Blogs: Kelly Hanlon
Over the course of a series of monetary conferences last fall, a fundamental question arose: should we continue on our current economic trajectory or can we foster long-term economic growth? Drs. Judy Shelton and Brian Domitrovic along with many others, argued that we could return once again to average annual growth rates of four percent as opposed to the measly eight-tenths of one percent average annual growth that we experienced over a five year period ending in 2010, according to data from the World Bank.
On our current path, the road ahead is filled with bumps, “Twists,” and turns as policymakers attempt to straighten out the financial and economic mess that has engulfed America and the world for much of the last four—now almost five—years. The president will continue to blame Congress for its inaction; Congress will point back to the president, seeking compromises that will never come. The Fed will continue to work with the Treasury to fund the runaway national deficit. And, more dollars will be printed and sent ‘round the world, fueling booms—and subsequent busts—in markets abroad.
But, there is another way: restore economic growth through the creation of sound money—not through the inflationary production of more money. Once again, define the dollar as a specific weight of gold. Although the precise methodology of returning to a gold standard varies, the underlying point is the same: today’s dollars continue to decline in value. John Maynard Keynes recognized the inherent dangers when governments devalued their currencies. Citing Lenin as the original author, Keynes repeated in The Economic Consequences of the Peace that “…the best way to destroy the capitalist system was to debauch the currency.”
In her new book, Dr. Shelton argues that the discretion exercised on an ad hoc basis by a small committee in D.C. is, in fact, debauching the dollar. Furthermore, the Fed is incapable of consistently producing long-term economic growth as happened more consistently under the classical gold standard in effect for almost 200 years. The examples of central bank mistakes are myriad— ranging from the Great Depression of the 1930s to the stagflation of the 1970s and even more recent examples from home and abroad. Professor Domitrovic explores this evidence—focusing particularly on the last century of American economic history—in a paper recently released by the Laffer Center for Supply-Side Economics. He concludes by saying, “It will be tragic if we fail to realize that noninflationary growth will solve all of our problems.”
Let’s hope that we come to our senses once again and focus on reestablishing a stable dollar by defining it as a fixed weight of gold along with currency convertibility, and, with it, unleashing economic growth for decades to come.
Businesses are reluctant to spend or hire. Unemployment remains high. Investors are cautious. Markets are volatile. These are the just some of the refrains sprinkled throughout the minutes of the December 13, 2011, Federal Open Market Committee Meeting. Nevertheless, the Fed reports that the economy is expected to continue expanding moderately in the quarters ahead.
What? We’re in dire straits (along with the rest of the world) but don’t worry because everything will be just fine since we are acting in ways consistent with our “statutory mandate to foster maximum employment and price stability.”
As many Fed-watchers have pointed out over the years, the Fed has not done particularly well in fulfilling either of its long-run objectives.
In the case of price stability, today’s dollar—backed by the full faith and credit of the United States government—is worth only 85% of a dollar in 1971 which until August of that year was convertible to gold. In the case of employment, the Fed reports that unemployment is expected to remain high for at least another two years although there are weak signs that the employment outlook is actually improving.
Releases such as this one are meant to provide market participants and the public with a better understanding of the Fed’s policy decisions. In fact, during the December 13, 2011, the FOMC members had a lengthy discussion about how to more effectively communicate their policy choices to the public. But what is actually communicated by statements that equivocate on every major point? Not much, it turns out; they simply contribute to the white noise and confusion about how to invest and save over the long-term. As the Fed put it, there is a “high level of uncertainty about the economic outlook and political environment.”
What, then, is to be done?
First, we need a true leader capable of understanding real economic growth and how to achieve it. Then, he (or she) must have the political will and courage to adopt sound money, once again establishing the dollar as a weight unit of gold.
As James D. Grant points out regularly, the funny thing about gold-backed dollars is that no one actually goes to the bank to redeem dollars for gold. The knowledge, however, that a dollar is backed by a real asset (rather than by the full faith and credit of the government) provides for a stable price level over the long run, as evidenced in the period from 1834 to 1914.
Price stability encourages long-term savings and investment. Aha! One of the Fed’s mandates! For example, between 1792 and 1914, America experienced economic growth of roughly four percent annually. Price stability alleviates uncertainty. If a dollar is worth more a year from now than it is today, the rational economic actor will squirrel away all extra dollars for the future. This is what we refer to as savings and investment. These monies are then available for productive use in the economy—encouraging real economic growth over time. When there is real economic growth, employment increases to achieve higher outputs. Aha! The second of the Fed’s mandates!
If the Fed—nay, if Congress and the President or even the GOP presidential candidates—are serious about encouraging economic growth, they would move forward to a true gold standard.
GOP candidates vying for the presidential nomination spent most of last week in New Hampshire, in advance of the January 10, 2012, primary contest. The contest has been described as both anti-Obama and anti-Romney. It has been analyzed in terms of the candidates’ charisma, positions on foreign affairs, the military, social issues, and economic matters. We’ve now seen the rise and fall of a number of candidates. Iowa was interesting but revealed that voters remain dissatisfied with their options, splitting the vote among the frontrunners.
Will New Hampshire be the same? Need it be?
