The True Gold Standard (Second Edition)
An age-old idea — the gold standard — is attracting new fans, amid growing investor concern that enormous government borrowing is weakening the dollar and spark hyper-inflation.
The day of realization is coming, James Grant, editor Grant's Interest Rate Observer told CNBC Thursday. "What can be said for the gold standard is that it is time tested. It has monetary properties. It worked imperfectly but consistently for a 100 years until it was interrupted," said Grant
The old standard, which fell out of use by the 1930s, was conceived to control money supply growth (and thus inflation and asset bubbles) by requiring currencies be backed by physical gold.
The concept has gained new currency in the wake of the 2008 financial crisis wherein governments and central banks tried to stimulate economic growth through extraordinary fiscal and monetary stimuli.
"The human society is going to recognize that current monetary arrangements are defective and are robbing us of the dynamism that this country has been known for," Grant noted.
According to Grant, under a gold standard, a given country can fix its currency to a given quantity of gold. However, in an event of a recession, governments would be powerless to print money under the gold standard.
"Under a proper gold standard the government would have to fund itself and the open market would not do it," he concluded.
The gold standard would limit the amount of debt the government could issue, Grant said.
"What we want is a monetary system that is objective, that we can understand, that has at its bottom as its root — something that we can recognize as money. Gold is recognized as money," he added.
Today is the 40th anniversary of the announcement by President Nixon of a New Economic Policy, the so-called “Nixon Shock.”
President Nixon, faced with rising inflation and the threat of a recession, imposed wage-price controls, built a tariff barrier around the USA, and “temporarily” suspended the convertibility of the dollar into gold.
It was, by results, the greatest debacle in the history of American economic policy.
What followed was not pretty. All of the Nixon Shock policies, save one, were quickly unwound by his more economically astute senior policy makers. The tax credits expired. Wage-price controls were allowed to implode. The tariff wall came down faster than you can say, “Mr. Nixon, tear down this wall!” All were unwound, that is, except one.
The only vestige of the Nixon Shock remaining was, arguably, the most damaging and it is still doing great damage.
The gold window is still closed.
The gold standard has a long and colorful history.
For all of its imperfections what cannot be disputed seriously is that, notwithstanding its bungled handling from time to time, the record demonstrates that the gold standard is, as financier and philanthropist Lewis E. Lehrman (with whom this writer is professionally associated) has observed, the least imperfect of all monetary systems that have ever been tried in the laboratory of history.
Why is it the best? Yes, it has a distinguished pedigree going back to Sir Isaac Newton and even Copernicus, and was firmly embraced by America’s founders. But that’s not why. The reason is simple. The gold standard is one of the greatest engines of job creation and real prosperity known.
Why are so many state legislators beginning to call for issuance of a form of gold money?
The Constitution prohibits states from coining money but allows them make “gold and silver Coin a Tender in Payment of Debts….” By prohibiting everything except “gold and silver Coin” the Constitution clearly contemplates this as legitimate.
The price of gold reached an all-time high of $1432 per ounce in December, rising 29% in 2010 following uncertainty in the equity markets and European sovereign debt problems.