth Amendment to the Constitution.

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Jack Nadler is a Retired Partner in the Washington DC office of Squire Patton Boggs.  While at Squire, Jack served as outside counsel for SAGE (formerly Services and Advocacy for Gay Elders), which represents the interest of LGBT older adults.  Jack led the team that drafted the extensive friend of the court (amicus) brief that SAGE filed in Obergefell v. Hodges, the case in which the Supreme Court struck down State restrictions on same-sex marriage.  Jack previously taught law at American University’s Washington College of Law in Washington, DC and the China University of Political Science and Law in Beijing, and served as a Law Clerk to the Hon. Joel M. Flaum on the United State Court of Appeals for the Seventh Circuit in Chicago.  He is a graduate of Columbia Law School, the Columbia University School of International and Public Affairs, and Vassar College. 

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A Response:  Why Overruling Roe v. Wade Threatens Marriage Equality

Jack Nadler  

I disagree with my friend Warren’s contention that a decision to overrule Roe v. Wade, based on the rationale in Justice Alito’s draft opinion in Dobbs v. Jackson Women’s Health Organization, would not threaten the right of same-sex couples to marry.  In particular, I do not agree that, even if the Court adopts the reasoning in the draft opinion, the courts would be likely to continue to uphold marriage equality under the Fourteenth Amendment’s Equal Protection Clause.

The rights of same-sex couples to marry, recognized by the Supreme Court in Obergefell, just like the right to abortion recognized in Roe, is grounded on the Due Process Clause, which provides that no State may “deprive any person of life, liberty, or property, without due process of law.”  Specifically, the right of same-sex couples to marry is based on the doctrine of substantive Due Process, which provides that the Due Process Clause’s protection of “liberty” precludes a State from infringing on certain “fundamental rights” that individuals possess, regardless of what procedures the State uses.

Justice Alito’s draft opinion in Dobbs is a direct repudiation of the doctrine of substantive Due Process.  The express rationale for overruling Roe is that the Constitution only protects rights that are expressly granted in its text or that are “deeply rooted in our nation’s history and tradition.” Because the Constitution does not expressly grant women the right to have an abortion, and because, prior to Roe, the United States did not have a long “history and tradition” of permitting abortion, the draft opinion concludes that the Constitution does not provide this right.

The same rationale is fully applicable to Obergefell, which held that the Due Process Clause precludes the States from depriving same-sex couples of their fundamental right to marry.  Indeed, in his dissenting opinion in Obergefell, Justice Alito applied the exact same standard and concluded that, because “[t]he Constitution says nothing about a right to same-sex marriage,” and because “it is beyond dispute that the right to same-sex marriage is not among those rights . . . deeply rooted in this Nation’s history and traditions,” the Court erred when it found that the Due Process Clause grants same-sex couples the right to marry. 

Warren’s reliance of Justice Alito’s assertion that the Court’s decision to over-rule Roe does not affect “any other right that this Court has held fall within the Fourteenth Amendment’s protection of ‘liberty’” – including the right of same-sex couples to marry – is misplaced.  The binding part of a court decision is not what the court says; it is what the court actually does and the reasoning essential to support that action.  The rest of the court’s opinion is non-binding dicta.  The reality is that Obergefell rests on the same substantive Due Process foundation as Roe.  The Court cannot demolish that foundation in the abortion context while simultaneously preserving it in all other contexts.  The Constitution either does – or does not – allow the Court to identify judicially enforceable rights beyond those expressly enumerated in the text or “deeply rooted in our nation’s history and tradition.”

I also disagree with Warren’s contention that overruling Roe and thereby “return[ing] the determination of the rules of abortion to the elected representatives in each state” is desirable because “policy in a democracy should be determined by voters and their representatives.”  This is precisely the argument that the marriage equality opponents made in Obergefell.  Indeed, in his dissenting opinion, Justice Alito contended that “[a]ny change on a question so fundamental [as the definition of marriage] should be made by the people through their elected officials.”  The Court rejected this argument, observing  that, “[w]hile the Constitution contemplates that democracy is the appropriate process for change, individuals who are harmed need not await legislative action before asserting a fundamental right.”  Had the Court left the question of whether same-sex couples should be allowed to marry to the States, then even now the right of same-sex couples to marry likely would still be denied in many States.

The impact on marriage equality of the Court’s decision to overrule Roe must be seen in the larger judicial context.  At the same time the Court is contracting the scope of the Fourteenth Amendment’s restriction on governmental infringement on personal liberty, it is also expanding the scope of the First Amendment protections for the free exercise of religion.  A clash is inevitable.  Indeed, in a 2020 concurring opinion, Justice Alito joined Justice Thomas in declaring that Obergefell has had “ruinous consequences for religious liberty.” 

In order to address the perceived threat to freedom of religion, several of the Justices appear to believe that in any conflict between a religious person’s right to free exercise of religion and a same-sex couple’s right to marry, the “express” free exercise right must trump any “judge made” liberty right.  This could have significant adverse consequences for same-sex couples.  For example, a business owner could refuse to provide the same spousal health insurance coverage to a gay employee’s spouse that the company provides to its straight employees’ spouses on the ground that covering the gay employee’s spouse would violate the owner’s religious conviction that marriage is between one man and one woman.  If the Court adopts this “hierarchy of rights” approach, then the State in which the company is located would be constitutionally powerless to apply its non-discrimination law to make the employer provide coverage.

I agree with Warren that same-sex marriage supporters should not be “hysterical” about the Court’s decision to overrule Roe.  But I do think we should be very concerned about the potential of this decision, over time, to erode the LGBT community’s hard-won victories that have secured judicial protection of our fundamental rights, including the right to marry.

Discussion

The Equal Protection Clause

Warren:  As a legal layman, I always thought that my right to marriage equality rested on the Equal Protection Clause of the Fourteenth Amendment.   Didn’t Obergefell hold that the restrictions on same-sex marriage violated both the Due Process and the Equal Protection Clause?

Jack:  Ever since the Court struck down State prohibitions of private consensual same-sex sexual relations in Lawrence v. Texas, it has relied on substantive Due Process, rather than the Equal Protection Clause.  To be sure, there is a brief section in the Obergefell opinion that essentially says that there is a “synergy” between the Equal Protection and Due Process Clauses because the denial of marriage equality is a denial of the “fundamental right to marry” protected by the Due Process Clause and a denial of a fundamental right to a specific group also violates the Equal Protection Clause.  As the Court somewhat delphicly explained:

“Rights implicit in liberty and rights secured by equal protection may rest on different precepts and are not always co-extensive, yet in some instances each may be instructive as to the meaning and reach of the other.  In any particular case one Clause may be thought to capture the essence of the right in a more accurate and comprehensive way, even as the two Clauses may converge in the identification and definition of the right.”

