The True Gold Standard (Second Edition)
As the truth-or-dare battle over raising the debt ceiling moves toward a resolution of some sort, we are witnessing a unique political moment, with attention finally riveted on our nation’s fiscal future. We are about to learn whether there is such a thing as fiscal responsibility in a democracy where 45 percent of households don’t pay income taxes. Or whether any sense of moral obligation still attaches to paying your own way as a citizen. Chronic budget deficits are evidence of endemic political cowardice when it comes to reconciling government revenues with government expenditures. And our elected officials keep choosing the coward’s way: They “fund” excessive spending through borrowing.
Government borrowing is a convenient ploy for putting off financial inevitability for another generation—except for one huge problem. You can’t have sound money if you don’t have sound finances. If we fail to get a handle on government expenses under our current dire circumstances, the dollar is doomed.
Now some folks around the world might be happy enough about that. The dollar has been at the core of global finance since the end of World War II, as the preferred global currency for trade and capital transactions. One major benefit: It has enabled America to more easily borrow. Debt obligations issued by the U.S. government offer built-in appeal as the repository for dollars accumulated by foreigners. If you are China, say, and you sell much more to Americans than they buy from you, where better to stow that future purchasing power than in risk-free Treasury bonds issued by the United States? The dollar’s prominent role in global financial affairs makes it the most vital nonmilitary instrument of American power; it figures in 85 percent of foreign-exchange transactions, and dollar assets account for roughly two-thirds of the reserve assets of industrialized and developing countries. Of course, not everyone appreciates all those perks going to the United States—even when they realize that a diminishing dollar hurts the value of their own portfolios.
Judy Shelton makes the case in the new issue of THE WEEKLY STANDARD for the “Gold Standard or Bust.” Sound finances, she points out, require sound money, and sound money, it turns out, seems to require a dollar as good as gold—i.e., a return to a gold standard. As she puts it, “monetary policy needs some discipline to prevent the dollar from being the default mechanism for enabling government mismanagement. Gold convertibility would signal that we intend to maintain the integrity of our currency.”
And in the business section of Sunday’s New York Times, Jeff Sommer has a respectful discussion of gold, citing TWS contributors Jeffrey Bell and Lewis Lehrman. Sommer captures the gist of Lehrman’s argument—that “a gold standard would require the government to balance its budget and its current account,” and that “it would have made it impossible to accumulate the enormous private-sector debt load that led to the financial crisis of 2007.” He quotes Lehrman: “The debts in the American banking system that were amassed simply would not have been feasible if you had direct convertibility of currency into gold.”
So when we get through the debt ceiling negotiations, and as Republicans continue to focus on the big changes that need to happen in fiscal and tax policy, some of them might want to turn their attention to the third leg of the economic stool—monetary policy. And there the case for gold—a case that was obscured for a while by the performance of Paul Volcker and (for a time) Alan Greenspan at the Fed—is increasingly compelling, both substantively and politically.
It all fits together.
In an important piece in today's Wall Street Journal, Lew Lehrman explains the connection between monetary and fiscal policy—fiscal policy will almost inevitably tend toward deficits and debt if the monetary authorities are (virtually) unconstrained in financing that debt. Until it all comes crashing down—as it is now about to. And he suggests a solution:
Why we need a dollar as good as gold.
Since the beginning of 2009, oil prices have almost tripled, gasoline prices are up about 50 percent, and basic food prices, such as corn, soybeans, and wheat, have almost doubled around the world. Cotton and copper prices have reached all time highs; major rises in sugar, spice, and wheat prices have been creating food riots in poor countries, where basic goods inflation is rampant. That inflation is in part financed by the flood abroad of excess dollars created over the last couple of years by the Federal Reserve.
Freshman Wisconsin senator Ron Johnson, one of the most promising of the new wave of Tea Party-allied Republican legislators, was chosen to give the Republican radio address, delivered just after President Obama’s weekly radio offering, on Saturday, January 29. This was a notable assignment for a freshman because, for a party not occupying the White House, the weekly radio address (often billed as a “response”) is customarily seen as representing the views of the national opposition party as a whole.