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Our Economy Needs A Golden Anchor
By Jack Kemp. Mr. Kemp, co-director of Empower America, was the Republican vice-presidential nominee in 1996.
How many more dashed hopes and false recoveries must we experience before politicians and monetary authorities accept the fact that our inability to manage fiat currencies is causing the global economic slowdown? They keep waiting for interest-rate reductions to kick in, yet more than six months after the Fed began lowering rates the economy continues to weaken. Waiting for the recently enacted tax cuts to provide "stimulus" will prove futile as well. The economy does not suffer a lack of consumer demand, and more money in people's pockets will not revive the supply side of the economy.
Unprecedented Experiment
Ronald Reagan once said he knew of no great nation in history that went off the gold standard and remained great. Since Aug. 15, 1971, when the U.S. ceased to redeem dollars held by foreign governments for gold, we have put that thesis to the test. For the first time in human history, not a single major currency in the world was linked to a commodity. Economist Milton Friedman called the situation "unprecedented" and said it is "not a long-term viable alternative." "The world," he said, "needs a long-term anchor of some kind."
In the short term, at least, he was vindicated. In creating a world monetary system of floating fiat currencies with the stroke of a pen, President Nixon touched off world-wide inflation that lasted through the '70s and early '80s.
Yet America recovered to preside over the demise of world communism, and overcame the rising inflation and unemployment of "stagflation" to enjoy an unparalleled 18-year economic expansion. Today, the U.S. is at the pinnacle of its power and enjoying its greatest prosperity ever.
Were Messrs. Reagan and Friedman wrong? I don't think so. If the U.S. has so far come out on top in this experiment, it is only because other countries' economies have suffered even more from floating currencies.
Once the U.S. government ceased redeeming gold at $35 an ounce, its price quadrupled on world markets to $140 to reflect the dollar's diminished value. By breaking the gold link, the Nixon economic team forced the unwanted liquidity pouring out of the Fed -- which had thus far built up in the Eurodollar market and the portfolios of foreign central banks -- to remain inside the U.S. economy where it would manifest itself in price inflation. Robert Mundell was the first to predict, in January 1972, there would soon be a dramatic rise in the price of oil, with general inflation to follow.
Where the rest of the economics profession blamed the Arab oil-producing states for quadrupling the oil price in 1973, Mr. Mundell and those supply-siders who followed his intellectual lead knew that gold's quadrupling had led the way. Tax rates rose through "bracket creep," capital formation stopped in its tracks, and it soon took two workers to produce the same income that one had brought home before the experiment. The stagflation that had its roots in leaving the gold standard was compounded when Congress and three different presidents tried to fight it with wage and price controls and high marginal tax rates.
But discretionary monetary policy is Janus-faced, and instead of too much liquidity in the world economy we now have too little. Deflation began in 1996 when the Fed tightened monetary policy to combat some inflation it had created attempting to offset the economic drag of the Clinton tax hikes. A rising dollar then caused the dollar pegs of emerging economies to snap, set off the Asian, Brazilian and Russian economic meltdowns, and caused the price of oil and other commodities to collapse. Oil producers took a two-year holiday from drilling, which in turn created an oil shortage and drove energy prices sky high.
Now, the energy-price hikes are working their way through the economy and are misconstrued by the Fed as inflation. Once again, central bank errors in the discretionary management of floating fiat currencies have put the entire world economy at risk.
The Fed has cut interest rates 275 basis points since the start of the year, but the price of gold is still down to about $272 from $385 in 1996, having fallen $5 yesterday alone on the Fed's announcement that it was lowering the fed funds rate another 25 basis points. Commodity prices are near their lowest levels in 15 years, and the foreign-exchange value of the dollar has risen against all major currencies since the Fed began its interest-rate-easing cycle.
Without a gold standard, the Fed has no means of determining how much liquidity markets demand, and all it does by targeting interest rates is guess how much liquidity to inject or withdraw to counteract mistakes it made earlier. The Fed may be on its way to mimicking the mistakes the Bank of Japan made when it lowered interest rates to zero, all the while prolonging and deepening Japan's monetary deflation.
This is no way to manage a currency. It's obvious that we have accumulated a long series of small deflationary errors by the Fed that are dragging down the U.S. economy and helping depress world commerce. It's time to restore a golden anchor to the dollar before our luck runs out and we suffer a real economic calamity.
The Fed may yet get lucky with its rate cuts, although the Bank of Japan never did. The only certain way to end this deflation is to have the Fed stop targeting interest rates and begin targeting gold directly -- not by "fixing" the price of gold by administrative fiat as some people mistakenly characterize it, but rather by calibrating the level of liquidity in the economy, over which the Fed has exclusive and precise control, to keep the market price of gold stable within a narrow band closer to $325 than $275.