However, as I noted earlier, the binding part of a court decision is not what the court says; it is what the court actually does and the reasoning essential to support that action.  The rest of the court’s opinion is non-binding dicta.  The dissenters in Obergefell correctly observed that the Court had utterly failed to conduct an Equal Protection analysis, and, in any case, this finding was not necessary to resolve the case.  Indeed, Chief Justice Roberts stated that the Court’s opinion had “fail[ed] to provide even a single sentence explaining how the Equal Protection Clause supplies independent weight for its position, nor does it attempt to justify its gratuitous violation of the canon against unnecessarily resolving constitutional questions.”  Justice Thomas similarly observed that the Court had “clearly use[d] equal protection only to shore up its substantive due process analysis.” 

The bottom line is that, if you take the substantive Due Process analysis out of Obergefell, the Equal Protection Clause analysis does not provide an adequate independent basis on which to strike down State restrictions on marriage equality.  Consequently, if the Court eliminates substantive Due Process, the passing reference to Equal Protection in Obergefell would not be enough to support the result in that case.

Warren: Even if the Court in Obergefell did not adequately rely on the Equal Protection Clause as the basis for striking down restrictions on same-sex marriage, could the Court rely on that Clause in any subsequent challenge to marriage equality?   Do you think it is worth doing so?

Jack: Unfortunately, if the Court demolishes substantive Due Process, the Equal Protection Clause is unlikely to be able to fill the gap.  Under modern constitutional jurisprudence, when presented with the claim that a statute violates the Equal Protection Clause by impermissibly treating two groups differently, the Court conducts its analysis in different ways depending on which group is being treated differently.

Historically, the Court was very reluctant to find that a distinction between groups made by the legislature violated the Equal Protection Clause.  So, the Court applied what came to be known as “rational basis” scrutiny.  Under this highly deferential standard, regardless of the legislature’s actual intent, the Court upheld a statute if there was any possible basis on which the legislature rationally could have made the distinction.  Not surprisingly, applying this standard, the Court virtually never found a legislative distinction between groups violated the Equal Protection Clause.

The civil rights movement changed things.  Instead of analyzing race-based statutory distinctions under the rational basis standard, the Court ruled that such distinctions were subject to “strict scrutiny.”  This meant that a race-based statutory distinction would be found to violate the Equal Protection Clause unless the legislature actually intended for the distinction to serve a “compelling purpose” and the means it chose were “narrowly tailored” to achieve the stated purpose.  Very few race-based distinctions can be found constitutional under this standard.

Things got still more complicated with the rise of the women’s movement, when the Court had to decide whether to use rational basis or strict scrutiny to assess whether gender-based statutory distinctions violated the Equal Protection Clause.  The Court decided that challenges to such distinctions should receive “intermediate” scrutiny.  Basically, such distinctions need to serve an “important” purpose and the means used must be “substantially related” to achieving the stated purpose. 

The Court has never determined what level of scrutiny to apply in cases involving statutes that make distinctions based on sexual orientation.  In his dissenting opinion in Obergefell, however, Justice Alito briefly considered the Equal Protection argument, effectively applying the rational basis standard.  He concluded that the States had provided a sufficient justification for distinguishing between same-sex and opposite-sex couples because marriage is “inextricably linked to the one thing that only an opposite-sex couple can do:  procreate. . . . States formalize and promote marriage    . . . to encourage potentially procreative conduct to take place within a lasting unit that has long been thought to provide the best atmosphere for raising children.”  Therefore, in his view, because same-sex couples cannot procreate, excluding them from marriage does not violate the Equal Protection Clause.

In order to use the Equal Protection Clause as a basis on which to uphold marriage equality, it would be necessary to convince the Court that distinctions based on sexual orientation should receive some degree of heightened scrutiny.  In light of the history of legal discrimination against gays and lesbians, heightened scrutiny clearly is appropriate.  But given that there are some objective differences between homosexuals and heterosexuals – especially the fact that our sexual unions cannot lead to procreation – some statutory distinctions conceivably could be legitimate, so strict scrutiny may not be warranted.   Moreover, the level of de jure discrimination suffered by gays and lesbians, while significant, is probably closer to the level suffered by women than by African Americans, making it hard to justify strict scrutiny.  Therefore, the most appropriate solution would be for the Court to apply intermediate scrutiny to sexual-orientation-based distinctions.  That said, as a practical matter, given its current make-up, there is no chance that the Supreme Court would add statutory distinctions based on sexual orientation to the short list of categories that receive heightened scrutiny.  A court that is prepared to shrink the reach of the Due Process Clause, is highly unlikely to expand the scope of the Equal Protection Clause.

Interstate recognition of same-sex marriage

Warren:  If marriage equality is overturned and returns to a state-by-state determination, the question arises what would happen if a same-sex couple legally married in Maryland and then moved to a state in which such marriages were not allowed? 

Jack:  We most likely would return to the situation that existed before Obergefell, when a lawful Maryland same-sex marriage would not have been recognized in the vast majority of States where same-sex marriage was not legal. This would lead to some horrific situations.  Here, based on actual experiences before Obergefell, are a couple of examples.

First, the ability of married  same-sex couples to travel would be limited.  Imagine that our lawfully married couple decided to go on vacation in Florida, which did not allow same-sex marriage.  During the vacation, one of the spouses is hospitalized with a life-threatening injury or illness and is unable to make medical decisions for himself.   If the hospitalized spouse had been married to a woman, the wife – as next of kin – would have the legal right to visit her spouse in the hospital and, if necessary, make life or death medical decisions for him.  However, because the hospitalized spouse is married to another man, Florida would not consider his husband to be next of kin.  As a result, he would not have the right to visit his critically ill spouse in the hospital.  Even worse, the right to make life-or-death medical decision for the incapacitated spouse would go to the person that Florida recognized as next-of-kin – who may be a parent, sibling, nephew, or child from a prior heterosexual marriage, even if that person disapproves of the spouses’ relationship.  That person could even requested the hospital to bar the spouse from visiting.

Second, getting a divorce would be a nightmare.  Let’s say that our married friends decide to retire to Florida.  However, after a few years of fun in the sun, the couple agrees to get divorced.  But, because Florida doesn’t recognize their marriage, Florida won’t grant them a divorce; the State cannot dissolve a union that it does not recognize exists.  Unfortunately, the couple can’t make a quick trip back to Maryland to get a divorce decree because they are no longer residents.  So, unless they are prepared to take up residence in a State that recognizes same-sex marriage, they’re stuck with each other.

Warren:  How could this be possible?  Wouldn’t the Constitution’s Full Faith and Credit Clause require Florida to recognize a marriage lawfully performed out of state?

