Blogs: Lewis E. Lehrman
Transfers of gold money effectively require adjustment of balance-of-payments deficits, reestablishing equilibrium among trading nations—the settlement of debt thereby eliminating a root cause of global imbalances. Under the true gold standard, balance-of-payments deficits could no longer be settled in newly issued national paper and credit monies, such as the dollar or euro. Instead, residual balance-of-payments deficits among nations would be settled with an impartial, non-national monetary standard—gold. The requirement to settle in gold promptly and efficiently rules out the exponential debt increases of flawed reserve currency systems and the gold-exchange standard. Under the true gold standard, without official reserve currencies, rebalancing of the world trading system is a function of an efficient international adjustment mechanism.
Moreover, it is in the American national interest to terminate the reserve currency role of the dollar, an insupportable burden borne by the United States since the end of World War II (even since the Genoa agreement of 1922). The U.S. taxpayer must no longer go further into debt in order to supply the world with dollar reserves denominated in U.S. debt. Terminating the “privilege” and the burden of the official reserve currency role of the dollar, combined with the restoration of dollar convertibility to gold brings gradually to an end the long era of extreme global trade imbalances, secular inflation, and currency depreciation. Furthermore, the reserves of monetary authorities, to be held only in gold and domestic currency claims, eliminates the exchange-rate risk to all national banking systems formerly dependent on official, foreign currency reserves.
The overall balance-of-payments of a country, or a currency area, is in deficit when more money is paid abroad than received; a surplus occurs when more money is received by a country or currency area than paid abroad. The United States has run an overall balance-of-payments deficit most of the past half-century and over that full period has experienced systemic inflation. When there are substantial unemployed resources in the U.S. economy, inflation of the general price level occurs gradually; but at full employment, rapidly.
Under both the Bretton Woods agreement (1944-71) and the subsequent floating, dollar-based, reserve currency system, the U.S. budget and balance-of-payments deficits have been financed substantially by U.S. government trust funds, the Federal Reserve, and by foreign central bank purchases of dollars flooding abroad. Since 2008 the budget and balance-of-payments deficits were accompanied by quantitative easing, a euphemism for central bank money and credit creation (or "money printing"). By this means the Fed finances not only the budget and balance-of-payments deficits, but also overleveraged banks, insolvent debtors, and other wards of the state. But when the Fed slows quantitative easing, deflation threatens.
The balance-of-payments deficit causes Fed-created dollars to rush abroad—directed there by relative price differences. In foreign countries, these excess dollars are monetized by foreign monetary authorities and held as official, foreign exchange reserves. But these official dollar reserves of foreign countries are not inert. They do not lie around in bank vaults. They are in fact reinvested in the U.S. dollar market—especially in U.S. government securities sold to finance the federal budget deficit. In effect, the United States receives back the dollars it created to settle its balance-of-payments deficits abroad. Everything goes on as if there were no U.S. budget or balance-of-payments deficits. No adjustment is required of the United States to settle its debts, or to rebalance the deficits with surpluses. Thus, the world dollar standard enables America to buy without really paying. Rebalancing world trade is impossible under an official reserve currency system. This perverse monetary system, whereby the reserve currency country issues its own money to finance and refinance its increasing deficits and debts, augments global purchasing power and potential inflation, because the newly issued money is not associated with newly produced goods and services. Total demand has been divorced from supply. When total demand exceeds total supply, inflation generally occurs in commodities and inflation hedges, only to be deferred in the CPI if unemployed resources exist. Ultimately, the general price level will rise.
It is rarely considered by conventional academic opinion that the long-term stability of a gold-based currency in a free market brings about a major mutation in human behavior. In a free market, shorn of subsidies for consumption, every able-bodied person and firm must first make a supply to the market before making a demand. This social and economic principle effectively alters human conduct. It encourages production before consumption, balances supply and demand, rules out inflation, maintains balanced international trade, and upholds the framework for stable money. In a free market, grounded by a convertible currency, new money and credit may be prudently issued only against new production or additional supply for the market. Moreover, worldwide hoarding, caused by government overissue of paper money, comes to an end. May I emphasize that hoarded trillions of inflation hedges—in the form of antiques, art, commodities, diamonds, jewelry, and innumerable other vehicles mobilized as hedges to cope with depreciating currencies—will give way to new liquidity, then to investment, as the reality of an authentic and trustworthy monetary standard takes hold in a free market worthy of the name.
