Mo Commodities, Mo Problems

Interesting piece at Unenumerated talking about the creation of commodity backed currency.

We may be seeing only the first stages of a switch from floating currencies, which may be proving to be unworkable, to commodity-backed currencies. Floating currencies were and are a great historical experiment, and there is no guarantee that such experiments will work out in the long run. By serving monetary functions such as stores of value and hedges against currency-denominated debt, commodity index ETFs and ETNs are starting to serve as monetary substitutes. But the benefits so far have been limited to investors and other big players. Those saving for retirement or who will have to pay for their child's education are benefitting from the use of commodity long positions to stablize pension and endowment funds against falling currencies and protect them against future inflation. But we still have to take our wages in floating currencies, hold our checking and savings accounts in floating currencies, and pay or be paid our debts in floating currencies. Can commodity money move from Wall Street to Main Street

This sounds like a good idea to me. More transparency should result in a much more sound fiscal system over the long term. On the down side, there is a higher risk of visible volatility due to the impossiblity of a central bank and the unification of the whole world behind one currency (regional currencies are good at readjusting sticky prices like wages).

There is just one problem: Gresham's Law. The government has one great weapon against sound money - it can accept only fiat money at tax time.

My guess is that the world will start to move to a two tiered currency system, with commodity backed currency used by institutions and for long-term investment, and fiat currency used for short term value storage and transactions.