Jack:  The answer, regrettably, is no.   The Constitution’s Full Faith and Credit Clause, Art IV Sec 1, provides that every State must give “full faith and credit . . . to the public acts, records, and judicial proceedings of every other State.” The Clause also gives Congress power to “prescribe    . . . the effects” of such State acts.  However, notwithstanding this Clause, the courts have long held that a State need not recognize an out-of-state marriage, lawful where entered into, that contravenes the State’s public policy – such as a polygamous marriage or a marriage involving a child or first cousins. 

Prior to Obergefell, a few States that did not yet have marriage equality recognized lawful out-of-state same-sex marriages.  However,  the vast majority did not.  Indeed, a large number of States adopted constitutional amendments expressly barring recognition of such marriages.  Moreover, when it enacted the infamous Defense of Marriage Act (DOMA), Congress, purporting to use its power under the second sentence in the Full Faith and Credit Clause, expressly provided that States did not need to recognize same-sex marriages lawfully entered into in other States. 

DOMA’s non-recognition provision was not challenged in the Supreme Court’s Windsor case and survived the Court’s decision to strike down the portion of the law that provided that the Federal Government would not recognize same-sex marriages even if they were lawfully entered into in a State that had marriage equality. One of the two questions that the Supreme Court subsequently agreed to consider in Obergefell was whether the Full Faith and Credit Clause required States that did not permit same-sex marriage to recognize lawful out-of-state same-sex marriages.  Because the Obergefell Court ruled that State had to allow same-sex couples to marry, it did not resolve the out-of-state-recognition question.  Thus, if Obergefell is reversed, a State could again decline to recognize same-sex marriages lawfully entered into in another State.

Conclusion

Warren:  It seems to me that if Obergefell is challenged on the basis that no explicit right to same-sex marriage can be found in the Constitution to which the Due Process Clause could be applied, a stronger case for applying the Equal Protection Clause could be made. If that failed, we would have to live with state-by-state determination of marriage equality and Congress could stipulate that the Full Faith and Credit provisions of the Constitution would obligate states that do not permit same-sex marriage to recognize such marriages legally obtained in other states. Public understanding of and sentiment toward LGBT people has evolved and progressed considerably from the earlier times in which restrictive and discriminatory legislation such as DOMA were first adopted. Thus, I think it is likely that marriage equality would be widely embraced in the democratic approach of legislation.

Jack:  Warren believes that times have changed and that, even if Obergefell were overruled, many States would choose to retain marriage equality.  He also believes that, pursuant to its express authority under the Full Faith and Credit Clause, Congress would adopt legislation requiring that every State recognize same-sex marriages lawfully performed in another State.  I am far less sanguine. 

Despite all the progress made, 27 States have not yet enacted statutes that expressly bar discrimination in employment, housing, and access to public accommodations on the basis of sexual orientation.  I do not want to count on these States to take affirmative action to preserve the right of same-sex couples to marry.  I am particularly concerned about the many States that, prior to Obergefell, had amended their constitutions to limit marriage to “one man and one woman.”  If Obergefell is overruled, these State constitutional prohibitions on same-sex marriage presumably would immediately come back into in effect.  In that case, same-sex marriage would be barred in those States until such time, if ever, as the State completed the often-arduous process of amending its constitution to remove the restriction. 

As for Congress, the prospect that 60 Senators would support legislation to restrict the historic right of a State to decline to recognize out-of-state marriages that contravene its public policy seems remote.

Warren:  As of the middle of last year 83% of Americans supported marriage equality. Support among Republicans has risen from 40% in 2016 to 55% in June 2021. “Support for same-sex marriage in the United States by political party” Thus, I think it is likely that marriage equality would be widely embraced in the democratic approach of legislation.

Even with regard to abortion, the most recent Pew survey finds that 61% of Americans support the legalization of abortion in all or most cases. “Majority favor legal abortion”  While support is stronger among Democrats, 38% of Republicans support it and almost half of Republicans under thirty do. “Senate Majority Leader Charles Schumer (D-N.Y.) late last week teed up a vote on the Women’s Health Protection Act, which would essentially codify Roe into law. The vote is expected to take place midweek. There is little drama surrounding the vote, as it will fail….” “The Hill”  Why it seems destined to fail is a mystery to me, but then life is full of mysteries.

Roe vs Wade

The debate for and against the legality of abortion has been around as long as I have, i.e., for a very long time. Quoting from Justice Alito’s leaked draft of a possible court decision: “For the first 185 years after the adoption of the Constitu­tion, each State was permitted to address this issue in ac­cordance with the views of its citizens. Then, in 1973, this Court decided Roe v. Wade, 410 U.S. 113. Even though the Constitution makes no mention of abortion, the Court held that it confers a broad right to obtain one.” “Alito draft annotated”

Should the Supreme Court rescind Roe vs Wade, it would not make abortions illegal or necessarily restrict when they would be allowed. The current standard is that an abortion is permissible before the fetus becomes viable (likely to live if delivered). What rescinding Roe vs Wade would do is return the determination of the rules on abortion to the elected representatives in each state.  I have always been “pro-choice”, but I also believe that policy in a democracy should be determined by voters and their representative. I am comfortable with either a state-by-state determination or a federal determination, but I would like to see the status quo preserved. By that I do not mean that Roe vs Wade should be upheld, as it is simply an incorrect interpretation of the Constitution as Alito correctly claims: “even abortion supporters have found it hard to defend Roe’s reasoning.”

As Alito has also explained: “The abortion right is also critically different from any other right that this Court has held to fall within the Fourteenth Amendment’s protection of ‘liberty.’ Roe’s defenders char­acterize the abortion right as similar to the rights recog­nized in past decisions involving matters such as intimate sexual relations, contraception, and marriage, but abortion is fundamentally different.”  The Fourteenth Amendment provided for the protection of equal rights for all people. What any two straight, white people can do, black and/or gay people have the right to do as well, such as marry.

The almost hysterical reaction to the possibility of overturning Roe vs Wade is unwarranted. It will not make abortions illegal. As Alito stated: “It is time to heed the Constitution and return the issue of abortion to the people’s elected representatives.”

Econ 101: Moving money abroad

The Washington Post published an article this morning titled “THREE DOZEN TYCOONS MET PUTIN ON INVASION DAY. MOST HAD MOVED MONEY ABROAD.”“Offshore Putin Russia Oligarchs Pandora” It said things like “many of them had been moving their wealth out of the country for years,” and “The money often ends up offshore.” While where income is claimed is important for tax purposes, which is another interesting and complicated story, the abandon with which this story discusses moving wealth around drives us economists up the wall.

Wealth can be physical (factories, stores, etc.) or human (the knowledge or skills of people).  Financial wealth, such as money, is a claim on physical or human wealth. People can move abroad, and many skilled Russian’s are doing so. Moving physical capital abroad is more difficult if even possible. A yacht built in Russia can be sailed off to another country, but not a shopping mall. What this and similar articles generally mean by moving wealth abroad, is, as the headline states, moving money abroad. This is often done to minimize taxation, which is usually based on where income is recorded. “The corporate income tax” That is an interesting subject of its own but not my focus today.

