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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. However, judging by the reaction with which many Republicans
have greeted the idea,
one would think that the platform might as well have called for the return of slavery.
The fact
that so many supposed conservatives liken a belief in a gold
standard as the monetary equivalent
of membership in the Flat Earth
Society shows just how far the American public has
come from a true understanding of how money works
within an economy. But,
if there were a parallel to be made between gold enthusiasts and
flat earthers, then it should strike
many as curious that the world's top central bankers, who can be seen
as the equivalent to the most
advanced astronomers,
continue to hold so much gold in their vaults. If gold were so obsolete, why would these
bankers hedge their positions?
The general
idea among most economists is that gold would be a
step backward for our modern monetary system --
the equivalent of trading
in an automobile for a horse and buggy. However, paper money is not new. It's been around for centuries,
and has been tried many
times, on many continents. But every
time it has been used, it has led ultimately
to economic disaster.
At the time of America's founding, the uses and abuses of paper
money were well understood. The Founding Fathers could have empowered the Federal Government to print paper money, a power enjoyed by
the Continental Congress under
the Articles of Confederation. However,
the Constitution represented an improvement
on that system. The framers,
having just experienced the horrors of the
Continental currency (which
had been used to finance
the War of Independence) opted
to limit Federal monetary powers to coining money, which for legal tender purposes they defined as gold and silver.
As a result
of that wise choice, our national economy thrived, and eventually became the richest on earth. In contrast, since the time that the standard was abandoned in 1971, America has become the world's largest debtor nation and is now teetering on the brink of financial ruin. It's ironic
that gold standard critics
look back to Nixon's decision
to close the gold window as proof that the standard does not work. In reality, it was precisely because the gold standard was working so well
that Nixon felt he had no choice
but to abandon it.
In 1971, adherence to the
gold standard meant the Nixon administration faced a politically difficult decision. Big increases in government spending associated with the Great Society
programs, the war on poverty,
the Vietnam War, and the Space
Race, resulted in large deficits
(by 1971 standards of course). This led the government to print lots of
money, thereby hitting Americans with large doses of
inflation. As a result, general
prices had by then tripled from the levels seen in 1932. But the price of gold had been held at 35 dollars per ounce. This led America's foreign creditors to exchange their paper dollars for gold (It was illegal for American citizens
to do likewise). This created
a drain on our gold reserves,
and if something were not
done, it was likely that
the U.S. would lose all
of its reserves.
Staying on the gold standard left
the government with only two options. One was to devalue the dollar and raise the price of gold
consistent with the increase
in the CPI. That would have required
a gold price of over 100
dollars per ounce. Alternatively,
the government could have
removed the excess
dollars from circulation, bringing
consumer prices back in line with
35 dollar gold. In other words,
the choice was devaluation or deflation. Neither was politically
appealing, and both would have brought deficit spending to a halt.
The gold standard forced the government to responsibly confront irresponsible fiscal policy. At first Nixon tried devaluation, but the amounts were far too small to stop the gold drain. As an escape hatch, he instead
abandoned the gold standard (although
he said that the move was temporary). Without this "relic", government could continue to
finance its spending with ever larger
deficits without losing any more gold. So instead of devaluation or deflation, we chose inflation instead. Many consider the impossibility of
running perpetual deficits
under the gold standard as proof of its unsuitability to the modern
economy. As I see it, this is
precisely why the gold
standard is so desirable and so badly needed today.
Proponents of the centrally planned pump-priming, deficit-spending welfare state see the gold standard as the enemy
of a healthy economy. However, if you believe in individual liberty
and limited government, then the gold standard is your best ally. Had Nixon made a more responsible
decision, the initial pain might
have been worse, but we would have ended the decade in much better shape. And had we stayed
that course, our nation would be far wealthier today as a result. We would
not have been enabled to bleed
away our wealth through two generations of deficit spending.
Many people also look badly on the gold standard because
it prevents central banks from using
monetary policy to manage
the economy. This, of course, may
be its greatest attribute. Under a
gold standard, the free market determines
money supply and interest
rates. Under our current
system of paper money a few politically
connected bankers make those determinations.
The results have been disastrous,
with the recent housing bubble and financial crisis being just the latest iterations.
In a market economy, prices must be discovered by supply and demand. Interest rates, which can be
described as the price of
money, are arguably the most
important prices of all. The only
way to get it right is to let the market do its work. Empowering politically motivated central bankers to fix the price instead is a recipe for disaster. Unfortunately, we have now all had a good taste, and a return to the gold standard is the only way
to refresh the palate. I hope the Republicans have the stomach to see it through.
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