The True Gold Standard (Second Edition)
Key Writings: Kadlec on the Gold StandardThe Price of Abandoning the Gold Standard
The whole notion of an energy crisis is a grand illusion created by the fall in the paper dollar against gold.Forty years ago President Richard Nixon severed the final link between the dollar and gold. We have been living with the consequences of that colossal error ever since. We were promised that breaking the link between the dollar and gold would free the Federal Reserve to smooth out costly recessions, provide high employment and strong economic growth. Internationally, the devaluation of the dollar was supposed to reduce our trade deficit and improve the international competitiveness of American workers and businesses. And, because trade was only one-tenth of the U.S. economy, all of this could be done while maintaining price stability. Each and every one of these promises has been broken. Since Nixon killed the gold standard the unemployment rate has averaged over 6% and we have suffered the three worst recessions since the end of World War II. The unemployment rate averaged 8.5% in 1975, almost 10% in 1982 and has been above 8.8% for more than two years, with little evidence of any improvement ahead. This performance is horrendous compared with the post-World War II gold-standard era, which lasted from 1947 to 1970. During those 21 years of economic ups and downs the unemployment rate averaged less than 5% and never rose above 7%. Growth, too, has slowed. Since 1971 real economic expansion has averaged 2.9% a year--more than a full percentage point slower than the 4% growth rate during the post-World War II gold-standard period. When compounded over 40 years, 1% slower growth under the paper dollar system has had a mind-boggling impact on our incomes and the size of the economy. At 3% growth the U.S. economy is about $8 trillion smaller than it would have been had we continued to experience the average growth rate prior to Nixon severing the link between the dollar and gold. That implies that median family income today would be about $70,000, or nearly 50% higher than it is today. It would also mean that the tax base--for federal, state and local governments-- would be approximately 50% bigger, generating a bounty of tax revenues that would make the current and projected fiscal challenges manageable without severe spending cuts or growth-killing tax increases on working Americans. Nixon's Colossal Monetary Error: The Verdict 40 Years Later
Today, Aug. 15, 2011, is the 40th anniversary of President Richard Nixon's colossal error: severing the final link between the dollar and gold. No other single action by Nixon has had a more profound and deleterious effect on the American people. In the end, breaking the solemn promise that a dollar was worth 1/35th of an ounce of gold doomed his Presidency, and marked the beginning of the worst 40 years in American economic history. The announcement itself was dramatic, contained in a Sunday evening address to the nation from the Oval Office. The promises made were profound and reflected the received wisdom of that day and today: unshackling the U.S. government from the requirement of maintaining the dollar's value in terms of gold would empower able men and women at the Federal Reserve to use monetary policy to increase the general prosperity of the American people. Domestically, we were promised that the manipulation of quantity and value of a paper dollar would avoid costly recessions, provide high employment, and produce strong economic growth. Internationally, we were promised that the devaluation of the dollar would reduce our trade deficit and improve the international competitiveness of American workers and businesses. And, because trade was only one-tenth of the U.S. economy, all of this could be done while maintaining price stability. Each and every one of these promises has been broken. Since Nixon killed the gold standard, the unemployment rate has averaged over 6% and we have suffered the three worst recessions since the end of World War II. The unemployment rate averaged 8.5% in 1975, almost 10% in 1982, and has been above 8.8% for more than two years, with little evidence of any improvement ahead. Monetary Reform: The Beginning of the Beginning
Fundamental reform of the world’s monetary system has begun. It is way too early and too amorphous to be front-page news. We are only at the beginning of the beginning of a popular effort to restore gold backed money to the center of economic activity. The power of this incipient reform movement is its grounding in human nature and our propensity – in Adam Smith’s famous words – “to truck, barter and exchange one thing for another.” We forget money is a human invention, emerging from what Hayek calls the spontaneous order of the market, to make possible mutually beneficial exchanges over an ever widening number of goods, across an expanding set of communities and through the keeping of promises of exchange even over long periods of time. The invention of money made possible an extraordinary increase in commercial