How do people “move money abroad?” Money is rarely moved in suitcases anymore, and a bag full of rubles can’t be spent abroad in most places anyway.  So, let’s take a deeper look at what is really happening when Russian tycoons (or anyone else) “move money abroad.”

The easiest example is when Russian exporters are paid in foreign currency (generally US dollars). If the exporter has a dollar account in a bank abroad (in a US bank to keep it simple) the payment for his export can be deposited directly there by a debit to Shell Oil’s bank account and a credit to the Russian exporter’s US bank account via the normal interbank transfer process. He can hold it there or buy US treasures or other US financial assets. His money is moved abroad by moving (selling) his goods abroad and keeping the payment abroad. This helps explain why Russia is insisting that German and other buyers of its oil must pay in rubles.

To pay for oil or any other Russian export with rubles the foreign buyers must first buy rubles in the foreign exchange market. The increased demand for rubles increases its exchange rate (or keeps it from falling as Russian importers sell rubles for dollars to pay for imports). Russia has made the process of paying dollars then buying rubles simple and almost automatic, but critically the Russian exporter receives ruble. Normally Russian exporters would convert dollar payments into ruble with which to pay for their workers and local suppliers, etc. But by keeping the dollar payment abroad, they have effectively “moved money abroad” by shipping goods (and services) abroad.

If a tycoon’s income/wealth is local (in rubles), and he wants to move it abroad, he can’t just write a check (or SWIFT payment order) to deposit X amount of money in his account with the Bank of America. The funds in his local bank, which will be in rubles, will need to be exchanged for dollars in the foreign exchange market. He (his bank) will deposit his ruble in the ruble account of the seller of the dollars and will receive those dollars in his Bank of America account in the U.S. If the supply of dollars to the foreign exchange market are not being supplied as the result of Russian exports, the increased demand for dollars will depreciate the ruble (increase the ruble price of a dollar). With a balance of imports and exports the ruble/dollar exchange rate should be stable. But a net increase in the movement of money abroad would depreciate the ruble. In short, underlying the movement of money abroad, there is a net movement of goods (exports minus imports) abroad.

If there was a sudden increase in money being moved abroad from Russia (often called capital flight) the ruble’s exchange rate would depreciate and the cost of imports would thereby increase.

Afghan update

The heart-breaking attack on Ukraine by Russian troops has distracted our attention from the tragic misrule (or failure to properly rule) of the Taliban in Afghanistan. An Afghan official I worked with over the last twenty years, who was able to leave Kabul on one of those final fights at the end of August 2021, sent me the following report on conditions in Kabul. I am not revealing his name for his safety and the safety of his family.

“The economy is getting worse day by day, businesses facing many problems, shopkeepers complain less sales, poor people hardly find one time meal, hunger is increasing, at DAB [the central bank], the payment system has been stopped, APS, FID and many other depts are paralyzed, they haven’t managed to print new banknotes, girls’ high school still closed, bomb blasts occurred in many mosques recently during Holy Month of Ramadan and only poor civilians killed, and many more problems.

God help people of Afghanistan.“

Indeed. Over the last twenty years Afghanistan gradually developed and strengthened its institutions of government. After toppling the elected government of Afghanistan, my hope, and the hope of the West, was that the Taliban would form an inclusive government that would build on that progress. It hasn’t happened. The new Taliban “government” has not even been able to solidify itself. If it fails, Afghanistan will suffer another (or continuing) civil war.  “Nation building in Afghanistan”

The former Canadian ambassador to Afghanistan, William Crosbie, commented that: “Hope is certainly receding that the TB will work towards a political settlement to make its military takeover a lasting peace. Our argument to those neighbouring countries and non-Western partners (e.g. China) has been that the TB regime is not sustainable as a Pashtun, TB clique relying on fear.  Quite apart from the economic devastation of a non-functioning government and private sector, the ethnic and tribal rivalries and other extremist groups will resort to the tactics that the TB used so effectively. And they will prove just as destructive.” 

God help the good people of Afghanistan.

A Libertarian Money

The long history of money began to take its modern form with the development of national central banks. “The story of central banking goes back at least to the seventeenth century, to the founding of the first institution recognized as a central bank, the Swedish Riksbank. Established in 1668 as a joint stock bank, it was chartered to lend the government funds and to act as a clearing house for commerce. A few decades later (1694), the most famous central bank of the era, the Bank of England, was founded also as a joint stock company to purchase government debt.”[1] Over time central banks were given a monopoly over issuing their country’s currency and usually for regulating the country’s banks, which create most of each country’s money.

Generally, the currencies issued by central banks (or commercial banks) were claims on, and thus redeemable for, gold or silver. The gold standard oversaw a long period of trade expansion and economic flourishing. A currency’s fixed price for gold regulated the money supply both domestically and between other countries also on the gold standard, keeping its supply consistent with the fixed gold price. Countries, like individual families, cannot buy more that they sell over their live time (whatever the lifetime of a country might be). The gold standard, via the price-specie flow mechanism, preserved such balance of trade between gold standard countries.

Two countries on the gold standard, with fixed prices for gold for their currencies, have an unchangeably fixed exchange rate for their two currencies. But if the domestic purchasing power of each currency changes (inflation or deflation) the real value of the nominal exchange rate will appreciate or depreciate. The real exchange rate adjusts via changes in the domestic prices of one country relative to the other.  If a country buys more abroad than it sells abroad, the outflow of its money to pay for its trade deficit will reduce its money supply if gold standard rules are observed (gold flows out and the supply of currency backed by that gold contracts). The reduction in its money supply will reduce domestic (and thus foreign) prices in that money. This adjustment in domestic prices relative to foreign prices, which make foreign goods relatively more expensive domestically and domestic goods cheaper abroad, will reduce and eventually eliminated the trade deficit.

When the United States established the Federal Reserve System, its central bank, in 1913, it continued to fix the price of the currency it issued in gold. But it only adhered to gold stand rules loosely and in 1971 no longer had enough gold to honor its commitment to foreign central banks to redeem its currency for gold. Thus, on August 15, 1971, President Richard Nixon “closed the gold window.” The era of the value of currencies anchored by (fixed to) gold or some other hard anchor was over. The Federal Reserve and other central banks needed to develop other criteria for determining the supply of their currencies.