By means of currencies mutually convertible to gold, people and firms worldwide will have regained the confidence to exchange inflation hedges for the convenience of convertible currencies with which to invest profitably in productive facilities and the jobs to work them.
The irony of the gold standard and currency convertibility is that it ends speculation in gold. It restores the incentive to use and to hold convertible paper currency and other forms of cash balances. Currency convertibility limits not only the extent of inflation, but it also limits its twin sibling, deflation. Thus can the road to rising real wages and growing employment be rebuilt on the durable foundation of a free monetary order—that is, money free from government manipulation.
A gold dollar, reinforced by effective bankruptcy law, sustains economic justice—regulating and disciplining speculative capital, restraining political and banking authorities such that they cannot lawfully depreciate the present value or the long-term purchasing power of dollar wages, savings, pensions, and fixed incomes. Nor under the sustained, legal restraint of convertibility can governments ignite major, long-run, credit and paper money inflations with their subsequent debt deflations. Under the gold standard, the penalty of excessive corporate and banking leverage is insolvency and bankruptcy. As the profits belong to the owners, so should the losses. Bankruptcy of insolvent firms shields the taxpayer from the burden of government bailouts. Managers, stockholders, and bond holders must bear the responsibility for insolvency. In the absence of currency convertibility and bankruptcy, crony capitalism corrupts and perverts free markets.
A stable dollar leads to increased saving not only from income, but also from dishoarding—releasing a vast reservoir of savings previously hoarded in the form of inflation hedges such as commodities, art, farmland and other vehicles—all purchased to protect against the ravages of inflation. These hoarded savings, imprisoned in hedging vehicles by uncertainty and inflation, are induced out of speculation by currency convertibility to gold. The savings are then supplied to entrepreneurs and business managers to create new income-generating investment in production facilities, thereby leading to increased employment and productivity. On the other hand, sustained, government-subsidized consumption—through deficit financing, transfer payments, paper money fiscal and monetary stimulation—leads to disinvestment, debt financing, speculative privilege, and growing inequality of wealth.
To choose or to reject the gold monetary standard is to choose on the one hand a free, just, stable, and objective monetary order, or on the other, to embrace a paper money, casino culture of speculation and the incipient financial anarchy and inequality it engenders. Only currencies convertible to gold are indispensable safe guards of the wages and savings of the middle class, pensioners, and all working people.
Restoration of a dollar convertible to gold rebuilds a necessary financial incentive for real, long-term, economic growth by means of increased saving, increasing investment per capita, and entrepreneurial innovation in productive facilities. Convertibility, therefore, leads to rising employment and rising real wages underwritten by a stable, long-term price level—reinforced domestically, as it should be, by a stable, unsubsidized banking system—and internationally, by stable exchange rates convertible to gold. During the past decade of managed paper currencies and floating exchange rates, American economic growth has fallen to 1.7%, at an average annual rate. Under the gold standard, U.S. economic growth averaged 3-4% annually over the long run.
The differential growth rates are no accidents of history. The gold dollar, or true gold standard, underwrites, among other things, just and lasting compensation for workers, savers, investors, and entrepreneurs. It prevents recurring, massive distortions in relative prices by manipulated paper currencies and floating exchange rates which misallocate scarce resources. It minimizes speculative capital flows characteristic of a paper-floating currency system. It rules out the “exorbitant privilege” and insupportable burden of official reserve currencies. It limits and regulates abuse of fractional reserve banking. It tends toward growth, not austerity. It inspires long-term savings, entrepreneurial innovation, growing investment per capita, and rising real wages. Moreover, the lawfully defined gold content of a stable currency encourages long-term lending and investment—more reliance on equity, less on debt. With currencies convertible to gold, long-term lenders receive, say after thirty years, the same purchasing power—measured by a standard assortment of goods and services—compared to the capital or credit they surrendered to the borrowers thirty years ago to make long-term investments. This fact is confirmed by the empirical data of the classical gold standard (1879-1914).
By Lewis E. Lehrman: