Michael Saylor has been making the rounds with a provocative twist to his long-standing recommendation that the US government should begin accumulating a Strategic Bitcoin Reserve (SBR). Namely, Saylor has pointed out that if the feds couple a Bitcoin accumulation with selling off their existing gold reserves, then it’s a “free” swap as far as US taxpayers are concerned. Beyond moving into a better asset (in Saylor’s estimation), he recommends the move because it would crash the world price of gold, thus harming other governments (including American enemies) who are clinging to gold reserves as a throwback to the past.
Economist George Selgin (whom I interviewed on a different topic for the InFi podcast earlier this year) has been loudly criticizing the proposals from the Bitcoin community for the feds to establish a SBR. In a solo episode of the InFi podcast [forthcoming Dec. 27], I have used Selgin’s article as a springboard to give my own thoughts on the proposal from Saylor and other Bitcoin boosters. (The present blog post accompanies the InFi episode.)
The quick summary is that Selgin gives a helpful summary of the history and rationale behind governments/central banks holding foreign exchange / gold reserves in the first place. But, when Selgin then concludes by arguing a SBR wouldn’t help shore up the dollar, I think he argues in a circle. None of this is to say that Saylor’s proposal is my top choice—in a perfect world, I would like to see the Federal Reserve dissolved and the US government leave money and banking entirely up to the free market—but I think Selgin’s narrow critique fails.
Selgin on the History and Rationale of Forex Reserves
Selgin’s article is long and detailed, but here I’ll give a very quick distillation: The purpose of a government (or central bank) holding reserves in the form of foreign exchange (which often means interest-bearing sovereign debt denominated in another currency, not the actual currency in the form of paper money sitting in a vault) is to credibly signal to the holders of its own currency that its exchange rate vis-à-vis the other currencies can be kept within a narrow band.
For example, a small, open economy that relies heavily on trading with another country might want to keep its currency’s exchange rate stable against the trading partner’s currency. This would foster a greater volume of imports and exports with that partner, because the citizens in both countries wouldn’t worry about “exchange rate risk.” Just like it helps Americans to rely on specialization and trade within the United States because it is one big “dollar zone,” likewise two countries using different currencies can replicate that stability if their central banks keep the exchange rate confined to a predictable range.
The obvious pinnacle of this approach was the classical gold standard, which reached its zenith on the eve of the first World War. In the year 1912, the US dollar, French franc, German mark, British pound, etc. were all defined in specific weights of gold, and would freely convert (at those stated ratios) with anyone who showed up at their offices. Simple arithmetic then implies “fixed” exchange rates between the respective sovereign currencies.
For example, at that time the US government defined the gold content of the dollar such that $20.67 could be exchanged for an ounce of gold, while the British authorities adopted a definition of the pound such that 4.25 pounds would trade for an ounce of gold. These respective definitions locked in an anchor point of $4.86 for one British pound. This “fixed” exchange rate wasn’t legally enforced, in the sense of a currency control, but rather arbitrage opportunities (which involved shipping gold from one country to another) kept the actual floating market exchange rates close to the anchor point. (See the free pdf of my book Understanding Money Mechanics for a more detailed history of the classical gold standard, and why it died.)
Naturally, the only way the world powers on the classical gold standard could maintain their respective convertibility ratios was to hold large stockpiles of actual gold. After World War II, the Bretton Woods system reigned for a few decades, until it formally died with Richard Nixon’s closing of the US gold window in 1971.
In today’s world, it is still desirable for countries to keep their currency’s exchange rate within narrow bands of the currencies of its major trading partners. And, in the event that there is a drop in purchasing power among all of the various currencies, gold is still held as a hedge.
With this context, Selgin argues that it might make sense for some other country—besides the US—to swap out some of its existing reserves and bulk up on BTC. But because the US dollar is currently the global reserve currency, there is no point (Selgin argues) for the US government to do so. This is because, he claims, the US government doesn’t need forex reserves. The other countries try to reassure their merchants and foreign investors that their own currency won’t fluctuate too much against the mighty USD. But the Americans don’t have to convince people about the USD, because it is now the global standard of comparison. One USD always trades for one USD; no forex is needed.
As a last point, Selgin agreed (when I asked him on Twitter/X) that he would be fine with the US government selling off its gold holdings. But he said the funds should be returned to US citizens. If they want to use the money to buy Bitcoin, they can do so; Selgin just didn’t want the US government acting as a hedge fund manager with taxpayer money.
Murphy Pushback
My main point of disagreement in Selgin’s argument is the final step: He argues that the USD doesn’t need reserves, because it is the global reserve currency. Yet this is arguing in a circle. I have been arguing—see for example my participation in a ZeroHedge debate in early 2024—that the USD is going to forfeit its vaunted status much sooner than most people expect. So if I’m right, then swapping out a better reserve asset (assuming Saylor is right about BTC outperforming gold over the next 10 years) makes perfect sense.
To reiterate, my dream proposal would be to unwind the Fed completely, and get the US government totally out of money and banking altogether, leaving these fields to entrepreneurs who can only achieve adoption of their preferred vehicles through voluntary persuasion. But, given that the Fed is going to exist and the US government is still in the business of managing the global supply of USD, I think it makes perfect sense to diversify the existing reserve portfolio. I would give the same qualitative advice (the specifics would depend on the client) to a private company wondering if they should add Bitcoin to their treasury.
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.
Twitter: @infineogroup, @BobMurphyEcon
Linkedin: infineo group, Robert Murphy
Youtube: infineo group
To learn more about infineo, please visit the infineo website
Comments