Following the inflationary experience in the U.S. in the 1960s and 70s, there were more and more demands for clear rules for the Fed’s regulation of is money supply, now that it was no longer constrained by a hard anchor (e.g., the price of gold). The objective of monetary policy was broadly accepted around the world to provide a stable value for the currency, though the Federal Reserve was shackled with the dual mandate of price stability and maximum employment. The short-term demand for money was not sufficiently stable for a Friedman rule (fixed growth rate for base, narrow, or broad money – M0, M1, or M2). Inflation forecast targeting (IFT) has evolved to become the state of the art of fiat money supply rules.

In IFT regimes, the central banks’ policy instruments (primarily the interest rate at which it lends to banks) are transparently set on the expectation (based on model forecasts and judgement) that in one to two years in the future they will produce (or maintain) the central bank’s target for inflation. While this approach has performed relatively well, its management of the money supply has been far from perfect and central banks are experiencing increasing government pressure to relax their price stability mandates. And then there are a few countries whose central banks have caved to fiscal dominance and behaved terribly.

Would some cryptocurrency, ala Hayek, provide a better monetary system? Some people claim that libertarians like cryptocurrencies like bitcoin because they do not rely in any way on government. Perhaps those people meant “anarchists” because libertarians accept the critical importance of government in defining and protecting property rights and personal safety. Cryptocurrency providers have been lobbying the U.S. congress (and others) to set out the rules for their legal operations. Are they money or speculative assets?  Bitcoin and most other cryptocurrencies do not satisfy the requirements for a good libertarian money because they do not satisfy the requirements for good money. This article explains why this is so and defines properties of a good libertarian money.

Are Cryptocurrencies the Answer?

Economists note the incredible power of markets and market prices in directing our scarce resources (our labor, capital, and technology) to their best uses. But prices are expressed in terms of money, the common unit of account that facilitates comparing relative values.

The presumption, and actual reality, is that within each market prices are expressed in terms of the same money. It would not facilitate our choices if apples were priced at $6 per bushel and oranges at 3 bitcoin per bag. Presently, virtually nothing is priced in bitcoin. In addition, sellers don’t generally accept payment in a currency other than the one in which the good’s price is expressed, thus very few sellers will accept bitcoin in payment. Moreover, you can only accept bitcoin in payment if you have a bitcoin account together with the software required (a bitcoin wallet).

None of these are insurmountable barriers to growth in the use of bitcoins or other cryptocurrencies, but they do require strong incentives for putting up with and/or overcoming them. I explained the basics of bitcoin’s value in the linked blog in 2014: “Cryptocurrencies-the bitcoin phenomena”[2] One incentive would be to replace the established currency in a market (a country’s legal tender) that has very unstable value (think Zimbabwe, Venezuela, Argentina, Brazil at various times in their histories). Another would be the need for anonymity (as is achieved with paper currency) that an illegal drug dealer or a political dissident in a repressive regime might require and find convenient.

Some mistook Fredrick Hayek’s “Competition in Currency” as an endorsement of what we now call cryptocurrencies. In the Preface to that book Arthur Seldon explained “The requirement is not to deprive government of the power to issue money but to deny it the exclusive right to do so and to force the citizenry to use it at the price it specifies. It is thus the government monopoly of money that is objectionable, and history is full of examples of governments that have attempted to enforce their power by extreme measures, including the ultimate sanction of death. The solution is therefore to allow people to use the money they find most convenient, whether the money issued by their own government or by other governments.”[3]

When the Zimbabwean dollar became worthless, reaching annual inflation rates of 10,000 percent in 2007 and exploding in 2008 with an estimated peaked rate in September 2008 of about 500 billion percent per annum, the Zimbabwean government legalized the use of foreign currencies and the country immediately dollarized (priced and paid in U.S. dollars flown in from South Africa). This was the remedy Hayek proposed and it ended inflation almost instantly.[4]

Later in 1976 Hayek followed up his Competition in Currency proposal with the more radical broadening to private currencies in his AEI pamphlet Denationalization of Money, An Analysis of the Theory and Practice of Concurrent Currencies.[5] Most money these days is privately produced by your and my banks (our deposits), but they are fixed in value to and ultimately exchangeable for the U.S. dollars created by our central bank. They are part of the U.S. dollar money supply. Bank deposits are not alternative, private units of account. In this second book Hayek was broadening his call for currency competition to the bitcoins of the world. Hayek was proposing that inflating central bank currencies should face competition from privately produced units of account and monetary assets (medium of exchange and payment).

Otmar Issing, Chief Economist of the ECB and member of its Executive Board from 1998 – 2006, concluded that adopting Hayek’s proposal “We would ‘discover’ that private currency competition – at least nowadays – would not work and would not serve the people affected.”[6] I made the same point to Hayek directly in a debate at the 1976 Mont Pelerin Society meetings in St. Andrews, Scotland. Competing private units of account would undermine an essential function of money in market economies (communicating the relative value of things). In high inflation countries, such as Venezuela, many things are priced in U.S. dollars. However, the Venezuelan government has made payments in dollars illegal. In such cases, Bitcoin and other cryptocurrencies are used to some extent to make dollar denominated payments. But as the value of Bitcoin is so unstable, holding on to then is very risky.

In El Salvador, which had successfully dealt with inflation by dollarizing a decade ago, President Nayib Bukele added Bitcoin as legal tender as of September 7, 2021. Though this legally obliges merchants to accept Bitcoin in payment, “few ordinary folk use…. Bitcoin, which has lost 70% of its value since November, is far too volatile to be a good store of value, especially in a country where GDP per person is $4,400.” according to a June 16, 2022, article in The Economist.[7] No one prices in Bitcoin.

Cryptocurrencies that use a Block Chain or Distributed Ledger Technology suffer from other problems as well. Bitcoin’s claim to eliminate the trusted third party (bank accounting systems) required by existing electronic (digital) payments with bank deposits, is particularly attractive to libertarians.  But this claim is a gross exaggeration. To prevent the double spending of the same bitcoin, each transaction must be verified by so called miners (third parties you don’t need to trust) which takes five to ten minutes and very large amounts of electricity to process as miners race to solve increasingly difficult mathematical puzzles. Also, all transactions are very public on block chains, though accounts may be held under pseudonyms and are thus described as pseudo-anonymous.

Though actual bitcoin transactions have been made easier via the development of software wallets, many assign their bitcoins to exchanges (trusted third parties).[8]  The loss of a bitcoin owner’s password to his account is fatal and final. Those bitcoins are lost forever. But more deadly to the use of bitcoin as money (unit of account and medium of payment) is the volatility of its value.  The price of a bitcoin has ranged from just under $30,000 to over $67,500 over the last year. It fell to $18,958 on June 18, 2022. Thus, payments of bitcoin generally involve temporarily purchasing them with dollars or some other stable currency and then exchanging them back to dollars as quickly as possible after receipt. The costs of these exchanges are often overlooked when claiming that bitcoin transfers are cheaper than traditional means of electronic payments. Of equal importance is that for an asset to function as money, it must be generally or at least broadly accepted for payments. Bitcoin fails this requirement miserably. Most buyers and sellers of bitcoin are indulging in a form of gambling rather seeking a “good” medium of payment.

Bloomberg exposes a false “libertarian” attraction to Cryptocurrencies on blockchains:

“An app running on, say, Ethereum, can’t easily be taken offline, since there’s no particular host or entity that can take it down.

“This architecture is inherently oppositional to governments and large corporations, and it’s for this reason that crypto has so much embedded politics. The whole space traces its roots back decades to hippies and hackers in Northern California, who anticipated that in an online world, pure cash-like peer-to-peer transactions would be impossible. When you pay a friend using Zelle or something, the payment goes through a series of intermediaries. You can get kicked off Venmo for buying a Cuban sandwich. Bitcoin can’t kick you off the network for anything.

“Take away the uncensorability of crypto, and all you’re left with is Ponzi schemes, dog coins, and drawings of monkeys. (Wait! That’s basically all that exists right now in the space, so ignore that thought.)”[9]

Unlike bitcoin, which are not redeemable for anything, so called stable coins have a fixed price for some other legal tender currency or even, potential, gold. The quality of the assurance of a stable price, and redemption at that price, vary considerably. Appropriate regulation that required transparency and external audit would be good. But the payment technology that has emerged in recent years such as PayPal, Venmo, or Zelle to transfer U.S. dollars (claims on bank accounts and ultimately on the Federal Reserve) have already introduced efficient, low cost, and fast payments of legal tender currency. The Federal Reserve is also modernizing its interbank settlement system. FedNow, which will operate real time 24/7 began testing in September and is expected to be operational in the summer of 2023. It is hard to see any further advantages introduced by so called stable coins.

The Libertarian Alternative

There are monetary regimes, however, that satisfy libertarian preferences for minimal government involvement and manipulation while satisfying truly valuable needs. The Constitution of the United States provides the authority for such a regime in Article I Section 8 “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;” The classical gold standard was such a system. However, its “rules” were diluted when taken over by central banks. Moreover, the practice of actually buying and storing gold distorted its market price and was costly, flaws that are avoided in the system I propose below.

In the U.S. today, as well as every other country in the world, there are thousands of private companies that create and offer their own currency. Most of them are banks. While that would seem to make libertarians happy, thousands of individual bank producers of money would not constitute an efficient monetary system without rules and mechanisms for linking them into what we think of as one currency–in our case the U.S. dollar.

While the dollars deposited in my bank are my bank’s liability, I am protected from the bank’s failure by deposit insurance. Your bank accepts my deposits in my bank because my bank credits your bank’s account with the Federal Reserve (by debiting its account with the Fed). In short, the deposits at thousands of different banks are accepted by every other bank because they are all ultimately claims on the Fed. This is similar to the gold standard in which the money created by thousands of banks were accepted everywhere because they were redeemable for a well-defined amount of gold.

Libertarians want a currency and monetary system that can’t be manipulated by the government (central bank).  The dollar is now a fiat currency, redeemable for a deposit with the Federal Reserve, and very importantly, acceptable by the government for the payment of taxes. Thus, its supply is determined by the Fed’s judgement of what is needed for “price stability and maximum sustainable employment.” We libertarians want a currency that we each individually control the supply of. In short, we want a currency with a hard anchor (which was the case for the gold standard) supplied according to currency board rules (which historically were violated by central banks nominally anchored by gold).

Currency board rules require the currency issuer to sell or repurchase its currency at its fixed price in response to public demand. Any number of private producers of dollars redeemable at an officially fixed price for a well-defined anchor (gold, aluminium, a basket of goods, etc.) would result in a money supply determined by the public that was consistent with and appropriate for its fixed price to the anchor and that was fully interchangeable. The central bank would be passive. It would have no monetary policy (beyond the fixed price for the anchor). This seems like libertarian heaven.

In addition to being anchored to a single commodity whose relative price could vary more than would the price of a basket (portfolio) of commodities, the gold standard was flawed by central banks actually buying and storing gold and thus distorting its market price. An ideal regime would use the anchor for setting the currency’s issue and redemption price but the anchor itself would not be purchased and stored by the central bank. Instead, the central bank would issue its currency for assets (such as treasury bills) of equivalent market value to the anchor. The arbitrage mechanism works just as well with this “indirect redeemability”[10]

I led the IMF teams that established the Central Bank of Bosnia and Herzegovina, which follows currency board rules. I have written a book about that experience.[11]  I also participated in Bulgaria’s central bank’s adoption of currency board rules. The currencies of both countries are anchored to the Euro and their currency experiences have been outstanding. Their money supplies are basically regulated by market arbitrage. If the market exchange rate of the Bulgarian lev to the Euro rises above its official rate, it would be cheaper for the banks that issue lev to buy Euros from the Bulgarian National Bank thus reducing the supply of lev in the market and lowering its market price for Euro. See my article on Bulgaria’s experience.[12]

A Libertarian International Reserve Currency

What about cross border payments? In brief, cross border transactors have found it economical to price and settle transactions in a vehicle currency, usually the US dollar. The increasingly frequent deployment of sanctions enforced by restricting the use of the dollar has intensified the search for alternatives. See my more detailed discussion in “The Empire and the Dollar”[13]  The search for alternatives to the dollar as proposed by Russia’s Sergey Glazyev[14] risks fragmenting the global market place.

The International Monetary Fund has already created such an alternative. An internationally established unit (anchor) is much less likely to be abused for national political purposes, but the IMF’s Special Drawing Right (SDR) suffers from some serious defects. However, these can be fixed.[15] [16]  

The SDR can be “fixed” in two stages. The first is to develop the private sector’s uses of the SDR unit of account (invoicing oil and other globally traded commodities in SDRs, borrowing and lending denominated in SDRs, SDR bonds and bills, and digital SDR deposits–eSDRs). See my more detailed discussion in “Proposal for an IMF Staff Executive Board Paper on Promoting Market SDRs.”[17] As with national currencies, where hundreds of individual producers of the national currency are made interchangeable by being claims on the central bank, the market SDRs of many competitive producers would be interchangeable as the result of being redeemable for the official SDR of the IMF.[18]

The second stage would require a reform of the IMF’s official SDR. Rather than allocating them from time to time to all IMF members, they should be issued according to currency board rules. In addition, the valuation of the official SDR should be changed from its current basket of five currencies to a small basket of homogeneous, globally traded commodities. The IMF’s existing rules for periodically adjusting the SDR’s valuation basket are transparent and appropriate and should continue to be used. In one sense, this would re-establish an improved international gold standard like system. It would be improved on the gold standard by replacing a single commodity anchor with a small portfolio of commodities and its supply would be improved by adopting the market driven rules of a currency board. Such a Real SDR issued by the IMF would bring to international payments the same hard anchor and currency board rules favored by libertarians for domestic currencies.[19]

