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The Gold Standard gets another look

- Peter Schiff - Euro Pacific Capital

This article by Mr. Schiff would seem to have been plagerized from a first year economics student who was about to flunk out, so shoddy is his reasoning. To begin with, it is not a litmus test among conservatives that they must be in favor of a gold standard; but rather it is the belief of Libertarians that gold and only gold makes for sound money.

Mr. Schiff correctly points out that the use of paper money has led to economic disaster time and time again. Unspoken is the fact that using gold as money has not saved the nations that used it from the very same fate, ancient Rome being but one example.

The author then makes a very important point, though i doubt he realized it and it is that the framers of the Constitution decreed that only gold and silver be legal tender. That is to say that just like paper, gold and silver are fiat currencies. And just like paper which can be abused by its over-issuance, money based on gold can be abused by arbitrarily changing the amount of gold equalling a dollar. Indeed, America saw that happen several times when using a gold standard.

Mr. Schiff then makes the statement that it was precisely that wise choice by the framers that led to a thriving economy. That is a huge leap of faith with absolutely no logic behind it. There were a number of factors that led to America's prosperity, none of which had anything to do with what was being used as the coin of the realm. The most important factor leading to America's prosperity is that it made things that the rest of the world wanted to buy. For the most part it did not run up large trade and budget deficits. But it certainly did so in the years leading up to 1971 and that is what led Nixon to sever the last remaining link to gold....As for his claim that neither devaluation or deflation was viable politically, i would remind Mr. Schiff that Hoover got himself elected promising to bring back the 5 cent cigar.

The author claimed that Nixon chose inflation and that is true. But by his own admission, under the gold standard, prices had tripled during its final 38 years. So, Nixon was really choosing to continue along the same path. And he chose to do so because America was engaged in both a hot and cold war at the time and if the nation was to prevail, gold would have to go. It was just too limiting. Schiff sees this limitation as being a good thing for the fiscal discipline it imposes. But in truth it is not gold that imposes that discipline. As we know, trade and budget deficits were the order of the day during the final years of the gold standard. And as we are finding out yet again, running up huge deficits no matter what we are using for money is a prescription for disaster. What matters is having fiscal discipline; that is living within one's means. It can be done using paper or gold just as one can run up debt using either. It is the discipline that matters, not what is being used as money.

If paper does have an advantage over gold, it would be the added flexibility it provides. That is to say that it enables the government to raise an army should it find itself being attacked by a foreign enemy or to provide relief to victims of natural disasters.

The long and short of it is that no matter what is being used as money, fiscal discipline is what keeps it sound, for in truth, all money is fiat and there is no escaping that fact.

Commented 4256 days ago

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Beginning of the headline :As Republicans convene in Tampa to nominate Mitt Romney and hammer out their party platform, one of the planks that could attract the most attention is the Party's official position on the gold standard. As it is now being considered, the platform stops short of recommending a return to the gold standard, but does advocate a commission to consider the possibility... Read More

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