Talk about a light unto nations. The shekel is in the news this week because its soaring value is proving to be a problem for Israel’s exporters. Reuters reports that the appreciation is forcing Israel’s foreign customers to pay more for the country’s exports. Some Israeli companies are moving operations overseas to shelter in countries with weak currencies.
Cheer up, I say. Writing from a country that is in the midst of a historic collapse of its currency, I have long since come to the view that a strong currency is better than a weak one. Even better is a currency that has readily exchangeable into gold (or silver) at a legally defined rate. Could it be that Israel is in circumstances in which it could lead the way back to such a system?
No doubt most economists would say no. After all, Israel’s economy, however healthy, is too small to play a leading role on the world stage. I’m less sure of that. It could well be that the relatively modest size of Israel’s economy could give it the agility to make a move where the giants are too timid to tread. It’s not as if the big economies have a lot of credibility left.
This, in my view, is a central lesson of our times. It has been coming into ever clearer view since 1971, when America defaulted on the dollar, closed the so-called gold window, and launched the world into the age of fiat money, meaning money that has no set value in terms of specie — gold or silver — but must be accepted as a matter of law because of governmental fiat. This was known as the Nixon shock.
Nixon brought to an end the international monetary system that has been set up at the end of World War II at Bretton Woods. That was the New Hampshire resort where the victors in the war set up a gold exchange standard. The Bretton Woods Treaty guaranteed the right of foreign governments to redeem their dollars in gold. The system crashed after America pursued a policy of both guns (Vietnam) and butter (the war on poverty),
The scale of the collapse since then has been breathtaking. A dollar that was fixed by law during the years of Bretton Woods at a 35th of an ounce of gold plunged in value to, a year or so back, but a 1,900th of an ounce of gold. It soared something like 46% since then, but is still valued at less than a 1,300th of an ounce of gold. The shekel, meantime, has soared something like 54% from its low in late 2012.
It has taken decades for the size of the catastrophe of fiat money to come into focus. But with the perspective of more than a generation we can see the impact. My own favorite statistic is that the average unemployment rate in America between the end of World War II and the end of Bretton Woods was 4.7%. Since the end of Bretton Woods, the average rate has been 6.4%.
This has been political hell for President Obama and the liberal politicians who think that they can fight unemployment by ballooning up the Federal Reserve’s balance sheets. Meantime, big American corporations are keeping more than $1 trillion overseas for fear of taxes and regulations at home. This is a trap into which Israel, whatever the Bank of Israel might fret, doesn’t want to fall.
Yet it is the trap that is brought to mind by reports like the one Reuters moved (and the New York Times published). The nub of it is that in an effort to dodge the gyrating shekel Israeli companies are moving operations overseas. Small so far, but not a good sign. It raises the question of whether Israel can use its prosperity and the boon that will come from its vast natural gas discoveries to begin laying in gold and silver specie in reserves?
Israel has eschewed such a strategy in the early decades of the modern state, but that’s no reason not to take the lead now. And what a basis it has. Specie was the basis of Abraham’s purchase of the field of Ephron and the cave where Sarah was laid to rest. In terms of national legitimacy it was the most important land purchase in history. The fact that Abraham insisted on paying — and in shekels defined as a set a mount of specie (in his case silver) — set a standard of integrity that has lit millennia.
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