activity by liberating us from a direct barter system where I have to have something you need in order to trade. By ancient times, gold and silver coins had become the money of choice because they were better than any other medium at maintaining their rate of exchange into goods and services, thereby favoring neither buyer nor seller. Defining a dollar, or a British pound, as a fixed weight of gold was an innovation that further increased the usefulness of money. You could take currency and trade it for something you needed, or you could trade that money for a fixed weight of gold. As a general proposition, paying with paper money was no different than paying with gold, except paper money was more convenient to carry. Forty years ago, that order was up-ended by President Richard Nixon’s decision to sever the final link between the dollar and gold. For the first time since Sir Isaac Newton established the British gold standard in 1717, all of the world’s major currencies during a time of peace were free to float against one another and to fall in value against precious metals. The consequence has been a debasement of the dollar and all other currencies, an ever more cyclical economy, a 40-year hiatus in real wage increases for American workers and a growing fear of yet more financial crises created by monetary instability. The Dollar, Gold And The Quality Of Money
Is gold money? That question, directed to Federal Reserve Chairman Ben Bernanke by Congressman Ron Paul in last week’s hearings before the House Financial Services Committee, strikes terror in the heart of all central bankers. Bernanke looked stunned and then answered, “No: Gold is an asset.” The rising price of gold reflects global uncertainties, he explained. “The reason that people hold gold is as a protection against what we call tail risks: really, really bad outcomes.” The daily headlines report those potential risks: governments needing bailouts, from Greece to Harrisburg, Pennsylvania; the possibility that the euro will splinter; runaway deficit spending in the U.S. With every headline, it is becoming increasingly apparent how much the governing class has overreached. Those who believe in government are simply running out of other people’s money. For example, President Obama’s call to reverse the tax break given to owners of corporate jets in his 2009 stimulus bill would supposedly raise $300 million a year in revenue, enough to cover less than two hours of current deficit spending. Even if the Federal government could tax 100% of personal income in excess of $250,000 a year, it would collect little more than half of the revenue needed to balance the budget. These real world results mock the conventional wisdom that given the power to spend, borrow, tax and print money, elite public servants can manage the economy and protect the average individual against the vicissitudes of life. Instead, government itself has become a source of systemic risk, and a direct threat to our prosperity and liberty. At the center of this political upheaval is the quality of money itself. “Is gold money?” is a show stopper because it raises the questions: “What is money and what power should government have to manipulate its value? The answers to these questions reveal how our most basic trust in government has been betrayed. When you or I accept dollars in exchange for providing goods and services, we do so trusting that when we spend those dollars, they will be accepted for an equivalent amount of goods and services. That’s how money frees us from a barter economy. Trust is always an assessment of some future action. Making a grounded assessment requires us to understand who is making the promise, what action they are promising, and whether they are sincere and competent to fulfill their promise. When an individual, company or government has a good credit rating, we are saying that we trust they will keep their promise to pay off their debts in the future. So it is with the value of money. Today Bernanke is making the promise effectively to “do his best” to achieve the Fed’s dual mandate of achieving maximum employment and stable prices. I do not doubt that Bernanke and his colleagues at the Fed have done their best. Here are the results:
A poll conducted by Rasmussen last week indicates that the American people are losing trust in the Federal Reserve and in the future value of the dollar. Fifty percent of those polled reported they are “very concerned” about inflation, and 79% said they were at least “somewhat concerned.” Is gold money? Technically, no, in that gold does not circulate as a medium of exchange. But, as trust in the paper dollar continues to erode, and the incompetence of the governing class to manage the economy becomes more evident by the day, there is growing interest in and support of making the dollar as good as gold. A gold standard works because the U.S. government rather than the Chairman of the Federal Reserve stands behind a promise that is explicit — a dollar is worth a fixed weight of gold. This promise can be verified every minute of the day by observing the current