Blogs: Lewis E. Lehrman
Why the True US Gold Standard Will Lead to a Boom in Savings, Investment, Rapid Economic Growth, and Full Employment
To choose true monetary reform and balanced budgets is to embrace not only the American Constitution but also the historic American financial policy, which led to American world leadership. Article I, sections 8 and 10 of the United States Constitution, enabled the monetary reconstruction of the American Republic at the Founding -- on the bedrock of a gold dollar. This original monetary reform of the Constitutional Convention of 1787 ended the currency collapse of the Revolutionary Era -- the worst inflation of American history. The Constitution stipulates that Congress has the power “to coin money and regulate the value thereof.” In addition, the Constitution prohibits the states from making anything but “gold and silver a legal tender.” The American Constitution, the supreme law of the land, suggests that the true gold standard was and is the historic monetary standard of the American Republic. Above all, it was the monetary system associated with the rise of America to economic primacy.
Let us summarize the data from my book, The True Gold Standard: A Monetary Reform Plan Without Reserve Currencies, to see why. Applying two criteria divides the monetary history of the United States into distinct phases. We can compare the stability of different monetary regimes by examining the variation in the Consumer Price Index (as reconstructed back to 1800), using two simple measures: long-term CPI stability (measured by the annual average change from the beginning to the end of the period of each monetary standard) and short-term CPI volatility (measured by the standard deviation of annual CPI changes during the full period). What do we conclude?
Weighting these two criteria equally, the classical gold standard (1879-1914) provided the most stable dollar, combined with rapid economic growth of all U.S. monetary regimes.
American economic reconstruction, based on the true gold standard, would lead to a resurgence of rapid economic growth, empowered by renewed confidence born of market expectations of a stable long-term price level. With American leadership, other nations would embrace an impartial, more equitable, international monetary order. Other large nations now call for a new, non-national, international monetary standard. By re-establishing an effective international adjustment mechanism and stable exchange rates under American leadership, monetary convertibility to gold would lead to the end of perennial deficits, the end of manipulated floating currencies, and thus end the present threat of currency wars among the major nations.
The true gold standard -- that is a dollar convertible by statute to a specific weight of gold, combined with the windup of the official reserve currency role of the dollar -- would engender a vast increase of true savings from current income made available for long-term productive investment. Confidence in a stable long-term price level, would cause vast, speculative sums of worldwide savings to abandon unproductive inflation hedges. This dishoarding would yield immense, liquid savings looking for productive investment in real goods and services. Equity and true capital investment would gradually displace debt and leverage. Under conditions of stable money and stable exchange rates, savings would be redeployed by entrepreneurs and investors in new and innovative plants, technology, and equipment -- minimizing unemployment as skilled and unskilled workers were hired to work the new facilities. The production machine of the United States would be reoriented -- by a convertible currency, budgetary equilibrium, and by the end of the reserve currency role of the dollar -- to produce for the world market. Producing for the world market would engage all the positive and equitable effects of economies of scale and free trade.
It is, I believe, incontestable that all the celebrated monetary gods of the twentieth century have failed. Originating in the conceits of twentieth century academics, bankers, economists, and politicians these monetary gods have sowed chaos. Now we reap the whirlwind.
In my book, The True Gold Standard: A Monetary Reform Plan Without Reserve Currencies, I chart a road to get from here -- a world of financial disorder, to there -- the remobilization of the gold standard. But I do emphasize that if the United States takes the lead to re-establish dollar convertibility to gold, the project should become a cooperative effort of the major powers.
To accomplish such a reform, first the United States announces future convertibility of the U.S. dollar -- the dollar itself to be defined in statute, on a date certain, as a weight unit of gold. Second, a major international conference must be convened to establish mutual gold convertibility of the currencies of the major powers, the U.S. if necessary, proceeding to convertibility unilaterally. Third, the curse of official reserve currencies born of the 1922 Genoa and 1944 Bretton Woods agreements must be ruled out -- gold alone designated to settle residual balance of payments deficits. At the same time a consolidation of official dollar reserves must be organized into long-term debt -- to be funded in the very way the Founders funded the volatile national and state debts at the birth of the American republic.
In this crisis of economic policy, to restore the gold standard is the one needful thing: It was not only the cornerstone of American financial integrity and balanced budgets; it was also the trusted monetary standard by which America rose from 13 impoverished colonies by the sea to the leadership of the world. There is an imperishable truth in our American saga. And it is this… As with individuals, so it is with nations… Character is the all decisive factor. With the restoration of American financial integrity, we can restore American prosperity, and we can restore American leadership.
It is a great lesson of American history that the classical or the true gold standard -- a dollar defined as a weight unit of precious metal -- is in fact the constitutional American monetary standard. Let us uphold the Constitution and thereby inaugurate a new industrial revolution, rebuild America’s self-respect, and with our constitutional monetary standard, restore American leadership in the global economy.
America and the world need monetary reform. Indeed, they need a twenty-first century, international gold standard. The gold standard -- i.e. national currency convertibility to gold -- is the simple, proven, global monetary standard by which to transmit reliable price information worldwide. Unlike manipulated, floating, paper currencies, the true gold standard -- a dollar defined in law as a specific weight of gold -- exhibits the optimum, impartial, networking effects characteristic of the electronic age of reasonably transparent, global standards.
America should lead in the age of monetary reform by unilateral resumption of its historic constitutional monetary standard -- namely, gold. Unilateral resumption of the gold standard means that the United States dollar will be defined by Congress in federal statute as a certain weight unit of gold -- as the dollar was so defined from 1792-1971. The Treasury, the Federal Reserve, and the banking system will be responsible for maintaining the statutory gold value of the United States dollar.
All financial claims on banks and government banking agencies, chartered or supervised under federal law, that are payable in dollars shall be redeemable in gold at the statutory rate without restriction. Dollar demand deposits (e.g., checking accounts) will be redeemable in gold upon demand, but other dollar claims, of course, at maturity. Along with customary bank notes and bank checking account deposits, convertible to gold at the statutory parity, Americans will be free to use gold and authorized, mint-issued, gold coins as money -- without restriction or taxation. The Treasury and authorized private mints will provide for the minting of legal tender gold coins. The Board of Governors of the Federal Reserve or any successor institution serving in a similar capacity, and all banks chartered or supervised by the United States government, or any one of its agencies, will be obliged by law to sustain the statutory dollar-gold parity and to redeem in gold, upon request, all Federal Reserve notes, all bank notes and demand deposits.
From 1792 until 1971, the dollar was defined in law as a specific weight unit of gold (and/or silver). As required by Article I, Section 8 of the U.S. Constitution, Congress will again establish by statute, after due deliberation, the sustainable gold value of the dollar; that is the convertibility price of the dollar to gold.
To facilitate termination of the unstable, dollar-based, global, reserve currency system and to mitigate the predatory mercantilism and economic disorder engendered by floating exchange rates, American authorities will invite interested nations to a conference to establish a modernized international gold standard -- not unlike the global arrangements necessary to establish worldwide telecommunications standards. By international gold standard, it is meant that gold -- not paper dollars, nor any other currency, nor Special Drawing Rights (SDR) -- would be the primary means by which nations settle their residual balance-of-payments deficits. The gold monetary standard -- a proven, impartial, non-national, universally acceptable money -- is the necessary remedy for the defect of unstable, floating, paper currencies and the currency wars they now ignite. An international agreement to implement such a monetary reform would also end the exorbitant privilege and the insupportable burden -- borne by the United States -- of the global reserve currency system based on the floating dollar.
In an imperfect world, peopled by imperfect human beings, there can be no perfect monetary system. Nor is the case for gold the case for investment in gold. Based on a prudent consideration of monetary history, it is an argument from principle by which to establish the optimum monetary standard for a stable, growing economic and social order.
By the test of centuries, the true gold standard, without reserve currencies, is the least imperfect monetary system of history.
Lewis E. Lehrman
May 21, 2012
America must now take one of two divergent roads. First, America may persist on the road of soft indulgence afforded by the unstable dollar’s official reserve currency role—the enabler of ever-rising budget and balance-of-payments deficits, therefore of immense American foreign debt. Though the centrality of the world dollar standard may gradually decline, it may still continue for another generation because of the unique amplitude and liquidity of the dollarized financial markets, repositories for vast sums not easily stored elsewhere as official national reserves. Therefore, the “exorbitant privilege” of the dollar’s role as the world’s primary reserve currency may enable American authorities, policy makers, and academic economists to persist in rationalizing the misleading mask of this reserve currency privilege as a boon, instead of a deadly economic malignancy leading ultimately to national insolvency.
Or, second, American leaders may acknowledge the dollar’s world reserve currency role as an insupportable burden, instead of a privilege. It is a burden because decades of supplying dollar reserves to the world in the form of dollar debt has caused an exponentially rising burden of United States foreign and domestic debt. This process enables America to finance rising American budget and balance-of-payments deficits without institutional limits. These monetized deficits of the reserve currency country entail arbitrage mechanisms which cause inflation followed by deflation both at home and abroad.
If American leaders continue to choose option one—rising debt and deficits financed by the dollar’s reserve currency role—the reserve currency fantasy may carry on for several more decades before its complete collapse. Historians have analyzed the very same pattern of gradual reserve currency decline of the British imperial pound as it persisted after World War II—lingering as it did on life support for three more decades, then collapsing, finally making clear to the world the general collapse of British power.
If American leaders choose option two, they will reject the siren song of the reserve currency’s “exorbitant privilege.” They will acknowledge the insupportable burden of the dollar’s official reserve currency role. They will plan now for the termination and wind up of the dollar’s reserve currency role, restore dollar convertibility to gold, define by statute the dollar as a certain weight unit of gold, and propose gold as the sole international reserve currency, thereafter settling all residual balance-of-payments deficits in gold alone.
For America to choose option one is not unlike an intelligent, insouciant dare-devil, Icarus, who—well-suited for the leap—takes off from the fiftieth floor of his skyscraper, secure in the knowledge that he is feeling fine ten floors down, the street level still forty floors far below.
To choose option two is to choose the American Constitutional roadmap to monetary reconstruction on the bedrock of a stable dollar, shorn of the crushing weight of trade disadvantages and the accumulating dollar debt intensified by the reserve currency system.
American monetary and economic reconstruction on this historic basis will lead to a resurgence of rapid economic growth empowered by a sound and stable dollar and the renewed confidence and certainty born of market expectations of a stable long-term price level. These fundamental incentives will engender a vast increase of true savings available for long-term investment from current income—investable savings—and much more from dishoarding. The outpouring of savings will be redeployed by entrepreneurs in new and innovative plants, technology, and equipment, minimizing unemployment as skilled and unskilled workers are hired to manage the new facilities. The United States export production machine will be reoriented to the world market under free and fair trading conditions.
This is the true road of American monetary and economic reconstruction.
By Lewis E. Lehrman: