Turkey Share of Foreign Currency in Total Deposits from 2005-2016
The lira’s recent plunge to record lows, triggered by Erdogan’s actions and reactions, exposes Turkey’s Achilles’ heel (see chart below). No country with a volatile and inherently weak currency has ever projected and exercised real power. The lira will eventually bring the Turkish economy and Erdogan down to earth.
United States Dollar to Turkish Lira Exchange Rate
And, this may occur sooner than the president thinks. The quality of the lira has been dramatically deteriorating since 2008. The net foreign reserves on the Central Bank of Turkey’s balance sheet have plunged since the summer of 2009 from over 100% of reserve money into negative territory. To keep the money supply growing, the Central Bank has replaced its disappearing foreign assets with those denominated in lira. That ugly picture is shown below.
Monetary Composition (as a % of Reserve Money) - Turkey
If President Erdogan wants to remove Turkey’s Achilles’ heel and start wielding real power, he has to do something about Turkey’s junk currency.
There is a solution — an elegant solution. Turkey should go for gold, a “currency” that is not issued or controlled by a sovereign. Turkey could do this by adopting a gold-lira.
Until early in the 20th century, gold played a central role in the world of money. Gold had an incredible run — almost three thousand years. And why not? After all, Professor Roy Jastram convincingly documents in The Golden Constant just how gold maintains its purchasing power over long periods of time.
But, since President Richard Nixon closed the gold window in August 1971, gold has not played a formal role in the international monetary regime. Today, the “regime” is characterized by many as a chaotic non-system.
Since the closure of the gold window, there have been noises in some quarters that gold’s formal role should be re-established in the sphere of international money. In 1997, Nobelist Robert Mundell went so far as to predict that “Gold will be part of the structure of the international monetary system in the twenty-first century.”
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One foolproof way to transform Professor Mundell’s prediction into a reality is via gold-based currency boards. Currency boards have existed in more than 70 countries, and a number are in operation today. Countries with such monetary institutions have experienced more fiscal discipline, superior price stability, and higher growth rates than comparable countries with central banks.
An orthodox currency board is a monetary institution that only issues notes and coins. These monetary liabilities are freely convertible into a reserve currency (also called the anchor currency) at a fixed rate on demand. The reserve currency is a convertible foreign currency or a commodity chosen for its expected stability. For reserves, such a currency board holds low-risk, interest-earning securities and other assets payable in the reserve currency.