One of the most recent, overarching, and, perhaps, astute assessments was published in Monday’s Wall Street Journal. Gerald F. Seib described the leading differences between the front runners this way: Santorum talks about the past, Gingrich talks about the future, and Paul talks about the threat government poses to personal liberty. All the while, the Romney machine conveys that it has the best chance to beat Obama.
The president must be concerned with the past, present, and the future and, at each point, the necessary and proper role of government. Can a single candidate convey this message to the country? If so, he would win New Hampshire and, more importantly, the nomination. What, then, is one of the issues which unites each generation with the one before it and the ones which come after it? Sound money.
In the past, America engaged in sound (and Constitutionally ordained) monetary policy. The dollar was defined by statute as a certain weight unit of gold, allowing millions of American families and businesses to save and invest in their futures. Incentives to save for the future were automatic—a dollar tomorrow, accounting for compound interest earned through investments over time, was worth more than a dollar today. Economic growth averaged four percent between 1792 and 1914, the year that the Federal Reserve System began operations. By 1971, the last vestiges of the gold-back dollar were decimated. And, since then the dollar lost eight-five percent of its value. In terms of gold prices, the dollar is worth two cents of its 1971 predecessor!
Market participants have not forgotten the past. Americans remember when we could buy a loaf of bread for a nickel (or a dollar, even). We are alive and awake and paying attention right now—we see the prices at the grocery store and gas pump creeping up. As for tomorrow? Well, Americans want a better future for our children’s children but most are not saving or investing in that long-term vision.
What does this mean for the presidential candidates facing off in New Hampshire?
The candidates will promise a good economic policy. But will they be wise enough to combine sound monetary policy with expert fiscal policy? As Lewis Lehrman describes it, “The restoration of American leadership rests upon a four-legged platform: low tax rates; deregulation of producer markets; budgetary equilibrium; and profound monetary reform.”
No matter who gets elected president, without such measures, economic growth is likely to continue sputtering along and far fewer good jobs will be created than would be truly optimal.
Nationally syndicated radio talk show host and New York Times bestselling author, Dave Ramsey, knows a thing or two about personal finance. His no nonsense approach, grounded in age old wisdom has helped thousands of American families regain financial stability and hope for the future. The cornerstone of his advice: a “plasectomy.” Cut up your credit cards. Stop spending more than you earn. Live within your means.
Lewis E. Lehrman applies the same common sense approach for the nation’s deficit woes in a new article published by The American Spectator. Lehrman writes, “The simplest solution to the government spending problem in Congress is ‘to tear up’ its credit cards.”
On a personal level, we readily understand how to—quite literally—cut up our credit cards. Indeed, Ramsey even has a gigantic pair of scissors that can regularly be heard on air destroying credit cards. But how does a nation go about tearing up its credit cards which have served as “open-ended charge accounts” for much of the last century?
Brian Domitrovic called monetary reform “the unfinished business of the Reagan Revolution.” At a recent conference hosted by the Atlas Foundation, it was as though the Reagan Revolution was born again to finish the job at hand—restoring a gold-backed dollar. Scholars, businessmen, and journalists discussed the economic and political history of sound money. Moderated by Jimmy Kemp, son of the late great Jack Kemp, panelists included Lewis E. Lehrman, Judy Shelton, and Steve Forbes. It was, of course, early during the Reagan years that Kemp-Roth tax cuts were executed unleashing one of the greatest periods of economic growth during the last century. And, it was President Reagan who established the United States Gold Commission on which Mr. Lehrman served.
The room was packed—more than 160 people gathered to hear this historic panel and many stayed long afterwards to continue questioning the panelists. Mr. Lehrman opened the discussion briefly surveying American economic history from the Industrial Revolution to the present day, tying our latest financial disorder to the modern reserve currency role of the dollar. The solution? Establish convertibility of the dollar to gold once again. Neatly laid out in a five step plan, Mr. Lehrman’s plan is compelling and offers a serious solution to the endless alternating cycles of inflation and deflation.
Dr. Shelton reminded us that it was Congressman Kemp who so clearly articulated the idea of the dollar in saying that “the dollar should be so honest, so sound, so trustworthy, so good, so predictable, so lasting in value that it’s as good as gold.” In her slim volume titled, A Guide to Sound Money, Dr. Shelton establishes ten core principles of sound money. Her newly released book, Fixing the Dollar Now: Why US Money Lost Its Integrity and How We Can Restore It, Shelton extends the principles laid out in her earlier volume and establishes a plan for gold-backed bonds as an intermediate step in returning to a gold-backed dollar.
Steve Forbes, businessman, entrepreneur, and former presidential candidate, offered the likely political rhetoric with which a rising GOP presidential candidate might persuade the nation to move forward to gold. Likening monetary policy to a well-run car, Forbes argued that if there is too little or too much money (fuel) in circulation, then the economy (car) stalls. However, if there is just the right amount, the economy (car) hums along, moving forward. The amount of money cannot be determined by a single central authority but rather by the people engaged in economic activity. With a gold-backed dollar, America may well have the chance to grow and prosper once again.
In closing, Dr. Shelton pointed out that it was Alan Greenspan, appointed as the Federal Reserve Chairman by President Reagan, who wrote in 1966 that, “Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
BY KELLY HANLON: