"(Lewis) Lehrman had in mind a traditional gold standard, restoring dollar convertibility into gold, although he also proposed changing Federal Reserve institutional arrangements, prohibiting open market operations and making the discount rate a penalty rate." -- from "Reflections on the Gold Commission Report," by Anna J. Schwartz, 1987
The 2012 Republican Party platform observes: "President Reagan, shortly after his inauguration, established a commission to consider the feasibility of a metallic basis for U.S. currency," referring to the Gold Commission. It goes on to "propose a similar commission to investigate possible ways to set a fixed value for the dollar." This provision elicited observations carried by four of the most prestigious financial or political publications in the world -- the FT, the Wall Street Journal, Forbes.com and the National Interest online, as to how the gold standard is going mainstream.
Indeed it is. And that brings renewed pertinence to the record of the original Gold Commission, assembled under gold-opponents serving in the Reagan administration. Anna Schwartz, executive director of the Commission -- and a self-described opponent of the gold standard -- wrote a thoughtful and informative backstory on the Commission's work entitled "Reflections on the Gold Commission Report" -- published in Money in Historical Perspective, edited by Anna J. Schwartz, University of Chicago Press, 1987. Dr. Schwartz, who lived a long and distinguished life of academic scholarship, departed from this life last June.
Some of her more noteworthy reflections on the Gold Commission Report:
Sponsors of a commission may have a variety of objectives. One objective may be to focus public attention on a problem that they regard as important. The sponsors may have a solution for the problem but lack the support for its implementation. One indication that the sponsors of the Commission set great store by this objective was their insistence that meetings of the Commission be open to the public. They objected strongly to the first closed meeting; thereafter, all meetings were open. Another objective may be to educate the public. Commissions can perform a genuine public service by collecting and summarizing facts and opinions on a national problem. They may make old ideas respectable, publicizing them and giving them legitimacy. Ideas that may have been limited to special groups may be given wider currency by a commission’s study. Commissions may also serve to develop a consensus. The sponsors of the Gold Commission may well have had all these objectives in mind.
By the time the Commission had concluded its sessions, it was clear that the pro-gold group consisted of an awkward coalition of Congressman Paul and two of the public members, Lehrman and Costamagna. It was awkward because neither of the latter supported the conception of the monetary system that Paul advocated. Lehrman had in mind a traditional gold standard, restoring dollar convertibility into gold, although he also proposed changing Federal Reserve institutional arrangements, prohibiting open market operations and making the dis- count rate a penalty rate. As for Costamagna, his sole concern for the present was to provide the market with U.S.-minted bullion coins.
The majority rejected the proposal that the United States should fix the price of gold and restore gold reserve requirements for the Federal Reserve. Except for Lehrman, no member of the Commission advocated such a course. They rejected a return to fixed exchange rates and endorsed a floating exchange rate system. Again, only Lehrman held a brief for fixed exchange rates.
Volume 2 of the Report is described as “annexes.” The bulk of the volume is occupied by a minority report.
The existence of a minority report was not revealed to the Gold Commission until a few days before the final revision of the Report that was intended to represent all views. The minority report was prepared under the direction of Congressman Paul and mirrors his views rather than those of Lewis Lehrman who endorsed it. Arthur Costamagna gave the minority report a qualified endorsement.
The world’s needs a twenty-first century money. Ironically, that money has been around for a long time – since virtually the beginning of civilization.
Back in 2006, former Cleveland Fed President Jerry Jordan wrote an essay entitled: “Money and Monetary Policy for the Twenty-First Century.” Jordan began his essay: Modern market economies would not be possible without financial stability. However, as events around the world in the past decade demonstrated, financial institutions are not sound and payments systems are not efficient when the value of money is not stable. Decades of experience have demonstrated that prosperity is undermined when the value of money fluctuates. Stabilizing the value of money has become the primary, if not the sole, objective of central banks around the world.”
Well, the truth of Jordan’s first premise seems self-evident. What is less evident is whether in recent years that central bankers have seen their primary objective as “stabilizing the value of money.” Their primary objective seems to be to stabilize the banks.
But the need for a radical restructuring of the monetary system continues. Recently. Chatham House released a report which regrettably concluded: “Although the discipline a gold standard imposes on monetary policy may have been helpful in limiting the reckless banking and excessive debt accumulation of the past decade, the rigidity of a fixed price for gold would likely have been a serious handicap with the onset of the financial crisis when a much more flexible monetary response was required.”
Flexibility, of course is what got governments and central banks into this problem. They has so much flexibility that they thought the value of money was elastic. In response to the Chatham House study, The Economist’s Buttonwood columnist wrote a thoughtful essay that noted “that the persistent rise of gold over the last decade must be telling us something, and central banks should at least take note.” Well, more than central banks should take note.
Let’s face it, monetary policy is not a walk in the park. Thinking about it concentrates the mind. You can’t edit it down for twitter or post it on your Facebook wall in a couple of sentences. It takes thought, study, reflection – qualities in short supply these days.
Former House Speaker Newt Gingrich and Congressman Ron Paul have drawn predictable criticism for suggesting that American might return to the gold standard. “Paul’s baseline obsession is with currency,” wrote the New Yorker’s Nicholas Lemann recently – as if obsession with currency were a criminal offense instead of a laudable attribute.
But elsewhere in the world, reality is already ahead of such short-sightedness...and ahead of the central bankers. TIME Magazine reported on the economic problems faced by Iran: “The value of the currency, the rial, has dropped by nearly half against the dollar in the past month, the price of meat has tripled to nearly $30 per kilo, and the price of tea has doubled. In recent weeks, Iranian companies have defaulted on payments for thousands of ton of rice and grain. The Iranian government, in desperation, is now proposing barter arrangements with some companies, particularly in India, where oil and gold would be traded for food products to bypass sanctions.”
Necessity is the mother of invention – or perhaps necessity is the mother of reinvention. As Ludwig von Mises wrote in his introduction to The Theory of Money and Credit, "Like all human creations, the gold standard is not free from shortcomings; but in the existing circumstances there is no other way of emancipating the monetary system from the changing influences of party politics and government interference, either in the present or, so far as can be foreseen, in the future. And no monetary system that is not free from these influences will be able to form the basis of credit transactions. Those who blame the gold standard should not forget that it was the gold standard that enabled the civilization of the nineteenth century to spread beyond the old capitalistic countries of Western Europe, and made the wealth of these countries available for the development of the rest of the world.”
So too might it be in the Twenty-First Century. The gold standard – thy time has come again.
Politicians need demons. It’s easy to blame one’s opponent for creating all the evils of the world, but not always convincing. So politicians and voters seek a more convenient and/or credible target for their frustration.
Writing recently in USA Today, the Rev. Henry G. Brinton noted that “demonization helps us when we are fighting Hitler but hurts us when we are choosing the next president. So, like addicts who begin their recovery by honestly admitting that they have a problem, we need to accept the fact that we are drawn to a dualistic world view. It is a powerful and deeply rooted approach to life, but not the only one we can take. If we resist the temptation to see everything as good vs. evil, we will discover that there are no true devils in the race for the White House.”
According to the Financial Times, France’s Socialist candidate for president, Francois Hollande, has found his enemy – and it is global banks: “My true adversary does not have a name, a face, or a party. He never puts forward his candidacy, but nevertheless he governs. My true adversary is the world of finance.”
Politicians can’t blame themselves – or least they can’t blame their own party (unless of course they are engaged in a vicious primary battle) so they need to look elsewhere for the cause of the world’s financial problems. Though the current mess may have started out as a problem with housing finance, it has clearly spread like cancer far beyond the original malignant growth.
Writing in the Financial Times, columnist Philip Stephens recently wrote that the crisis in the financial world has exposed the weaknesses of the political system: “Governments have ceded power to mobile capital, to cross-border supply chains, to instant global communications and to rapid shifts in comparative advantage. Citizens expect their politicians to protect them against the insecurities of the age – whether economic or physical. Yet governments no longer have the tools to provide such a shield.”
Maybe it is time provide such a shield – by using a long-recognized monetary tool.
Forbes Editor in Chief Steve Forbes wrote recently of the U.S. Republican presidential race – that Mitt “Romney should also steal a page from Ron Paul and, by echoing the words of John Kennedy, declare that the dollar should be as good as gold.”
