The True Gold Standard (Second Edition)
Key Writings: Shelton on the Gold Standard
Many in America today fear that our nation is going the way of Europe—becoming more socialist and redistributionist as government grows ever larger. But the most disturbing trend may not be the fiscal enlargement of government through excessive spending, but rather the elevated role of monetary policy.
Our central bank, the Federal Reserve, uses its enormous influence over banking and financial institutions to channel funds back to government instead of directing them toward productive economic activity. For evaluating the damaging effects of this unhealthy symbiosis between banking and government, the more instructive model is the Soviet Union in its final years before economic collapse.
We can draw lessons from the fact that the Soviet Union went bankrupt even as its fiscal budget statements affirmed that government revenues and expenditures were perfectly balanced. Under Soviet accounting practices, the true gap between concurrent revenues generated by the economy and the expenditures needed to sustain the nation was obscured by a phantom "plug" figure that ostensibly reflected the working capital furnished by the Soviet central bank, Gosbank.
The problem for the Soviet government was that financing provided by the state-controlled bank was supporting an increasingly unproductive economy—bailing out unprofitable enterprises that had long since quit producing real economic gains that might have raised living standards. The extension of credit to these entities had little to do with merit or potential usefulness.
Beware of President Obama's call for a doubling of U.S. exports over the next five years as a way to reduce the unemployment rate. The obvious quick route to export success for any nation is to depreciate its currency. Dollar depreciation is already being pushed by the Obama administration as the key solution for resolving our massive trade deficit with China.
Meanwhile, the president is tapping into widespread concern over our nation's future role as a global leader to justify even more spending by government. It hardly matters that proposed new outlays are cleverly branded as "investments" in training, research or infrastructure; it still amounts to increased government spending that can only worsen our perilous fiscal condition.
For the Obama administration, it all works conveniently together. The government will continue to run a large budget deficit, which must be financed by issuing more government debt. The debt is monetized when the Federal Reserve purchases it from the public. The effect is to increase the money supply. Inflationary monetary policy goes hand-in-hand with a falling dollar in foreign-exchange markets.
If you think the government makes better decisions on where to invest, how to innovate, or who to train, you may perhaps accept the consequences of inflation that inevitably result when the money supply is expanded to accommodate excessive government spending. But if you trust the private sector's ability to better discern the most promising avenues of research leading to productive future gains, it merely adds insult to injury to have your own purchasing power reduced as the dollar is diluted.
To bring up the word ‘gold’ in the context of proposing future global monetary arrangements has long meant to put at risk one’s intellectual credibility. But widespread dissatisfaction with the current state of affairs, with the dollar and euro engaged in a race to the bottom while emerging-market countries are left to wrestle with exchange rate distortions and rising trade pressures, is prompting the search for new solutions.
In the US, meanwhile, the populist movement to restore values associated with the founding of the nation has already had a remarkable impact on political developments. Leaders with economic savvy, such as Paul Ryan, the House Budget chairman, have advocated a return to “the American system of limited government, low taxes, sound money and the rule of law” as the best way to renew economic prosperity. Indeed, during the widely viewed televised Republican presidential debates, the phrase “sound money” was frequently invoked by various candidates. The notion that sound money must be part of any pro-growth economic agenda meant to challenge the current administration is becoming a mainstream assumption. While remedies vary, candidates are increasingly being asked whether they would support a return to the gold standard.
As the truth-or-dare battle over raising the debt ceiling moves toward a resolution of some sort, we are witnessing a unique political moment, with attention finally riveted on our nation’s fiscal future. We are about to learn whether there is such a thing as fiscal responsibility in a democracy where 45 percent of households don’t pay income taxes. Or whether any sense of moral obligation still attaches to paying your own way as a citizen. Chronic budget deficits are evidence of endemic political cowardice when it comes to reconciling government revenues with government expenditures. And our elected officials keep choosing the coward’s way: They “fund” excessive spending through borrowing.
Government borrowing is a convenient ploy for putting off financial inevitability for another generation—except for one huge problem. You can’t have sound money if you don’t have sound finances. If we fail to get a handle on government expenses under our current dire circumstances, the dollar is doomed.
Now some folks around the world might be happy enough about that. The dollar has been at the core of global finance since the end of World War II, as the preferred global currency for trade and capital transactions. One major benefit: It has enabled America to more easily borrow. Debt obligations issued by the U.S. government offer built-in appeal as the repository for dollars accumulated by foreigners. If you are China, say, and you sell much more to Americans than they buy from you, where better to stow that future purchasing power than in risk-free Treasury bonds issued by the United States? The dollar’s prominent role in global financial affairs makes it the most vital nonmilitary instrument of American power; it figures in 85 percent of foreign-exchange transactions, and dollar assets account for roughly two-thirds of the reserve assets of industrialized and developing countries. Of course, not everyone appreciates all those perks going to the United States—even when they realize that a diminishing dollar hurts the value of their own portfolios.
It can be hard to remember these days, but the International Monetary fund started out as an undeniable force for good. Even as World War II was raging in July 1944, delegates from dozens of nations convened at the remote mountain resort of Bretton Woods, New Hampshire, to hammer out an international monetary agreement. The goal was to provide hope to a world beset by war through a stable monetary foundation to support free trade and international capital flows.
Yesterday former French Finance Minister Christine Lagarde took the helm of the IMF, and the world now faces a different sort of crisis. The prospect of debt default by Greece threatens the euro currency union. While riots and tear gas in Athens are a far cry from the horrors of war, the scenes of unrest are disturbing nonetheless. The IMF's ostensible purpose remains to counter disillusionment and enhance economic opportunity. By all appearances of its ministrations in Europe, it is failing.
Financial stability can only arise from coherent monetary arrangements. But the IMF has strayed from its founding mission of supporting sound money—far enough that, when it comes to promoting the free flow of goods and optimal use of investment capital around the world, the IMF may be doing more harm than good.
The monetary stability inherent in the original Bretton Woods agreement arose from gold convertibility. The U.S. dollar was convertible into gold at $35 per ounce; the currencies of other nations were fixed to the dollar. The IMF was expressly charged with maintaining the integrity and viability of this fixed exchange-rate system. Unlike the beggar-thy-neighbor practices of competitive depreciation that thwarted financial recovery in the turbulent 1930s, the postwar monetary system was aimed at preventing governments from debasing their nations' currencies to gain artificial advantages for exports.
BY JUDY SHELTON: