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The Public Policy

It’s Not the Debt Ceiling — It’s the Dollar

By on 6.9.11 @ 6:08AM

A world standard of monetary measurement that is extremely unstable is no trustworthy standard at all.

The missing issue of this President election is monetary policy — America’s need for a stable dollar. But massive Federal Reserve credit expansion, QE1 and QE2, has forced the volatile dollar down to such a depreciated level on the foreign exchanges that, absent QE3, a reversal of trend should appear with rising interest rates by the upcoming Presidential election. 

Even more confusion pervades the public controversy over the future of the world dollar standard and its alternative — the true gold standard. The international debate focuses on the longevity of the dollar as the world’s official reserve currency. The debate stems from two, recent, contradictory events. On the one hand, an unstable dollar, caused by the Federal Reserve credit contraction of 2005-2007, led to the deflation of 2007-2009. On the other hand, the steady rise of the gold price — also caused by the subsequent Fed expansion of QE1 and QE2 — has signaled the threat of inflation. The painful economic consequences of alternating deflation and inflation have refocused the historic American monetary debate. Americans must choose between paper money and gold. The choice will be either: (1) floating paper currencies mixed with pegged exchange rates for key currencies — such as a fixed link between the paper dollar and the paper Euro; or (2) on the other hand, a non-national, neutral American monetary standard such as gold, i.e. a dollar defined in statute by a stable, fixed weight of gold. 

To choose the gold standard and a stable dollar entails an American self-denying ordinance by which to reject the privilege and the burden of the official reserve currency role of the dollar. To choose floating paper currencies with a pegged dollar-Euro exchange means continued systemic inflation and deflation, caused by unconstrained Federal Reserve and foreign central bank manipulation of the official dollar reserve system. 

Dollar instability has engendered a near-universal loss of confidence in the world dollar standard. But there is no equally liquid currency alternative for national reserves. Two generations of collapsing pegged exchange rates and unhinged floating currencies have turned trust in official dollar reserves into mistrust and contempt, not least because dollar volatility and near-zero interest rates primarily benefit the subsidized bankers and Wall Street speculators. It is their lobby that welcomes near zero interest rates and the profit-making volatility of speculative markets — the very same volatility that deranges sound, long-term business planning and destroys the savings of working families. 

A world standard of monetary measurement that is extremely unstable is no trustworthy standard at all. Take an example from uniform weights and measures, such as the yardstick, which is defined everywhere as 36”. All contracts made according to such a standard of measure are based on the agreed definition of the yardstick and thus rely on the stability of the standard. No government agency, no person, has the authority to manipulate the yardstick and to manage it toward 33” tomorrow, 39” next year. The economic consequences of such arbitrary volatility would be enough to deconstruct all industries that depend on a stable standard of measure. Floating exchange rates are like floating yardsticks. Floating exchange rates abruptly distort entire national economies, radically repricing in world trade the value of national labor and national factors of production, thereby forestalling investment and inducing intermittent inflation and deflation — boom, panic, recession, and unemployment.

Given the instability of the dollar, the once-trusted measuring rod of value in world trade, a single question should dominate the present monetary debates: Does a dollar convertible to gold at a fixed price, i.e., a dollar defined in law as a weight unit of gold, rule out systemic inflation and deflation better than the Fed manipulated, inconvertible paper and credit-based dollar of today? The answer to this question, given the historical evidence, is yes. (See Table I and discussion below.) Can any proposed further pegging of key currencies produce anything but more pegged currency financial crises of the kind we have experienced in the past? These crises include the 1971 collapse of the Bretton Woods dollar exchange rates pegged to European currencies, followed by a decade of stagflation; the collapse of pegged European currency exchange rates before the onset of the Euro in 1999; the near total collapse in 1996-2000 of pegged dollar exchange rates in Asia, along with the collapse of the Asian economies and other emerging economies. Moreover, the pegged undervalued Chinese-American exchange rate has helped to deindustrialize America and to encourage mercantilism — generating inflation in both countries. These are but four profound examples of the consequences of floating and pegged currency exchange rates that still orbit unpredictably around the unstable world dollar standard. 

Ultimately, America will choose either dollar convertibility to gold at a fixed price, or continue with the Fed run paper-credit dollar that has lost 80% of its purchasing power since 1970 (see Graph I). 

 

Graph I: The Dollar Deflated by the CPI. See Testimony, Lewis E. Lehrman, March 17, 2011 before Congress. 

