At first, currency and healthcare appear to be unrelated. However, after composing four books about Health Savings Accounts, currency-backing and health-financing now seem to have much more in common. In particular, interconnections and ideas appear along the way, and new ideas emerge as extensions of the original one. This slender volume uses that quality of composition to explore what it might be like if three concepts (backing the national currency, preventing currency manipulation, and total-market index funds) were combined.
The basic idea turned out to have considerable coherence, with index funds well suited as universal "standards of exchange" (instantaneous indicators of market value). That was especially valuable when the trade becomes injured by out-of-control inflation. Index funds, however, are less satisfactory as long-term "stores of value", when nations resort to currency price manipulation, which they can use to resist the afore-mentioned commodity price stabilization. Therefore, a common standard is required at two levels, not just one. In the Bretton Woods system, the supra-national level is the Special Drawing Rights of the International Monetary Fund.
It is here suggested stock index funds be the price standard which substitutes for both currencies and SDRs, thus removing both levels from political control, but in different ways. In all this, they somewhat resemble Health Savings Accounts, where the price of healthcare could be stabilized by market-basing its finance on passive (i.e. total stock index) investing, a concept which was never envisioned at their beginning.
Health Savings Accounts were created in 1981 by John McClaughry of Vermont and me when John was Senior Policy Advisor in the Reagan White House. The underlying idea was patterned on the tax-exempt IRA (Individual Retirement Account) devised by the late Senator Bill Roth of Delaware. Its three revenue-enhancers were the tax exemption, compound interest magnification, and the incentive to save for yourself rather than for demographic groups of strangers. Almost any financial institution might handle the straightforward mechanics, with policy decisions shifted toward the customer who owned them. Fitting for a medical emphasis, HSA tax-exemption was confined to medical expenses, with unexpected big medical events covered by inexpensive high-deductible health insurance. But switching from favoring health issues to favoring more trade and more economic growth was less a revenue issue, and more a hindrance-removal one. So when the focus changed to international balances, it then needed international features to channel it, while purely medical features could be downplayed. The thing they had in common was a large and dependable funding pool. The effective size was not how much was deposited into them, but how much could be withdrawn when it was really needed. Only later was it realized that a substantial amount might be left over at age 65, where it could be used to fund the extended retirement of those with superior health. Not only did that extend the period of compound interest, but it also provided an incentive for younger people to save even though they felt no threat of illness. The emphasis shifted somewhat from the threat of sickness expense to that of a lifetime reserve fund.
The idea of a nation state, on the other hand, was established for the Western World in 1648 by the Treaty of Westphalia, after the Thirty Years War over Religion. It took years of squabble and deep thinking to arrive at a simple formula allowing for multiple religions in Western Europe: a nation was to be inflexibly defined by its boundaries, and within those boundaries, the nation's religion was defined by the religion of the King they happened to have chosen by their own methods. Everything else could move across borders. The nature of the currency posed a slightly different problem from religion. Kings were regularly observed to cheat on the currency, mostly to finance wars about boundaries. National sovereignty was both enhanced and subordinated to accommodate religious problems. Everything else was negotiated between kings, mostly by fighting wars as it turned out. Three hundred years later, religion was of reduced importance, kings were nearly irrelevant, but the issue of an international currency continued to fragment European harmony.
The quantity of gold within a nation roughly matched its economic prosperity, and ways had been devised to inhibit it from migrating while the trade it symbolized was encouraged to move around. The King controlled paper money (or any other surrogates for gold serving as public-owned instruments of trade), within and between nations. Meanwhile, the quantity of gold remained fixed and "owned by the King" until some form of "squaring up" took place. There were two disadvantages: prices were suppressed by the fixed value of gold, as before. But periodically new gold was discovered in the ground or conquered in wars in a haphazard (non-trade, non-economic) way. In particular, two Twentieth century world wars disrupted the roughly fixed relationship between the King's possession of gold and the public's economic health. The United States eventually found itself with practically all the world's gold in 1945, so nobody else could buy anything from us. That was carrying theory to the point of paralysis.
The Bretton Woods Conference did supposedly devise a patchwork substitute, but the seeds were sown for eliminating the gold standard. In its place was put a system of national central banks, trading through the International Monetary Fund, which used a super currency called International Trading Receipts to square up national accounts. Freed of the gold restraint, there might emerge a gradually enlarging currency pool as the populations grew and supposedly shrink during international recessions. This arrangement supposedly solved the inflexibility of gold. However, without a metallic currency standard, nations found various ways to cheat, just as kings had historically found ways to cheat on gold. Inflation resulted, the power of treaties was always less than the political power of the state, the independence of central banks was eroded, and small, steady but relentless inflation resulted. That brings us to the present: we have no gold standard, but the various world economies are periodically on the edge of war about international trade. Inflation seems less threatening than war, so the balance between inflation and war calls the tune in the monetary trade dance hall. The public does not understand, but is restless about the future, as it well might be. At the moment, a huge proportion of the world in the third world have become economic factors, while retaining pre-1648 tribal patterns rather than becoming nations of boundaries. "Floating" currencies address this problem, somewhat at the expense of dependable trade relationships, and possibly the third world.
We now propose to interpose the Health Savings Account concept into this precarious arrangement. To do so, we minimize medical features and expand currency ones. Background features like index investing and individual ownership become vitally prominent, while health yields importance to demographics. But the ideas of tax exemption and equity investing are expanded to meet the changed focus on trade. Eventually, the evolution from a Health Savings Account to a monetary standard becomes obscured. But it is substantially based on the same approach. There are two alternative approaches available. Either substitute the index funds backing HSAs for metallic monetary standard or else substitute the same sort of paper for the International Trading Receipts now used for trading between nations at the International Monetary Fund. One would replace the Federal Reserve's system of adjusting the paper value of a nation's currency, relative to its nation's economy. That would center the nation's money supply on the size and health of its economy, and work better as a medium of exchange.
The other would substitute the same paper for the International Monetary Fund's (IMF's) Special Drawing Rights, hoping to regulate the long-term store of value function by having long-term money come closer to representing real underlying values, as assessed by its trading partners. Both such changes would involve a change of power, and so would be opposed by successfully constructed power centers. Even in a crisis, these centers would attempt to maintain their control. So they must be described as anticipating a crisis, possibly one which might never occur. They would serve notice on both incumbent power centers that alternatives have been prepared in case they fail, and perhaps improve their performance to prevent failure.
Originally published: Saturday, February 18, 2017; most-recently modified: Friday, May 31, 2019