Key Writings: Mueller on the Gold Standard
To ask "Is the S & P downgrade fair? Whose fault it is? What can be done about it?" is like posing those questions about a thermometer that reads 99 when the temperature in Washington, D.C., is actually 90 degrees in early August. The thermometer is inaccurate, possibly due to malfeasance on the part of the manufacturer. But it's still August in Washington.
Who deserves blame for that? God? The thermometer's manufacturer? Global warming? Or Thomas Jefferson and Alexander Hamilton, for having solved America's first debt crisis by sitting our nation's capital in a tropical swamp, to get the votes of Virginians that Hamilton needed to get Congress to pass his plan for the federal government's assumption and payment of the debts of the feckless Continental Congress and colonial governments? (Which his strategy did, by the mid-1830s.)
Like all commercial rating agencies, Standard & Poor's has the same hand-in-pocket relationships as members of the U.S. Congress have with the partisan factions they represent. S & P was negligent in certifying low-grade junk as high-grade before the 2008 crash. But that didn't cause the crash. And the folks at S&P bootlegged their own clueless and partisan comments about taxes into the downgrade, while making huge careless mathematical errors. But as James Madison and Alexander Hamilton explained in the Federalist, this is the way a workable political system behaves, because it is peopled by human beings, not angels.
The main reason the stock market has been falling is not S & P's downgrade or even the fecklessness of Congress. As I explained in a paper published in October 1997, "The tremendous rise of the stock market since 1980 is due primarily to the relative rise in the number of Baby Boomers saving for retirement. This has bid up stock prices to the benefit of their parents' generation, which bought stocks while prices were relatively low." But, "the same factors imply that the stock market's total return will peak relative to the economy before the year 2000, and decline sharply thereafter."
I wrote the paper to explain why it was fatuous to believe that privatizing Social Security could solve its long-term financial problems, because markets are affected by exactly the same demographic bust caused by Roe v. Wade. It's also the main factor in the long-run budget deficits.
But both the stock market's latest decline and Congress's inability to balance the budget are related to a different problem: Congress having abandoned Hamilton's first principle of American political economy: Don't issue money to fund the federal deficit.
I predict that the next successful president will hire another Hamilton to restore the gold standard, and end the dollar's role as the chief official reserve currency of the world by repaying outstanding dollar reserves.
If you think I'm crazy, I'll simply remind you that I participated in several initiatives, including the tax reforms of 1981 and 1986, that were pronounced ridiculous, crazy, impossible—right up to the day they were signed into law. And lawmakers jostled to be in the Rose Garden and take home a pen that the president used to sign the bill.
At the last two World Congresses of Families in Warsaw and Amsterdam, I presented a country-by-country model of fertility, which has since been published in my book Redeeming Economics. At this 2011 Moscow Demographic Summit, I'd like to update that analysis to discuss "Babies and Dollars: Implications for USA, Russia, and the World," drawing on a recent article in The Family in America. But since several Russian officeholders and experts are associated with this summit, I will close by suggesting briefly that it is in the interest of all major countries including Russia to co-operate in ending the dollar's role as chief official reserve currency.
As Touchstone Magazine's publisher Jim Kushiner noted yesterday, the Parable of the Good Samaritan epitomizes the Bible's Second Great Commandment to "love your neighbor as yourself." But its lesson transcends nationality and religion. The cover of my book features Gustave Dore's engraving, "Arrival of the Good Samaritan at the Inn" because the parable illustrates all the possible economic transactions we can have with our fellow man: the robbers beating a man and leaving him for dead illustrates crime; the priest and Levite who passed him by illustrate indifference; the innkeeper's bargain with the Samaritan illustrates justice in exchange; and finally, the Samaritan's devotion of time and money to restore the beaten man to life illustrates a gift. Crime, indifference, just exchange, and gift: this is the range of possible transactions.
Excerpt: Monetary Reform
Even apart from the demographic challenge that faces the United States, the American family budget has been squeezed by three factors that are the direct result of a faulty monetary policy: instability, insecurity, and declining take-home pay. American and world history show that only monetary reform—specifically, restoring the international gold standard without official-reserve currencies—will end their root causes: chronic episodes of inflation (or deflation), declining U.S. international competitiveness, and endless federal deficit spending. To put these problems in perspective, the stability of the U.S. dollar has varied widely in history. This variation is explained by two factors: how policymakers in this country set the monetary standard for the dollar and whether policymakers in other countries used securities payable in dollars as their own monetary standard.
The United States has alternated between two kinds of standard money: inconvertible paper money, on the one hand, or a fixed weight of some precious metal (first silver, then gold), on the other. The dollar was an inconvertible paper money during and after the Revolutionary War (1776–92), the War of 1812 (1812–17), the Civil War (1862–79), and again from 1971 to the present. The dollar was effectively defined as a weight of silver in 1792–1812 and 1817–34, and as a weight of gold in 1834–61 and 1879–1971. The dollar was not used by foreign monetary authorities as a monetary-reserve asset before 1913, but has been an official “reserve currency” for many since 1913, and for most since 1944.
Chart 4: Consumer Price Index, 1800–2010
Source: Mueller, Redeeming Economics, Table 16-1.
Applying these two criteria divides the monetary history of the United States into distinct phases. We can compare the stability of monetary regimes by examining the variation in the Consumer Price Index (as reconstructed back to 1800) by two measures: long-term CPI stability (measured by the annual average change from beginning to end of each monetary standard) and short-term CPI volatility (measured by the standard deviation of annual CPI changes during the period). Weighting these criteria equally, we see that the regime defined by the classical gold standard from 1879–1914 was the most stable of all.
As Chart 5 shows, the commodity-led inflations that triggered the respective recessions of 1974–75, 1979–80, 1990–91, and 2007–09 were preceded by commensurately massive monetization of U.S. public debt through the monetary system. The chart compares the annual rate of inflation of CPI nondurable goods—mostly food and energy prices—with a ratio of the main factors affecting demand for them: the lagged “World Dollar Base,” or total supply of “high-powered” dollars, divided by a proxy for the current demand for high-powered dollars (U.S. currency and commercial-bank reserves times current world oil production). In each case, voters blamed the president: Richard Nixon, Gerald Ford, Jimmy Carter, George H. W. Bush, George W. Bush, or Barack Obama.
Chart 6 (on page 40) shows why the dollar’s official-reserve currency role has eroded U.S. international competitiveness and why ending that role is necessary to end chronic U.S. payments deficits and restore U.S. international competitiveness. In 1980, U.S. residents owned net investments in the rest of the world equal to well more than 10 percent, but by 2009 had become net debtors equal to about 20 per cent, of U.S. GDP. Meanwhile U.S. net official monetary assets—official monetary assets minus foreign liabilities—declined by almost exactly the same amount, while the books of the rest of American residents remained in balance or showed a slight surplus. This comparison proves that the entire decline in the U.S. net investment position has been due to federal borrowing from foreign monetary authorities.
Atlas Foundation Conference on
“Consequences of Progressive Policy on Money and Investment”
Dallas, TX, 1 April 2011
I’m grateful for Alex Chafuen’s invitation—I’ve long admired his work—to take part at the Atlas Foundation conference on the consequences of progressive policy on money and investment, on this panel on the principles of sound money. I’d like to draw on a chapter in my recent book, Redeeming Economics, to explain why both American and world history show that only proper monetary reform—specifically, restoring the international gold standard without official-reserve currencies—will end three longstanding problems which have undermined the United States: first, endlessly expanding federal deficit spending; second, chronic episodes of inflation (or deflation) leading to recession; and third, declining U.S. international competitiveness. I’ll close by explaining why the reform that eluded President Ronald Reagan is now finally doable.
To put these problems in perspective, we must recall that the stability of the U.S. dollar has varied widely in history. This variation is explained by two factors: first (as Mark Wynne of the Federal Reserve Bank of Dallas correctly noted), how policymakers in this country set the monetary standard for the dollar; but also (which he did not mention), whether policymakers in other countries use securities payable in dollars as their own monetary standard—that is, use the dollar as their official “reserve currency.”
Economic theory began in the natural law philosophy with elements from Aristotle and Augustine, first integrated by Thomas Aquinas, which were widely disseminated by "Protestant scholastics" like Samuel Pufendorf, and further developed by the American Founders.