The True Gold Standard (Second Edition)
This December will mark the 100th anniversary of the opening of the Federal Reserve. As we have seen in recent years, there is no institution of economic policy with more power and less transparency than the Fed.
The Fed has almost never been held accountable for how it has performed. We have simply assumed that we need a central bank and trusted those in charge to make the right decisions. But the Great Recession may have changed that.
Congressman Kevin Brady, R-Texas, has proposed creating a bi-partisan Centennial Monetary Commission (H.R. 1176) that would engage in a formal performance review of the Fed, exploring both how well it has met its stated goals and what those goals should be. This is an excellent, and long overdue, idea.
The Fed itself emerged from a National Monetary Commission created in the aftermath of the Panic of 1907 to examine the problems with the previous banking system. Scholars who have compared the Fed's record to the National Banking System that it replaced have found the Fed's performance to be worse.
In its first two decades, the Fed generated a wartime inflation that led to a sharp, though short, recession in 1920-21, and then contributed to the 1920s boom that ended with the onset of a recession in 1929. The Fed then allowed the money supply to fall by 30 percent over the next three years, turning that recession into a very deep depression that would last for another decade.
Since World War II, the Fed's record has been one of consistent inflation that has led to a series of recessions, culminating in the housing boom of last decade and the Great Recession from which we are still struggling to recover. That inflation has also distorted the price formation process, making it more difficult for entrepreneurs to use those prices to create wealth.
... "When intellectuals of such distinction can state ... that 'There's nothing that's obviously economically problematic' about a theoretical near trillion dollar discrepancy between the intrinsic, or market, value and nominal value of U.S. legal tender it would appear that cleverness is triumphing over motherwit in Washington," writes Ralph Benko about Gagnon on his blog The Gold Standard Now
The platinum coin trick does not pass the laugh test; this does not mean, however, that the idea is going nowhere. Unless Congress acts to prohibit the coins from ever being struck it is always possible the president, any president could keep one or two up his sleeve just in case. It's bad policy, bad politics, and bad economics. It should be rejected out of hand and the White House should make clear it has been.
There's a new gold rush going on.
Presidential candidates have sponsored gold events, and some like Rep. Ron Paul have talked about returning to the gold standard, a favorite issue of Washington groups. Nearly half of America's voters and 79 percent of Tea Party voters are in favor of the gold standard. Also, gold prices are near all-time highs.
And now gold is king on TV, prompting some gold standard proponents to herald the Discovery Channel show Gold Rush as a sign that Washington should hurry up and get on the gold bandwagon.
With 4.5 million viewers, Gold Rush has recently been the No. 1 cable show at 9 p.m. Fridays.. And it's tops among men across cable and network TV.
Jeff Bell, of the pro-gold standard American Principles Project, tells us, "Gold Rush reminds me of the presidential race. If we don't get returning to a gold-backed dollar onto the GOP agenda, the party will not be able to offer any solution to the monetary/banking crisis that is the chief source of economic stagnation."
Gold Rush star Todd Hoffman also sees the future in gold. "Paper money is just a promise from our government. The hard-working American deserves better than that; they deserve to have their cash backed by gold. It wouldn't be an easy transition, but it would be the only economy in the world that would be solid and stable."
The show follows the pattern of recent hit reality shows. Says Discovery: "In the face of the economic meltdown, determined men risk everything to strike it rich mining for gold in the wilds of the far north. Todd Hoffman of Sandy, Oregon, along with his father, lead a group of greenhorn miners in search of the American dream and a new frontier."
The dollar just ain't what it used to be.
Literally: For most of the United States' existence, the value of dollar had been tied to gold. That ended in 1971, when President Richard Nixon decided that the dollar could no longer be converted, at a fixed rate, into gold. But now, 40 years after abandoning what's known as the gold standard, fears over a falling dollar—both due to America's debt and the recent fiscal indecision of its leaders—may be giving gold, and its advocates, like GOP presidential contender Ron Paul, a new shot.
The price of gold has risen steadily for at least the past decade. At the start of July 2001, according to precious-metals dealer Kitco, the spot price for New York gold was at around $265 per ounce. In contrast, at the beginning of this month it was nearly six times that at $1,544 per ounce. And now, after last week surpassing the $1,600 mark for the first time in history, the market price of gold is close to $1,620 per ounce.
It's safe to say that the fight over the debt ceiling in Washington has had something to do with that, says Mark Calabria, senior fellow of economic regulatory studies at the libertarian Cato institute. "Underlying the dollar ultimately is faith in not just the Federal Reserve, but also faith in the fiscal situation," he says. "There really is a sense that if the United States doesn't get its house in order, it's going to debase the dollar. So, you're going to see flight to these alternatives, like gold."
While a bullish run on gold doesn't directly mean a bullish attitude toward a renewed gold standard, some economic experts suggest that it could raise the profile of such ideas, especially as trust in the dollar declines. According to Lewis Lehrman, chairman and founder of the Lehrman Institute, a research organization which advocates for the gold standard, since abandoning the gold standard, the high rate of inflation and the depreciation of the dollar have raised doubts about the stability of the current monetary system. Gold, he says, is the "least imperfect currency" out there. "The whole paper credit money system has failed to protect those who are most vulnerable--which is to say, those on salaries, wages, fixed incomes. The nimble, speculative classes on Wall Street are generally in position to keep ahead of inflation, but those who are not insiders are at a profound disadvantage and have grown poorer as a result," he says.