Gold Standard or Bust
Fixing the dollar before it’s too late
Aug 1, 2011, Vol. 16, No. 43 • By JUDY SHELTON
The connection was made last November when former Alaska governor Sarah Palin called for a stable dollar to put our economy back on the right track. “The Fed’s pump priming addiction has got our small businesses running scared,” she noted, “and our allies worried.” Robert Zoellick, who heads the World Bank, lamented in a Financial Times op-ed that global consternation over the Fed’s quantitative easing was prompting talk of currency wars. Zoellick proposed that the global monetary regime be reformed to spur economic growth—and suggested that any new system should “consider employing gold as an international reference point.”
Though it’s odd to think that the objectives of the Tea Party conservatives for whom Palin speaks might coincide with the concerns of the global elite who read the Financial Times, there is a thread that unites them. It’s the realization that the world economy cannot take another devastating boom-and-bust cycle.
What gold brings to the monetary table is discipline. If individuals suspect that money is being issued in excess of levels warranted by legitimate economic needs and growth prospects, they can exchange their currency holdings for gold at a pre-established, fixed rate. Gold convertibility ensures that the money supply expands or contracts based on the collective assessment of market participants—as opposed to the less-than-omniscient hunches of central bankers. Gold provides a self-correcting mechanism for irrational exuberance; as credit begins to flow too freely, as equity values or commodity prices appear frothy, the astute observer at the margin cashes out in gold. Monetary central planning gives way to the aggregate wisdom of the free market.
A gold standard brakes runaway government spending. It allows individuals to defeat governments that dilute the value of money. A gold standard provides citizens with “a form of protection against spendthrift governments,” as the economist Ludwig von Mises put it. “If, under the gold standard, a government is asked to spend money for something new, the minister of finance can say: ‘And where do I get the money? Tell me, first, how I will find the money for this additional expenditure.’ ”
Under a gold standard, money regains its primary purpose as a vital tool of free markets instead of serving as a corrupted instrument of government policy. Genuine economic growth—as opposed to the money illusion of artificial wealth reflected in bloated equities or housing prices—is no longer sacrificed to monetary policy encumbered by the fiscal failures of government.
We have learned from the European Union’s experience with the euro this past decade that major benefits can be derived from eliminating price distortions caused by fluctuating currencies; unfortunately, the lack of fiscal discipline among participating eurozone nations now threatens the entire system. As with the dollar, the ability of eurozone governments to borrow money to cover nonproductive deficit spending—and then convert government-issued debt obligations into a component of the monetary base—undermines the credibility of the currency. Robert Mundell, the Nobel laureate in economics who laid the theoretical groundwork for the euro, suggested recently that the world could move forward to a better monetary system by tying the U.S. dollar and the euro to each other and also to gold. “Gold is nobody’s liability and it can’t be printed,” Mundell told Bloomberg. “So it has a strength and confidence that people trust.”
Mundell was the intellectual god-father of supply-side economics, usually remembered as advocacy of low taxes but equally a movement that favored hard money. He also mentored Jack Kemp, the pro-growth Republican congressman and vice-presidential candidate who championed the cause of making the dollar “as good as gold.” Kemp made the case for restoring sound money an integral part of his policy agenda; even as he extolled the benefits of international exchange-rate stability as the logical underpinning for free trade, he was able to bring home its relevance for the American public. “Let’s not forget that what is true of nations is also true of individual workers, savers, investors, businesses, and families.”
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