There is nothing mysterious about how gold could be used as a reference point or how a new monetary standard for a new millennium would work. It would simply mean the Fed would stop guessing how much liquidity is good for the economy and allow the market to make that decision for it. With the dollar defined in terms of gold and with American citizens free to buy and sell gold at will, the Fed would forget about raising or lowering interest rates and simply add liquidity (buy bonds) when the price of gold tries to fall and subtract liquidity (sell bonds) when it tries to rise. Markets would determine interest rates.
The paper dollar would once again be as good as gold -- no more, no less. There would be no need for the U.S. government to maintain a large stock of gold or to redeem gold and dollars on demand since people would be free to do so on their own in the marketplace. As long as the Fed calibrated its infusions and withdrawals of liquidity by the market price of gold, the world would be free of monetary inflations and deflations caused by the whims and errors of central bank governors, as was the case for more than 200 years when the private Bank of England managed the pound sterling in exactly that way.
Nothing Simpler
The good news is that this could all be done easily, if President Bush and Treasury Secretary Paul O'Neill could work out an accord with Alan Greenspan. That accomplished, I believe Britain would soon follow to make the pound as good as gold and avoid having to adopt a sinking euro.
There is nothing simpler than a gold standard, as Alexander Hamilton pointed out when he persuaded the first Congress to adopt one. Just as President Nixon took us off with an executive order, President Bush can put us back on with the stroke of a pen. It would be politically popular, as ordinary people benefit most. At Camp David in 1971, as President Nixon signed the papers, he is reported to have said: "I don't know why I'm doing this. William Jennings Bryan ran against gold three times and he lost three times."
O.K. all you economists at FR. I am not one. Help me out. Is he right or wrong?
Mr. Kemp, as usual, is right on the money (so to speak). Part of the huge problem is that Bush, and his advisors, are seen as supply-siders and they are not. This tax cut will not have any effect on the economy and when it doesn't, the New York Times and the Washington Post will call "supply-side" economics and tax-cuts dead.
"...Bryan ran against gold three times and lost three times."
Now, we're 'crucified' on a cross of derivatives.
Not nearly as resonant as "cross of gold."
Let's face it, even most free-market supporters think 'gold-bugs' are nuts; when the music stops, however, owners of gold will have something valuable, holders of paper will have memories and keepsakes!
owners of gold will have something valuable,
What about owners of manufacturing equipment and other hard assets? While the sales value of the equipment will depreciate, the manufacturing capability creates income. Hmmmm.
/john
BTTT
This hasn't been a 18 year expansion - it's only been about ten years. There was a Recession during the first Bush administration that Kemp and other Republicans conveniently forget.
Pegging the dollar to the value of gold would not be acceptable to the special interests who rule Washington DC because the federal government they feed off would lose tax revenue from phantom income caused by inflation. In addition, inflation has been a tool to ratchet taxpayers into higher tax brackets.
No Fiat currency in history has ever survived. John Law conned the King of France into it, and within a few years the currency was totaly worthless. The subsequent economic catastrophe is probably the largest reason for his son Louis XVI in losing his head. The reason is quite simple, a government with a currency not relegated to a commodity can spend as much of it as it can create. And in all of history what filth ridden bureaucrat has not spent every penny they could get. However, I do not believe the price of gold has declined beacause of monetary deflation. Rather I believe it is a response by World Government to try to prop up their currencies by dumping Gold on the market to discourage markets from investing in it. Russia, China, Australia, and probably the US (their has never been an audit of the FDR confiscated Gold in Fort Knox) have been selling large amounts of Gold on the market over the past 3 years.
Sir, you get a gold star. Click here to keep up to date with the "gold rig" that has been going on since the final days of 1994.
The answer is yes, we should anchor the dollar to gold for stability. This would force the government into responsible governing=spending---which is the problem to begin with.
Ask yourselves what hasn't worked the past 30 years since Nixon broke the dollar-gold link and you'll see that nothing else has worked, i.e., the only thing that hasn't been tried lately is a dollar-gold link.
I've been following the Mundell-Laffer-Kemp-Kudlow-Wanniski brand of economics for the past 3 years. Follow it and you'll clearly see economic impacts before they occur and do better financially. If the USA followed the Supply-Side brand of economics from the above bunch (pretty much the same stuff taught for decades as normal economics prior to the Depression), the country would be better off. I heartily recommend Jude Wanniski's timeless work, "The Way The World Works." You can order the book on Amazon or from Polyconomics---and pay more. Look for Jude Wanniski's URL (Polyconomics) found as a link on the Drudge Report home page, that's where I first found it. This is exciting stuff.
Do what you like about linking the dollar to gold but if you really want to get the American economy going eliminate the federal income tax and replace it with a national sales tax exempting food and fuel(which already has a federal tax). Of course Congress and Bush don't have the cajones to do that! Semper Fi, Mike
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.
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