On the basis of experience and evidence, Americans should make this choice. Reviewing the history of American monetary standards since the Coinage Act of 1792, an act which established the gold and silver monetary standards at the Founding of America, the evidence suggests that the classical gold standard is the least imperfect American monetary standard of our history (see Table I).

 

Table I: See John D. Mueller, Redeeming Economics (ISI Books, 2010) 

In a word, over the long run the gold standard produces the most stable dollar. This stability was the key to long-term savings and long-term investment, which underwrote the unprecedented industrial revolution and economic growth in America of the 19th century.

Of course, no monetary system can be flawless in the world of human affairs. But empirical evidence of two hundred years of American monetary history shows that the true (or classical) gold standard has the least imperfect record as a stable monetary standard, because the dollar convertible to gold acted as the stable gyroscope of rapid economic growth.

Neither the unstable, pegged exchange rate system of the 1920s, based on sterling and the dollar; nor the crisis prone, dollar-based, post–World War II Bretton Woods pegged-exchange rate system; nor especially the volatile floating-pegged dollar system of the past forty years — none of these floating and pegged exchange rate arrangements measure up, by empirical stability tests, to the classical gold standard period of American history (as Table I shows). Both American and modern history also suggest that monetary systems based on mutually convertible currencies to gold produce the most stable international price level over the long run. This is so because the classical gold standard requires prompt adjustment and settlement of deficits and debt. Indeed, the institutional discipline of gold convertibility, without reserve currencies, limits inflationary U.S. current account deficits and endless federal deficit spending — both financed by the Federal Reserve and foreign central banks which monetize the flood of dollars arising from these twin deficits. 

Page: 1 2  

About the Author

Lewis E. Lehrman is a senior partner at L. E. Lehrman & Co. and chairman of the Lehrman Institute.

Letter to the Editor View all comments (25) |

aj| 6.9.11 @ 8:09AM

Lehrman is right....dead right. Won't happen in a million years. Article is a waste of ink (bandwidth).........so is this comment.

SonOfSam| 6.9.11 @ 8:23AM

Have to disagree aj: this situation will right itself in time, whether the ObamaNazi politicians "allow" it to or not. When the dollar is finally reduced to confetti, what do you think people will do? Just lay down and die? Maybe the welfare queens on Wall Street and the inner cities will do so, but the hardworking american majority will find a way around this stupidity. WE will find new mediums of exchange, because we the people are determined to live our lives, no matter what the imbeciles in Washington and Wall Street try to cook up next

John C.| 6.9.11 @ 8:49AM

The author is correct about the gold standard but it will never happen politically. But he misses the main point in that both Wall Street along with the collusion of both Parties are corrupt to the bone. The best thing now is for the so-called conservative media to expose a Fed-gone-wild that is printing monopoly money to tank the dollar in order to once again prop up a corrupt Wall Street and to enrich the global bank gamblers.

Wall Street loves a low dollar because their outsourced overseas plants make larger profits in USA dollars. But both the left and right wing media are silent because they both have a love affair with Wall Street and these global banks.

Right now Obama is pledging to do everything he can to support socialist Greece, which is code for once again bailing out the banksters who have gambled and bought Greek debt. The Bush original Tarp bailed out the go-go banks, including many foreign banks, with the help of both Harry Reid, Pelosi, the present GOP leadership along with the approval of both the MSM & alternative media.

I expect the MSM to cover for the helicopter Ben but the silence on the talk radio is troubling. Rush and company needs to push the present GOP leadership and presidential hopefuls to expose this continuing bailout Ponzi scheme, which will certainly ensure another crash.

C Smith| 6.9.11 @ 9:43AM

Ultimately, America and the world will choose the "obvious" solution for monetary measurement. The technology has long been available; expect it to be proposed any day. No more floating exchange rates; no more identify thief; something "better" than the gold standard:

"And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name" (Revelation 13:16-17).

"... if any man worship the beast and his image, and receive his mark in his forehead, or in his hand, The same shall drink of the wine of the wrath of God, which is poured out without mixture into the cup of his indignation; and he shall be tormented with fire and brimstone in the presence of the holy angels, and in the presence of the Lamb: And the smoke of their torment ascendeth up for ever and ever: and they have no rest day nor night, who worship the beast and his image, and whosoever receiveth the mark of his name." Revelation (14:9-11).

http://popularapostasy.blogspo.....ement.html

Len| 6.9.11 @ 11:29AM

I think Revelation 18 is also germane in light of this topic, with the merchants of the earth weeping over Babylon's downfall.

http://bibleresources.bible.co.....&version=9

Fairbanks99| 6.9.11 @ 3:11PM

And this is what Obama is all about. World Government. All his efforts to destroy our freedom and economy have but one end.