[1] Michael D. Bordo, “A Brief History of Central Banks” Federal Reserve Bank of Cleveland, Dec 2007 https://core.ac.uk/download/pdf/6670255.pdf

[2] Warren Coats: “Cryptocurrencies—the Bitcoin Phenomena,” Feb 14, 2014, https://wcoats.blog/2014/01/25/cryptocurrencies-the-bitcoin-phenomena/

[3] F. A. Hayek: Competition in Currency, A way to stop inflation, The Institute of Economic Affairs, Feb 1976, London

[4] Warren Coats: “Hyperinflation in Zimbabwe” Jan 25, 2014, https://wcoats.blog/2009/05/29/hyperinflation-in-zimbabwe/

[5] F. A. Hayek: Denationalization of Money The Institute of Economic Affairs Oct 1968 London

[6] Otmar Issing: “Hayek’s Suggestion for Currency Competition: A Central Banker’s View,” Chapter 8 of Stephen F. Frowen (editor): Hayek: Economist and Social Philosopher, A Critical Retrospect, Macmillan Press, 1997, London

[7] The Economist, “El-Salvador’s Government is Gambling on Bitcoin” June 16, 2022. https://www.economist.com/the-americas/2022/06/16/el-salvadors-government-is-gambling-on-bitcoin

[8] Warren Coats: “The Future of Bitcoin Exchanges, March 3, 2014,
  https://wcoats.blog/2014/03/03/the-future-of-bitcoin-exchanges/

[9] Bloomberg: https://www.bloomberg.com/news/newsletters/2022-08-18/five-things-you-need-to-know-to-start-your day?cmpid=BBD081822_MKT&utm_medium=email&utm_source=newsletter&utm_term=220818&utm_campaign=markets  Aug 18, 2022

[10] R. L. Greenfield and L. B. Yeager, 1983, “A Laissez Faire Approach to Monetary Stability”, Journal of Money, Credit, and Banking 15: 302-15.

[11] Warren Coats, 2007: “One Currency for Bosnia – Creating the Central Bank of Bosnia and Herzegovina” Jameson Books, Chicago Ill.   https://wcoats.blog/2008/08/13/one-currency-for-bosnia-creating-the-central-bank-of-bosnia-and-herzegovina/ or  “Amazon– One Currency for Bosnia”

[12] Warren Coats: “Bulgaria and the Chicago Plan” Central Banking Vol. XXX Issue 3 (2020)
Available at: http://works.bepress.com/warren_coats/51/

[13] Warren Coats, “The Empire and the Dollar”, John Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, Studies in Applied Economics, SAE./No.207/March, 2022, https://www.dropbox.com/s/7bnvejb5zhqzatj/The-Empire-and-the-Dollar-by-Warren-Coats.pdf?dl=0

[14] Pepe Escabar, “Exclusive: Russia’s Sergey Glazyev introduces the new global financial system” The Cradle April 14, 2022

[15] Warren Coats. “Time for a New Global Currency?” New Global Studies Vol. 3 Iss. 1 (2010)
Available at: http://works.bepress.com/warren_coats/1/

[16] Warren Coats, Dongsheng Di and Yuxuan Zhao. “Why the World needs a Reserve Asset with a Hard Anchor” Frontiers of Economics in China (2017)
Available at: http://works.bepress.com/warren_coats/34/

[17] Warren Coats: “Proposal for an IMF Staff Executive Board Paper on Promoting Market SDRs” The Bretton Woods Committee Feb 19, 2019 :  “Promoting Market SDRs”

[18] Warren Coats: “Real SDR Currency Board” Central Banking Journal Vol. XXII Iss. 2 (2011)
Available at: http://works.bepress.com/warren_coats/25/

[19] Warren Coats. “Free Banking in the Digital Age” Banking & Finance Law Review Vol. 33 Iss. 3 (2018) p. 415 – 421 ISSN: 0832-8722 Available at: http://works.bepress.com/warren_coats/45/

Why does Turbo Tax want our data?

The usually helpful Geoffrey A. Fowler’s article in today’s Washington Post reveals that Turbo Tax and H&R Block want our tax data “to target you with “offers” — or, as they’re more commonly known, advertisements.” For them to take and keep these data we must agree. Mr. Fowler asks, “did you know that by clicking ‘agree’ to some of their privacy prompts, you may be letting them use you?”  “Tax Prep Privacy”  

Wow. Econ Prof Coats was immediately aroused.

Turbo Tax, like any other company, is in business to make money. It makes money by developing products we like enough to pay for. We are presumably better off as a result. In looking for tax assistance software, we can search the web for what we think would be useful. Or, if Turbo Tax has developed something they anticipate we would like but might not know about, they can advertise it in the hopes that we will be interested and try their new product. Or if they have information from our earlier tax returns that enable them to refine their list of who might benefit from their product, they can target only those specific individuals with their “ad” while sparing millions of others from getting the ads they have no interest in. Like most economic transactions, this would be win-win.

I clicked “agree.”

What future Russia do we want?

It is not possible to see the pictures of dead bodies (320 and counting) and to hear the reports of the barbaric massacre of citizens of Bucha or the recent rocket attack on a train station in Kramatorsk that killed 50 and injured 98 civilians without feeling outrage towards the Russians and sorrow for the people of Ukraine. Understandable though such feels are, it is not a good state of mind in which to plan for a better future.

In a face-to-face interview with the Editor in Chief of The Economist in Kyiv on March 25, President Volodymyr Zelenskyin defined victory as: “being able to save as many lives as possible…because without this nothing would make sense.”  “The Russian war in Ukraine”  In this spirit, compromises will be made by both sides and a peace deal will be signed. It is for Ukraine to decide what is acceptable to them. But what should we wish for and— via various sanctions around the globe against Russia—what should we press for?

Our hearts cry out for revenge and punishment for Russia’s aggression and inhumane and barbaric behavior. But we would be much wiser to rely more on our minds than our hearts in fashioning the future. Existing and potentially strengthened sanctions will flatten the Russian economy if not lifted. Reallocating confiscated Russian property (e.g., the Central Bank of Russia’s foreign exchange reserves) for the reconstruction of Ukraine may seem justifiable but is surely illegal and no one should forget the role played by the Treaty of Versailles (providing for German reparations for WWI) in bringing about WWII. “How to stop a new cold war”

Ukraine President Zelensky has already indicated Ukraine’s potential willingness to become politically neutral ala Austria and give up seeking NATO membership. While taking territory by force violates international law, the formal return of Crimea to Russia, which is supported by over 80% of its residents, may well be part of a peace agreement. Should the U.S. and EU oppose such provisions? Should?

