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Gold Standard or Bust

Fixing the dollar before it’s too late

Aug 1, 2011, Vol. 16, No. 43 • By JUDY SHELTON
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Kemp’s initiative to establish a new international gold standard was financially sophisticated​—​far more so than Nixon’s blunt decision in 1971 to renege on America’s historic commitment to redeem dollars for gold. Yet Kemp also insisted that “honest, sound, stable money is a popular, blue-collar, bread-and-butter, winning political issue.” The 1984 Republican platform referred to gold as a “useful mechanism” for aligning Federal Reserve monetary policy decisions with the goal of price stability. Citing the domestic need for “real economic growth without inflation” and the benefits of a stable dollar internationally (“commodity prices which change only when real production changes”), the plank combined political appeal with sound economic reasoning.

Could such a proposal find resonance with voters today? Americans are more cognizant now than in the 1980s of the inverse relationship between the spot price of gold and the perceived value of the dollar. Far from inclining toward naïve provincialism or embracing rigid dogma, the growing number of citizens who purchase gold​—​in physical form, or through exchange-traded funds​—​testifies to increasing savvy. Tired of falling for the ruse of putting dollars into savings accounts at near-zero rates of interest, many opt to purchase Treasury Inflation-Protected Securities to avoid getting burned by dollar debasement.

Which raises the question: Why should we have to game the future value of our own currency? Why can’t we just have money that works?

Frustration over the arrogance​—​and ultimate price tag​—​of fiscal stimulus is now spilling over into its monetary counterpart. The passive role originally stipulated for the Fed has morphed into one of overwhelming dominance of the economy, even as the Fed’s fundamental mission of preserving the purchasing power of the dollar has been subordinated to papering over fiscal failure. The fact that legislation has been introduced in 13 states to allow gold and silver to function as legal tender indicates broad dissatisfaction with the Fed’s stewardship of the dollar.

Anyone who believes that the effort to reaffirm a gold link for the dollar is politically quixotic was not paying attention when Senator Jim DeMint questioned Fed chairman Ben Bernanke at a hearing earlier this year. Making reference to a 1981 proposal by Alan Greenspan, published in the Wall Street Journal, that the Treasury issue five-year notes payable in gold or dollars, at the option of the holder, DeMint asked: “Have you given any thought to the idea of issuing bonds payable in gold that would begin to create some standard for our currency?” Bernanke demurred, observing that a gold standard was no “panacea” yet also conceding that “it did deliver price stability over very long periods of time.”

One could say, of course, that a balanced budget is no panacea either​—​but it imposes needed discipline on fiscal decision-making. In the same way, monetary policy needs some discipline to prevent the dollar from being the default mechanism for enabling government mismanagement. Gold convertibility would signal that we intend to maintain the integrity of our currency. It’s all about trajectory and confidence; sound money makes it real.

Judy Shelton, author of Money Meltdown: Restoring Order to the Global Currency System, is a senior fellow at the Atlas Economic Research Foundation and co-director of the Sound Money Project.

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