NJ Tommy| 6.9.11 @ 11:21AM

Elect Romney, in 2014 the Democrats win back the Congress and in 2015 Romney allows the debt-ceiling to reach 20 trillion to avoid impeachment.

Len| 6.9.11 @ 11:25AM

I must say I am pleased that AS has presented this article, as this kind of discussion is often missing from the conservative forum, partly I think because it's not a sit down and read subject, but one that needs analysis and study. I can only hope that true conservatives, those who are for a free market, will examine the subject of the FED (central banks) and money, and see that central banks socialize the banking and money industry, and not only that enable government to surreptitiously tax the people and ruin the economy.

I offer two easy read books in PDF form to help people understand these matters....

http://mises.org/books/fed.pdf

http://mises.org/books/whathasgovernmentdone.pdf

If after reading these books one becomes intrigued and willing to delve further, then I recommend Murray Rothbard's History of Banking and Money in the US, so that people can see how the banks have worked with politicians from both sides to gain control of the government and why anyone who does not oppose the FED is suspect, or at best economically ignorant and still a problem.

On a side note, for those who support Herman Cain, please tell me why someone who supports the FED (even sat on a board), supported TARP (public statements of support), supports the federal government owning stock in banks, and thinks the FED is constitutional is a good choice for President?

Clint| 6.9.11 @ 1:06PM

Cain has monetary & fiscal baggage.

The Bruce| 6.10.11 @ 1:24AM

I really liked Cain, right up until I discovered his Fed baggage. Maybe that's the reason he's still a Tea Party favorite -- they don't know of it.

John C.| 6.9.11 @ 11:45AM

Good point about Herman Cain. The reason they do support him and other like-minded globalist Republicans is because the Republican base gets most of their information from talk radio and these very clever talking heads only present half the conservative story. They are very good about smaller government, lower taxes, less spending and regulations but unfortunately they are in bed with big-money Wall Street. They are virtually silent on helicopter Ben, crooked bankers, and free trader sellouts. We are so screwed.

Louis Jenkins| 6.9.11 @ 12:36PM

The gold standard would be best. The article speaks the truth. Funny money will not be so funny in the future.

prestonsbrooks| 6.9.11 @ 1:46PM

There will be a gold standard once there is a unified global currency. Of course, the dollar will be long gone by then.

Nunya| 6.9.11 @ 2:57PM

This article is right on the money (pun intended). :-)

Unfortunately, one has to follow the money trail to really see what's down the rabbit hole, so to speak. The Fed has transferred many BILLIONS of dollars to the owners of the Fed, and there are billions more to be made by the destruction of the dollar. The return to the gold standard will not happen while there are still billions to be made, and once the dollar is destroyed it's relatively easy to peg a new currency to gold. Unfortunately, the bankers don't make nearly as much money on the gold standard, it's easier if they control the printing press. It's a ponzi scheme, using fiat currency to steal from the unknowing, unsuspecting public--and as long as the masses are not educated about money and economics, they won't figure out the scam. The majority of people in this country don't have a clue as to what is going on.

Why do you think it was that the Founder's specified that only gold and silver were to be minted, in the Constitution? They were studied, and had seen this before in history. Every time fiat currency is introduced, it's those that control the money supply who are enriched, at the expense of the people. Every time.

"Give me control over a nations currency, and I care not who makes its laws.”
Baron M.A. Rothschild
(The Rothschild's are part owners of the Fed)

Handy| 6.9.11 @ 5:10PM

Right on Mr. Lehrman, and good comments, too.

I would like to remind everyone that it was that great monetarist, Milton Friedman, who argued in favor of floating exchange rates before 1971. This was only one of his critical mistakes during his storied career. First was the minimum wage, then federal withholding of income taxes. And, on a more technical front, his myriad equations to identify and accomplish the "Optimum Money Supply." None have worked, but he is lauded as a conservative icon.

Back to gold, and other precious metals. Mr. Lehrman argues from a utilitarian standpoint: That gold is the least imperfect basis for a currency. Fine, but there is a more compelling argument on behalf of gold. The moral one.

Money is a moral concept. It must serve three real, basic functions, however. It needs to be a store of value, a medium of exchange and a unit of measure. Fiat money serves only one of these necessities. It is used as a medium of exchange, but only so long as people will accept it. Inflation destroys fiat monetary balances, so it is not a store of value. It is also no longer a unit of measure as we can see from the article's excellent analogy about the yardstick.

