An honest dollar

Six decades ago the great Christian scholar J. Gresham Machen, in an aside during a speech about Christian schooling, made a point that has significant implications for the current worldwide financial meltdown-namely that currency soundness is above all a moral issue. Money is a matter, Mr. Machen observed, "in which our Lord said a man must be faithful if he is to be faithful in higher things." He argued that by moving away from the gold standard, the U.S. government wasn't being faithful.

Mr. Machen's admonition is important to keep in mind as we see the economies of numerous countries, from South Korea to Malaysia to Russia, crumble. Their troubles, which in a global economy are also our troubles, are largely the result of attempts to manipulate currencies with pegged exchange-rate systems. As Mr. Machen saw clearly, this is at root a moral problem.

A country can adopt one of three types of exchange rates: pegged, floating, or fixed. Under a pegged system, a central bank determines both monetary policy and exchange rates. With a floating system (which the U.S. has), a central bank determines monetary policy, but lets the market determine the exchange rate. With a fixed rate, a country puts both monetary policy and exchange rates beyond the reach of bureaucrats and politicians. The exchange rate is set by law (and doesn't change), and the money supply changes in response to market forces. This can get confusing, because sometimes the terms "pegged" and "fixed" are used interchangeably. Just remember that if a "pegged" rate is set by law and defended by a currency board with 100 percent reserves, then it's really fixed.

Most of the countries currently in crisis had pegged systems, and that's no coincidence. Unencumbered by market discipline, political considerations determined money supply and exchange rates, and that is always a prescription for economic problems. "Inevitably, pegged rates result in fundamental contradictions between the exchange rate and the domestic money supply," writes economist Steve Hanke. "When the contradictions start to appear, the speculators show up."

But the problem of pegged rates goes beyond a lack of market discipline. Whatever one says about pegged or floating rates, this much can be said of a fixed rate-it's honest. A currency board fixes, by law, a nation's currency to something which citizens in that country consider valuable, such as gold, the U.S. dollar, or the German mark. Every unit of currency is backed up 100 percent by, and can be exchanged at any time for, a specific amount of the reserve currency. Under other systems, a government issues a currency, says it is worth a certain amount, and then later declares it to be worth less. In other words, that government goes back on its word.

This is what bothered Mr. Machen so much. In the 1934 speech mentioned above he noted that "we hear much about the question whether what is euphemistically called a 'managed currency' is or is not economically more advantageous than the gold standard. But the sad thing is that in all this discussion we hear little about simple honesty, which is the law of God." To Mr. Machen, political manipulation of currencies constituted "a very ruthless application of the devil's principle that 'might makes right.'"

Government's taking up this principle set a tone for the nation, he believed. Speaking at a time when many American cities were already hotbeds of crime, Mr. Machen argued that "the real reason why young men fall into crime is that the law of God is so generally disobeyed. When the government itself lends itself to a sort of glorified robbery, what can be expected from the impressionable youth of the day? If solemn contracts, public and private, are mere scraps of paper, if sheer power is everything, if that principle is operative in high places, who can wonder if it is put into operation also in individual lives? The real evil is the same in both cases. The real evil is the ruthless disregard of the law of God."

The sour fruit of a dishonest currency is at least as plain today: Economies in many countries are contracting at the same time that inflation is wiping out people's savings. Rioting (sometimes directed against scapegoated ethnic minorities, as in Indonesia) has at times been the result. In the case of Russia, the security of a large supply of nuclear weapons is even at risk. All of this because governments, often at the prodding of the International Monetary Fund, ignored biblical principles and were not straight with their citizens. The moral of this sad story: Even in complex monetary matters, honesty remains the best policy.