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For now, everybody is terrified of rocking the boat. They sense that
things could easily spiral into crisis – currency crisis, banking
insolvency, derivatives breakdown, sovereign default, pension
insolvency, perhaps accompanied by some changes in governments
themselves. The stock market might go down.
But, the boat will probably rock itself before too long. There’s a chance that monetary reform will begin to happen as early as 2018. China and Russia are already getting ready. Judy Shelton, a well-known gold standard advocate, recently became an advisor to Donald Trump. David Malpass, another Trump economic advisor,
is known for being somewhat gold-friendly. Alan Greenspan, the most
successful central banker of the floating fiat era, has been expressing his admiration for the pre-1914 Classical Gold Standard era.
At that point, things might become very immediate and practical. Those
who wish to end the four-decade experiment in floating currencies, and
return to the gold-based system that the Western world (and the rest of
the world too) used for centuries until 1971, will have to be ready for
Game Day.
For many years, Team Gold was nowhere near ready. Indeed, the reason
that the Bretton Woods system collapsed in 1971 was not because people
decided to try something different – this was after the two most
prosperous decades of the last century — but because they didn’t know
how to maintain what they had. One of the most prominent gold standard
advocates, Murray Rothbard, openly advocated a 95% devaluation of the
dollar. In his 1962 book The Case For A 100% Gold Dollar, Rothbard said:
"Depending on how we define the money
supply- and I would define it very broadly as all claims to dollars at
fixed par value-a rise in the gold price sufficient to bring the gold
stock to 100 percent of total dollars would require a ten- to
twentyfold increase."
In that book, Rothbard actually mocked Walter Spahr, who (along with
the U.S. Treasury and Federal Reserve, including its chairman Arthur
Burns) wanted to maintain the $35/oz. parity of the time.
A little less wacky stance was held by a variety of people loosely
associated with Ludwig von Mises, who suggested a devaluation to
perhaps $70/oz. Rothbard says that Spahr expelled Henry Hazlitt from
his organization for making such suggestions. Another was Jacques
Rueff, who, in a series of writings in the 1960s (contained in The Monetary Sin of the West), recommended a devaluation of the dollar to $70/oz.
President Richard Nixon, by comparison, was practically a hard-money
saint. Attempting to fix the problems caused by the floating of world
currencies in August 1971, he put together the Smithsonian Agreement in December 1971, in which the dollar would be relinked to gold at $38/oz.
Is it OK if I blame these people, at least in part, for the end of the
world gold standard in 1971? Anyone who doesn’t assign at least some
blame here is probably deep in denial.
This kind of kindergarten mayhem isn’t really going to help with the
reconstruction of a world gold standard system, perhaps beginning in
2018. We need some serious people. Fortunately for all of us, this is
starting to happen.
I suggest that this necessary expertise has two basic elements: Why and How.
WHY: The real goal here is Stable Money – money that is stable in value. Linking the value of a currency to gold is just a practical means of achieving this goal.
It’s the best method that anyone has ever been able to find. It is also
a method, as proven over the last five hundred years of economic
history, that works pretty darn well in practice. There aren’t even really any contenders today, even in the form of a proposal. When you hear about all the variations on “stability”
proposed by economists – including “price stability” – these are
basically rhetorical masks concealing a floating currency system.
HOW: The Nixonites didn’t
actually want to create a floating fiat currency system in 1971. They
wanted to maintain the dollar’s link with gold, at $35/oz. The problem
was that they did not know how.
Oops.
They didn’t recognize
that you couldn’t have both a fixed-value system (the gold parity at
$35/oz.) and also a discretionary domestic monetary policy – the
“discretionary domestic policy” that Nixon was relying on for his
re-election in 1972. It’s a recipe for certain disaster.
If you decide to have a fixed-value link – with gold, or even with
another currency like the euro or dollar – then you need to also have
an automatic system that has no discretionary element. The purest
expression of this is today’s currency boards. Central banks in the
pre-1914 era had a similar system, although it was rather more complex
in operation than a simple currency board. (I discuss this topic in
detail in Gold: the Monetary Polaris.) Germany and Japan adopted essentially automatic processes during the Bretton Woods era.
When people have mastered the Why and the How, then they will know
exactly what they want, and exactly how to accomplish it. Today’s
arrangement will look like self-destructive madness. Sometime after the
currency reform of 2018, historians will marvel that people could have
ever been so stupid.
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