Ron Paul and Lewis Lehrman have been right all along, never more so than in this age of massive debt.
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THE IDEA THAT the liquidity of fiat currencies fuels growth is a myth. Quite the opposite has proved true when the record since 1971 is compared with that turn-of-the-century period when the U.S. operated under a gold standard.
Much of this history and argument is covered in a new book by Lewis E. Lehrman, a scholar, philanthropist, and longtime student of monetary policy. Titled The True Gold Standard, it is being published by his own Lehrman Institute in New York, a public policy foundation. Independently wealthy (the Rite Aid drugstore fortune), Mr. Lehrman has been a student of public policy for many years. He ran for governor of New York in 1982, losing in a tight race to Democrat Mario Cuomo. Among his many endeavors was his service on Ronald Reagan’s Gold Commission in 1981. He collaborated on the minority report titled, “The Case for Gold.”
That report might have made a bigger impact had it been issued two years earlier. Beset by the great inflation of the late 1970s, which cast early doubt on the future of the fiat dollar, Jimmy Carter acknowledged his existential political problem by hiring banker Paul Volcker as Fed chairman with instructions to restore order. That he did at the cost of a sharp but short recession. His necessary bloodletting was firmly supported by Mr. Carter’s successor, Ronald Reagan.
The Volcker fix lasted for 20 years and it looked like the fiat dollar might serve after all. But then came the big asset inflation of the 2000s, followed by the 2008 bust. This put the progressives back in power and instead of fixing the dollar, they embarked on a new social spending binge—Obamacare et al.—and ran up the government deficit to its present astronomical level. The dollar is again shaky, with inflation at times nearing the rate it was running, just over 4 percent, when Bretton Woods crashed.
Gold pretty much dropped out of the monetary debate during the 20-year dollar hiatus, but it is back now with a vengeance as prices rise and securities markets are roiled by the massive global overhang of sovereign debt.
The time is ripe for Mr. Lehrman’s new book. That’s because it goes well beyond making a persuasive case for a return to the gold standard and provides a detailed road map for how to get there. When the time comes for a new U.S. administration and Congress to seriously consider monetary reform—and it will come sooner rather than later if the Fed pursues its current course—Mr. Lehrman’s book will serve as a valuable guide.
“I submit this urgent proposal to my fellow Americans and our friends abroad because the historical evidence of the early 20th Century compels me to believe that contemporary international monetary disorder, national currency wars and inflationary impoverishment of working people the world over has again led to violent social disorder, revolutionary civil strife and vicious deflationary consequences,” Mr. Lehrman writes.
Those words might well strike a chord with Americans trying to fathom the reasons for their current mood of unease that goes beyond the obvious concerns about inflation and unemployment. The time is ripe for a reconsideration of the gold standard.
MR. LEHRMAN QUICKLY dispels the notion that there isn’t enough gold above ground to operate a true gold standard. The global stock of gold today, some 5 to 6 billion ounces, roughly approximates global population, as it has for centuries. But at any rate, nothing like the entire stock of gold is needed to operate a gold standard. That’s because individuals prefer the convenience of paper (or electronic) currency over lugging around gold coins. You don’t have to mint a huge amount of gold coins to operate a gold standard. It works this way: If the price of gold in paper money goes up, the gold standard automatically reduces emissions of paper. Conversely when the price of gold falls, more paper is emitted by the monetary authority. These adjustments maintain the value of paper, without requiring a vast supply of gold.
It is, of course, important to get the initial exchange rate between paper and gold right. The British gold standard broke down after World War I because the Bank of England tried to return to the prewar parity and thereby set the price of gold too low. It failed to take into account wartime inflation.
Mr. Lehrman’s detailed road map for a return to gold requires that the U.S. lead the way by announcing a date certain on which the U.S. dollar would be convertible to gold. Before that date, the U.S. would announce the conversion rate. This is an intricate process, particularly after the sharp run-up in the world market price of gold that has accompanied the abuse of the dollar by the Obama administration and its co-conspirators at the Fed. But Mr. Lehrman believes it is manageable and the success of past gold standards supports that belief.
To implement the standard internationally, Mr. Lehrman proposes an International Monetary Conference to work out a system of exchange rates, much along the lines of the old Bretton Woods system. The crucial difference would be that, unlike with Bretton Woods, the currencies of the conferee states would also be convertible to gold.
It is at this point, that Mr. Lehrman’s road map may get to be a bit too intricate. Rather than trying to set parities among national currencies, à la Bretton Woods, it might be better to let them do as they wished, fixing to the dollar as they come to recognize such fixing as a source of stability, just as some countries, China, for example, have with the present dollar.
Of course, that might lead to arguments such as the ones raging today over whether this or that country tried to gain competitive advantage by fixing too low. But that argument is a bit spurious, because it is by no means clear that fixing exchange rates too low yields any long-term advantages. Rather, it would appear that the U.S., not China, has been the main beneficiary of any rigging that China has done on behalf of its export industries. China’s goods have been a bargain for American consumers and China has financed the American government’s debts. During the heyday of the U.S.-China trade, the U.S. enjoyed near-full employment. The rise in U.S. unemployment occurred when a nontradable good, housing, went sour.
IT MIGHT BE SAID that a simpler approach than Mr. Lehrman’s might be the most likely way to get back to a gold standard. The Ron Paul strategy is more direct, but at the same time more subtle. In early 2011, the Texas Congressman introduced H.R. 1098, a refreshingly short (three pages) bill which he called “The Free Competition in Currency Act of 2011.” It would repeal the legal tender laws of the United State Code which give the Federal Reserve a legal monopoly on money creation.
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