For several decades the U.S. dollar was on some type of gold or silver standard.  Doing so anchored the dollar’s value to something of value.  But why has it always been anchored to gold or some other precious metal?  Is there any reason why it has to be gold or precious metals?  It seems fairly arbitrary.   Maybe it’s because it’s rare and valuable?  In reality it though, the dollar – or any currency – could be tied to almost anything.  It could be precious metals, agricultural goods, or even consumer goods.  So why not set the value of the dollar to unskilled labor?  I think you’ll find that we have all the advantages of price stability that gold provides, but also eliminate and reduce several other social problems.

Before describing how to implement a dollar that’s on a “Labor Standard”, let’s review how governments maintained a gold standard.  First, they would have a reserve of gold.  Then they would declare that every so many dollars could be exchanged for so many ounces of gold.  For instance, 8 dollars for an ounce of gold.  At that point, the government must then constantly buy and sell gold to maintain it’s value.

For instance, if the market determines that an ounce of gold is worth more than 8 dollars, people are going to trade in their dollars for gold.  This will remove dollars from circulation and add gold to the market.  As that happens, the supply of gold on the market will increase and thus it’s value will decrease.  The opposite happens to the dollar.  As dollars are traded in, less will be in circulation which means the remaining dollars are worth more.  These two trends will continue until the 8 dollars for an ounce of gold is achieved.

If an ounce of gold is worth less than 8 dollars then the government must buy gold until it’s value is back to 8 dollars.  As the government buys more gold it’s value goes up.  At the same time, the market is flooded with dollars which makes the value of dollars go down.  The government must continue to buy gold until the value of a dollar is back to 8 dollars for an ounce of gold.

The thing to take away is that to maintain the value of it’s currency in a gold standard, the government sets the price first.  Then, once it’s price is set, it let’s the quantity of gold it buys and sells float according to the open market.  It’s important to understand how this is different from most government spending.  Most government spending first sets how much it’s going to buy (say number of cars for the FBI) it then let’s the market determine how much it’s going to pay(whatever the market price for a black SUV is).

Instead of anchoring the value of the dollar to the price of gold, Modern Monetary Theory(MMT) economists propose that we set the value of the dollar to the price of unskilled labor.  For sake of argument, let’s say 8$ an hour for 1 hour of labor.  Just like in a gold standard where the government makes a permanent market offer of 8$ for an ounce of gold, in a labor standard the government would make a permanent job offer of 8$ for one hour of work.

With the dollar set to the labor standard, the government would set how much it’s willing to pay any American citizen for an hour of work.  The open market would then set how much labor would accept the job offer.  If 3 million people are unemployed and are willing to work for 8$ an hour, then the government would hire 3 million people and find work for them to do.  If the private economy improves, and offers people more money to work for private firms, the amount of workers hired will go down.  If the economy declines, the number of people hired will go up as the private sector lays people off.  Inflation and budgets are automatically controlled as people move between government 8$ pay and private sector pay.

Doing this would provide the same advantage that a gold standard has which provides long-term price stability.  Deflation would always hit a floor, because as the labor market slacks, the government would pump money into the economy as it hires all the freshly laid off laborers.  Inflation could only get out of control in one unlikely scenario:  The private sector hires virtually all the labor on the market and still demands more.  I call this scenario unlikely because it’s never been achieved in the united states with only the exception of World War II.  Even in that case, it required the government to spend massive amounts of money by buying items at the market rate.

In addition to long-term price stability, a labor standard provides the added benefit of giving work to people who are unemployed.  Another way that a labor standard is superior is that instead of unemployed people being idle, they can provide a benefit to society in whatever form the government desires such as in-class teacher assistants, librarian assistants, visiting the elderly and infirm, being part of a neighborhood watch, cleaning up streets, litter, and graffiti, etc.

Another thing that makes the labor standard superior to a gold standard is that labor cannot be stored.  Unlike gold, for every hour that a worker isn’t working, value is lost that can never be regained.  So why would we “fully employ” gold that always maintains intrinsic value, but let labor stay idle?  If the private sector leaves labor idle, any value the public sector can get out of it can only benefit society overall.

Finally, the last thing that makes a labor standard superior is that it eliminates most unemployment and all the social ills that accompany unemployment.  Any unemployed workers that the private sector doesn’t want, the government would hire if they are ready, willing, and able to work.

Of course, this diary is just using an alternate description of the Job Guarantee.  For more information on how that works, please see my diary: Job Guarantee:  Zero Unemployment Without Causing Inflation.  (I encourage you to read it before attacking the program.  Especially if you’re going to use the tired, “zOMG! Socialism!” attack)  When talking about the Job Guarantee, most people get caught up in the social safety net aspect.  However, for those who worry about inflation, currency devaluation, etc, I wanted to write this alternative way of thinking about the same thing.  The dominant economic thought believes that inflation and unemployment must be balanced, but as I’ve tried to show here, Modern Monetary Theory shows that price stability can be achieved through full employment.

  • jon

    The only thing that bothers me about this is the possibility that what will happen is that in its effort to find productive things for the unemployed to do, and under lobbying pressure from corporations, the government will eventually start placing them with private companies to work at this base rate, at which point I’m not sure why the company would ever want to hire any unskilled labor, except through the job guarantee program. Maybe I haven’t thought it through, but I am uneasy about the potential oppressiveness of such a regime.

    • http://www.ourdime.us/ Dustin

      Not a completely unreasonable fear, I suppose. Anytime government resolves to do anything there is the possibility that it will be used to serve corporatewealthy interests instead of the public interest. That’s why for implementing the program I would favor local government control as well as a ban on working forwith private business.