Gold is better than blame.
In the ten days between the South Carolina primary won handily by yet another GOP presidential candidate and the next primary to be held on January 31 in the Sunshine State, economic and political winds were frenzied.
The IMF declared that there is a greater threat of a second, double-dip recession. As reported by the Washington Post, the IMF said,
Meanwhile, Forbes columnist Agustino Fontevecchia, reported on the first-ever, post-FOMC press conference during which, “…Fed Chairman Ben Bernanke recognized his zero-interest rate policy hurts savers. Bernanke made it crystal clear that his intention is to make people spend, practically telling savers to get out there and invest. The Chairman also said QE3 is still on the table, while he disregarded Republican criticism of the Fed as ‘political rhetoric.’”
As to political rhetoric, this week saw two more debates—the 18th and 19th—as the four remaining GOP presidential candidates tried to distinguish themselves from one another and from the incumbent president. Gingrich and Paul—representing half of the Republican field—found a bit of common ground on the economy and monetary policy during the January 23rd debate. Gingrich even called for the establishment of a gold commission, naming Lew Lehrman and Jim Grant as co-chairs.
In an exclusive interview with Lou Dobbs following Mr. Gingrich’s call for a 21st century gold commission, Mr. Lehrman pointed out the failures of the Federal Reserve System, including the inability of the Fed to maintain dollar stability over the long run. Indeed, the average wage-earner has seen the value of his wages erode by 85% since 1971 when the last vestiges of a gold-backed dollar were eliminated unilaterally by President Nixon.
Later in the week, David Malpass connected the economic rhetoric of the week with the political maneuvering, consistent with Lehrman’s view that “Obfuscation on the dollar works fine for Wall Street, which reaps billions in profits from the Fed's unstable dollar policy.” Malpass argued that, “Dollar weakness doesn't work at all for economic well-being. The corollary to the Fed's policy of manipulating interest rates downward at the expense of savers is declining median incomes.” Malpass continued, “When the currency weakens, the prices of staples rise faster than wages, hurting all but the rich who buy protection.”
All the while, Mr. Obama in his annual State of the Union Address used political rhetoric artificially (and unnecessarily) dividing the nation between the haves and the have-nots—seating Warren Buffett’s secretary next to Mrs. Obama. What Obama, the Fed, and other academic and policy elites have failed to understand, however, is that their cheap-money policies have widened—and continue to widen—the very economic inequality which they rail against.
At the conclusion of the week, New York Times best-selling author and Wall Street Journal columnist, Peggy Noonan described this political season as the “most volatile and tumultuous…of our lifetimes.” She went on to say that “…it's left almost everyone…scratching their heads: what the heck is going on? We are in uncharted territory.” Noonan’s account of politics—“volatile,” “tumultuous,” and “unchartered territory”—could have just as easily been describing recent economic events.
One question remains, however, in the final hours before the Florida primary: what policy (or policies) will ease both our economic woes and the political unrest?
Lew Lehrman convincingly reasons that the gold standard is a major component in answering this very question. In a recent interview, Lehrman argued
If ever there was a time for a president to restore the confidence of the American people in their government, it is now.
If the race for the Republican presidential nomination in 2012 proved anything, it is that the implausible can become plausible, and the plausible can as quickly become implausible. Consider conductor Alan Gilbert who recently won kudos for his executive leadership in an implausible circumstance.
Gilbert recently stopped a performance of Mahler’s Ninth Symphony in mid-symphony. The cause was an annoying cellphone set to perform “Marimba” as an alarm. Gilbert decided not to compete with a cell phone. Apparently, one musical score is enough for the New York Philharmonic. As one concertgoer-blogger reported:
The phone kept ringing, “Finally, finally, finally, mercifully, it stopped,” wrote blogger Max Kinchen.
Compare the cell phone situation to that of a central banker, trying helplessly to silence the persistent and repeated alarms from the financial sectors about international monetary policy and currency crises. The alarm keeps going off. The economic audience hopes the alarms will stop, but in the silence, they clearly keep ringing.
Who will have the courage to say “stop” and reset the monetary system? Calling Alan Gilbert, anyone? Cue the applause.