There are some, not just the defense industry, which profits from war, who believe that Putin is determined to reestablish the Imperial Russian Empire and must be resisted at all costs. We should fight Russia “to the last Ukrainian.” “How to stop a new cold war”  See the following interesting interview of Noam Chomsky: “Chomsky-US policy toward Putin assures no path to de-escalation in Ukraine”

Others, myself included, take seriously Putin’s (and Boris Yeltsin before him) pleas for a European security architecture in which Russia feels comfortable. We believe that America’s Monroe Doctrine is applicable to all major powers. Our true interest is in a peaceful Russia that is a comfortable member of the European continent ten or more years into the future. We should encourage Ukraine’s peace negotiations and our own sanctions and defense policies in that direction. Our defense industries have profited enough from our never-ending wars. Enough is enough. “Economic sanctions”

And we must never forget that our own flourishing rests, in part, on our reliable commitment to the rule of law. Why are we sanctioning Russians living outside of Russia and confiscating their yachts when they have not been convicted of any crimes? “The American Civil Liberties Union helped scuttle a bill this week that would have enabled the Biden administration to liquidate Russian oligarchs’ assets and turn the proceeds over to Ukraine.” “ACLU Ukraine-Russia-Oligarchs”

Our news media are confronting us daily with Russia’s atrocities (facts Russians are unable to see in their own country). It is hard not to want to strike out against Russia in kind. Such short-sighted reactions are not in Ukraine’s, nor the world’s, long run interest. We are, and should behave, better than that. “Ukraine itself is proposing terms that, if backed by a combination of U.S. and European sticks and carrots, stand some prospect of success.” “What can the US really do to protect civilians in Ukraine”  We should not let our short sighted, emotional, anger towards Russia and our military industry get in the way.

The good and evil in us all

Listening to political dialog in the U.S. has become very painful and disheartening because there is no dialog. The Republicans and Democrats simply hurdle nasty insults at each other. They are enemies rather than fellow citizens with different views. Serious policy issues and challenges do not receive the serious debate they need. The atmosphere is ugly.

Russia’s unjustified and increasingly barbaric attacks on Ukraine is another example of the worst in mankind.  Following four weeks of Russian attacks on Mariupol, Bucha, and other cities the destruction of lives and property is clearly visible. While it may take a while to sort out the truth of who did what, “President Biden on Monday joined the chorus of world leaders who have said reports of mass killings in the Kyiv suburb of Bucha constituted a ‘war crime,’ vowing to hold Russian President Vladimir Putin ‘accountable’ for the apparent atrocities in Ukraine.” “Bucha Biden sanctions Russia Ukraine”  However, it is natural, and appropriate, that we honor the bravery of Ukrainians defending their homeland and despise the savagery of the Russians invading it.

These understandable reactions do not excuse our damaging loss of our ability to differentiate among people, judging each other individually. Removing Russian performers from western stages may seem a childish reaction–OK it is a childish reaction–but it reveals a dangerous predisposition of caveman behavior. What are we to make of the removal of compositions of Pyotr Ilyich Tchaikovsky from current orchestral programs? He has been dead for more than a hundred years. Or as tweeted by Edward Luttwak: “The U of Milano cancels Dostoevsky course; Poland cancels Mussorgsky, Shostakovich & Stravinsky…. Actual thought is needed.”

Not all Russians living in Russia disapprove of their country’s war in Ukraine (hearing only official Russian propaganda) but many do according to those now leaving Russia in fear or disgust. We are told that many of the young Russian soldiers sent into Ukraine didn’t know why they were there and are not happy fighting their Ukrainian cousins.

Seeing such behavior has been very disheartening.

But man left the caves with admirable instincts as well. Helping their fellow man in need contributed to their own survival as well. The incredible welcome of 4 million Ukrainians in Europe in one month is breathtakingly heartwarming. Though I am embarrassed that the admission of Afghan and other war refugees has not been as easy or welcoming. My friend Tom Palmer continues to help fleeing Ukrainians relocate to Poland as do many others. A recent J Street webinar interview of Naomi Steinberg from the Hebrew Immigrant Aid Society about their work assisting Ukrainian immigrants was equally heartwarming. She noted that in earlier days HIAS helped Jews flying from persecution. Today, she said: “We are helping refugees, not because theyare Jewish but because we are Jewish.”

The fear and loathing of “others” and the desire to help those in need are both impulses that helped cavemen survive. But we no longer live in caves and our survival and flourishing requires that we tame the first instinct and encourage the second one.

The Russian War in Ukraine

“Mariupol. As things have worsened the escape routes, already dangerous, have become more deadly. Oleksandr Horbachenko, a welder, says that when he left on March 18th the city was in a state of collapse, with no municipal services, no drinkable water and no food. He says at least 80% of buildings are bombed out. ‘The whole of the centre is in ruins, with wires and glass everywhere. The worst thing is seeing the corpses strewn across the street. There are hundreds of them rotting away near the central market.’” The Economist: An uncertain outlook”

All wars are terrible, especially when seen up close. Those who recklessly urge them are almost always viewing them safely from afar.  Russia’s war on Ukraine has become tangible to us because the Internet brings it visually to us in our living rooms almost instantly and because Russia’s poor planning and poor excursion on the ground have pushed it to launch rocket attacks on civilian locations. Anatol Lieven: Why the Russians are losing their military gambit in Ukraine”

In an in-person interview of Ukraine President Volodymyr Zelensky in his compound in Kyiv, The Economist staff asked the President how he would define victory.

“’Victory is being able to save as many lives as possible…because without this nothing would make sense. Our land is important, yes, but ultimately, it’s just territory.’ To save everyone, defend all interests while protecting people and not giving up territory is probably an impossible task, he concedes.”

Why then, asked The Economist, hasn’t the President agreed with Putin on the terms of a peace?

Zelensky replied that: “Everyone has varied interests. There are those in the West who don’t mind a long war because it would mean exhausting Russia, even if this means the demise of Ukraine and comes at the cost of Ukrainian lives. This is definitely in the interests of some countries. For other countries, it would be better if the war ended quickly, because Russia’s market is a big one that their economies are suffering as a result of the war. They would like to see Russia keep certain markets” The Economist: Volodymyr Zelensky in his own words

This should give you pause. The severe economic sanctions being imposed on Russia (leaving aside the legally questionable confiscation of the private property of Russian oligarchs living in England and elsewhere) seem designed to flatten and isolate the Russian economy. Why? To what end?  That certainly doesn’t benefit me or my country. Presumably they are meant to bring an end to the fighting, but what conditions must Russia satisfy to have them lifted? I have heard none stated.

Why hasn’t the U.S. pressed harder for negotiations? Who benefits financially from prolonging this war? Who besides the usual profiters of war (Military Industrial Congressional Media Complex)?