But, politically feasible or not, what would happen if the US simply declared that dollars would return to a certain convertible amount of gold? If that value were too low, say $100 per ounce, everyone including foreigners would rush down to the local national bank and turn that paper in. Fort Knox would be emptied (if it isn't already) overnight. If too high, say $5,000 per ounce, people would just buy gold on the open market and turn it in to the Treasury Department for a guaranteed (paper) profit. The Treasury (that's us folks) would take huge (also paper) losses. Sure, things would adjust eventually, but there would be chaos for awhile. The point is, the calculation of the new exchange rate must be done very carefully.

Here's another way. Within the US, physical assets exist. There is a table in the Statistical Abstract that shows the value. Hope the link works.

http://www.allcountries.org/us.....gible.html

Now, it needs to be updated, but that's doable. Here's the simple way to set the exchange rate. Take the Net Stock of Fixed Reproducible Assets (Our real wealth) subtract our national debt and divide by the number of ounces the Treasury actually possesses. Voila!!! New conversion rate. And, goodbye and good riddance to the Federal Reserve Banking System.

(The notes to the table are good. Recommend reading them, if you are not familiar with the basic concepts.)

Would be interested in any thoughts from you thoughtful people.

Len| 6.9.11 @ 5:19PM

Wouldn't it be simpler to repeal the Federal Reserve Act, allowing banks to operate independently and allow them (or whoever) to issue gold and silver and thus the return to metal money happens naturally?

If the federal government chooses to coin money themselves, let it happen, but don't prevent the private market from doing so also, or rather unlikely amend the US constitution and insure that money is done through the free market, and neither states, nor the federal government may issue money, bills of credit, or whatever.

Handy| 6.9.11 @ 5:49PM

Good point Len. There should be room for private banks. My preference would be for 100% gold reserved banks.

The way I see it is that when someone deposits gold, he automatically becomes a part owner of the bank. A mutual bank, instead of a stock bank. The entry would be: Debit gold and credit reserves, as opposed to crediting liabilities (deposits).

Now, when a loan is made, the entry could be to debit reserves (equity) and a credit to a contra-asset account (loans). As payments are made, the loan account would be debited as would the gold account. The credits would be to reserves and interest income. In the case of default, the debits would simply be to loss and to the loan account. The changes in equity would show up when the trial balance is closed.

I think that is how they did it in the good old days.

Paul Nelson| 6.13.11 @ 4:19AM

I would suppose that the price should only reflect the value of federal assets, or perhaps a bit more to force the sale of those assets. Sell off those federal lands!

Mutch Moore | 6.10.11 @ 1:09AM

Lithium instead of Gold: With Nixon's nix of the gold standard in the early 1970s, coupled with exponential post WW2 economic expansion, it would be impossible for U.S. treasury even to possess enough gold to back each dollar. Not enough gold even exists. Therefore, for the sake of stability (see Lewis Lehrman's yardstick analogy) the U.S. dollar should be pegged to some other more abundant, but precious commodity. A commodity, though more abundant than gold, is not readily obtainable by rogue governments, such as lithium. Without such an outside the box maneuver, the U.S. dollar is already doomed as the world reserve currency. Just as the British Sterling (known these days as the pound) was upstaged as a world reserve currency, so will the U.S. dollar.

Mutch Moore | 6.10.11 @ 1:12AM

Enough gold in the entire world does not exist to keep up with the U.S. governments printing presses.
Let's switch to the lithium standard before the U.S. dollar relinquishes its status as the world reserve currency.

Paul Nelson| 6.13.11 @ 4:27AM

The priceof gold is an independant variable. If it were set at 20 dollars per ounce all the gold in the world would be insuffriecent to back the US dollar. If the price were set at 17 trillion dollars per ounce, I think that I have enough in a desk drawer to back all the US dollars in existance

weddingdresses | 6.10.11 @ 2:03AM

Article is very interesting,thanks for your sharing.I will visit this site.And welcome to our wedding dress online shop.

Tenn Slim| 6.11.11 @ 8:54AM

Understand the complex article not too well.
I choose Dirt, Land, real estate, with or without improvements.
Grand Pa P..... did quite well during the Great D. He owned and operated some dozen sets of farms, residences, with renters and tenant farmers. ALL were able to survive, prosper and the farms are viable to this date.
Dirt unlike paper does not decay, nor rot in the wallet. I also opt for gold possession. I still recall the Gold Coin collection Gramps had in 1936. FDR confiscated a good amount of that, but not the stability it provided
end

insanity | 6.13.11 @ 11:00AM

good to hear that

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