rate of exchange between the dollar and gold, and, under a classical gold standard, by exchanging currency at a national bank for gold coins of a fixed weight and purity. In addition, a gold standard provides a transparent set of practices to keep the promise. A rise in the price of gold signals too many dollars, triggering quantitative tightening. A fall in the price of gold signals too few dollars, triggering quantitative easing. Since these Fed actions are made daily and at the margin, such adjustments are not disruptive, but produce stability and trust. Finally, a gold standard produces trust in the dollar because gold has the unique characteristic of maintaining its buying power over time. For example, if today’s dollar were worth 1/35th of an ounce of gold as it was under the post World War II Bretton Woods system, a barrel of oil today would cost less than $3 a barrel, just as it did in the 1950s and 1960s. Steps to restore gold’s legitimate role as money are afoot. In Utah, gold and silver coins are now legal tender and exempt from sales and income taxes. The Swiss Parliament soon will hold hearings on creating a parallel, “gold franc.” And, the central bank of Zimbabwe is considering replacing its worthless currency with a gold-backed Zimbabwe dollar. The question: “Is gold money?” terrifies central bankers because it highlights their inability to provide a currency that is better than one whose quality is guaranteed by a fixed rate of exchange into gold. Between Aug. 15, 1971 — the day President Richard Nixon suspended the promise that a dollar was worth 1/35th of an ounce of gold — and Feb. 1, 2006 — the day Bernanke was appointed Fed Chairman — the dollar had fallen to 1/569th of an ounce of gold. Today, it is worth a teeny tiny 1/1600th of an ounce of gold. An acceleration in the dollar’s decline and the inflation, political and economic turmoil that would follow are among those “really really bad outcomes” that people are trying to escape. Restoring the promise that a dollar is worth a fixed weight of gold would guarantee its value and eliminate the “tail risk” of monetary disorder that individuals, businesses and government all over the world increasingly have reason to fear. The benefits of price stability, low and stable interest rates, an increase in high paying jobs and the spread of prosperity would redound to the benefit of all. Why the Fed Should Choose Quantitative Neutrality
What will replace QE2, the Federal Reserve’s current operating rule of purchasing $75 billion of securities a month when it expires at the end of June? The answer to that question will be front and center when the Federal Open Market Committee meets Tuesday and Wednesday (June 21, 22) and issues its post meeting statement. The most likely answer is that the members of the FOMC will use their collective best judgment – that is, do their best – to achieve their dual mandate of achieving maximum employment and price stability. An alternative, advocated by former Federal Reserve Board Member Wayne Angell in an interview with me, is to replace Quantitative Easing with a transparent policy of “Quantitative Neutrality.” The “do our best” approach is fraught with the risk. It provides no reliable answer to the fundamental operational question: Should the Fed expand, contract, or leave unchanged the monetary base through the sale and purchase of securities? The overwhelming experience of the last 40 years demonstrates this approach leads to recurring financial crises, as the Fed first supplies too much money, and then over-reacts by providing too little money, whip-sawing the economy with bubbles and busts that are becoming ever more recurrent as the Fed stumbles from success to failure. The challenge to find the right balance has seldom been higher. Developments outside the U.S. are creating significant shifts in the demand for dollars in time frames measured in days and weeks, not months and years. Since QE2 began in November, consumer price inflation has accelerated into the mid single digits. If the Fed continues to produce too much money, that would add to inflationary pressures. The resulting concern over the value of the dollar could lead to a crisis of confidence and trigger an inflationary decrease in the demand for dollars. However, the uncertainties created by the sovereign debt and potential bank crisis in Europe could just as easily trigger a flight out of the euro into dollars. Failure to accommodate such a shift in demand would mean a de facto tightening on the part of the Fed. If the Fed now becomes too tight, deflationary pressures would be unleashed, further disrupting economic activity and likely triggering another recession. |
BY CHARLES KADLECThe 21st Century Gold Standard
Read The 21st Century Gold Standard: For Prosperity, Security, and Liberty by Ralph Benko and Charles Kadlec to learn what the gold standard is, how it works and how a dollar linked to gold would pave the way for a new age of American prosperity. By Author:By Publisher:Kathleen M. Packard, Publisher In Memoriam
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