Back to the Gold Standard
The sharpest, wittiest, and most cogent financial writer today is James Grant, whose Grant's Interest Rate Observer is a must-read.
Must-read, that is, if you've got $900, which is the price of a yearly subscription. (Makes the Ricochet $3.47 a month seem rather threadbare, actually....) Although I have to say that it's worth every penny. Grant is a dazzling and astringent writer.
He's also a Gold Bug. Well, not the "new" kind of Gold Bug -- someone who's always pushing the metal as an investment -- but rather the philosophical kind. Grant thinks it's time to go back to the gold standard. As he put it in the NYTimes (hat tip to Tyler Durden's Zero Hedge), it's not really a case of "going back" to the gold standard:
“You can’t go back,” today’s central bankers are wont to protest, before adding, “And you shouldn’t, anyway.” They seem to forget that we are forever going back (and forth, too), because nothing about money is really new. “Quantitative easing,” a k a money-printing, is as old as the hills. Draftsmen of the United States Constitution, well recalling the overproduction of the Continental paper dollar, defined money as “coin.” “To coin money” and “regulate the value thereof” was a Congressional power they joined in the same constitutional phrase with that of fixing “the standard of weights and measures.” For most of the next 200 years, the dollar was, in fact, defined as a weight of metal. The pure paper era did not begin until 1971.
The gold standard, according to Grant, was an engine for economic growth:
Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it.
It was simplicity itself. National currencies were backed by gold. If you didn’t like the currency you could exchange it for shiny coins (money was “sound” if it rang when dropped on a counter). Borders were open and money was footloose. It went where it was treated well. In gold-standard countries, government budgets were mainly balanced. Central banks had the single public function of exchanging gold for paper or paper for gold. The public decided which it wanted.
Finally, a safer, simpler job for the Fed:
At the outset, the Fed was a gold standard central bank. It could not have conjured money even if it had wanted to, as the value of the dollar was fixed under law as one 20.67th of an ounce of gold.
Neither was the Fed concerned with managing the national economy. Fast forward 65 years or so, to the late 1970s, and the Fed would have been unrecognizable to the men who voted it into existence. It was now held responsible for ensuring full employment and stable prices alike.
Today, the Fed’s hundreds of Ph.D.’s conduct research at the frontiers of economic science. “The Two-Period Rational Inattention Model: Accelerations and Analyses” is the title of one of the treatises the monetary scholars have recently produced. “Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering” is another. You can’t blame the learned authors for preferring the life they lead to the careers they would have under a true-blue gold standard. Rather than writing monographs for each other, they would be standing behind a counter exchanging paper for gold and vice versa.
Grant suggests the following path to gold:
To reinstitute a modern gold standard today would take time, too. The United States would first have to call an international monetary conference. A chastened Ben Bernanke would have to announce that, in fact, he cannot see into the future and needs the information that the convertibility feature of a gold dollar would impart...
If the classical gold standard in its every Edwardian feature could not, after all, be teleported into the 21st century, there would be plenty of scope for adaptation and, perhaps, improvement. Let the author of “The Two-Period Rational Inattention Model: Accelerations and Analyses” have a crack at it.
James Grant: funny, sharp, and willing to say the unsayable: Bring Back the Gold Standard.
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Oct '10
Re: Back to the Gold Standard
@Rob: You may already know this but a monetary reform act has been written and is available to see here http://www.themoneymasters.com/monetary-reform-act/. Pass it on...
Oct '10
Re: Back to the Gold Standard
My only regret about rolling an old 401(k) over to a Silver IRA a few months ago is that I didn't do so a few years ago.
Jun '10
Re: Back to the Gold Standard
The gold standard will do nothing for a government unwilling to control spending. Given the nature of lunacies such as QE2 the government could always inflate currency relative to the value of gold, i.e. today dollar buys 1/100 of an ounce and tomorrow 1/200 of an ounce of gold. Presto! you have just doubled the money supply. The required political machinations might be more difficult to do this but it would not be impossible, as the gold-to-dollar ration would still be be set by fiat. I think what we are looking for in the a gold standard is a measurable and easily understood form of political discipline by way of monetary policy, A.K.A. a magic bullet. It may not be wise "to stand athwart of history" demanding the anachronistic.
Aug '10
Re: Back to the Gold Standard
I'm a huge fan of Grant and hard money policies for all the reasons you describe, but there are problems he's glossing over. For example, Winston Churchill, as Chancellor of the Exchequer, took Britain back to the gold standard in the 1920's and caused a near depression. If you have one nation that does it alone, the inevitable soaring currency value will wreck exports.
Also, there are times when the money supply needs to be increased and there's not enough gold to go around.
Not just gold, but any hard asset - like silver - will accomplish the same thing; which is, tether the money managers to reality.
May '10
Re: Back to the Gold Standard
France almost single-handedly caused the Great Depression due to its actions on the gold standard. Smart monetarists (such as Milton Friedman) have no use for the it. Let the market determine the value of floating currencies.
Aug '10
Re: Back to the Gold Standard
I've always been suspicious of the gold standard since it feels, in my non-economist mind, that the value of gold can be manipulated like any other currency, and so you're just trading one set of problems for another.
Re-watch the episode of Milton Friedman's Free To Choose series where Dr. Friedman discusses the causes of the Great Depression. The gold standard isn't a fix if the government manages its gold reserves poorly.
I've often thought that a constitutional amendment that sets "the interest rate" in stone would be a better way to achieve the same effect. It would create ONE constant in the financial system that could not be manipulated by the federal government.
If banks got their currency from the federal government at a set-in-stone interest rate, does it not follow that the interest rates they charge to customers would have to be based on other market conditions and competition, rather than a reaction to government attempts to manipulate the economy?
I leave it to the economists out there to explain the unintended consequences that make this idea unfeasible.
Edited on Nov 20, 2010 at 2:02pmOct '10
Re: Back to the Gold Standard
This is my concern with moving away from fiat currency. While I find the idea intriguing, I'm concerned that the financial community that brought us ideas like mortgage backed securities would figure some awful way to exploit the gold market in such a manner that would cause real problems. There also is the issue of government mismanagement of the gold reserves that you mention.
One suggestion that I've heard is that rather than going to a purely gold backed currency, that the dollar be backed by a basket of commodities where gold would just be one of many. I have no idea if that's a good idea or not, but it does seem like a way to diversify some risk .
Jun '10
Re: Back to the Gold Standard
It would be virtually impossible to change back to commodity based currency. The Fed now has a monopoly on our currency and is basically a scorekeeper. Government spending is NOT constrained by tax revenue, hence our love affair with deficit spending. I can't see any political scenario where that changes.
May '10
Re: Back to the Gold Standard
To learn from another gold money advocate, at a Ricochet price, dial up the Peter Schiff Show each evening and read his books.
http://schiffradio.com/
Re: Back to the Gold Standard
When I gaze into the future, at any rate, I think I can make out larger and larger numbers of people -- if still a minority -- adopting their own personal gold standards.
May '10
Re: Back to the Gold Standard
Publius
This is my concern with moving away from fiat currency. While I find the idea intriguing, I'm concerned that the financial community that brought us ideas like mortgage backed securities would figure some awful way to exploit the gold market in such a manner that would cause real problems. There also is the issue of government mismanagement of the gold reserves that you mention.
There is nothing fundamentally wrong with the idea of mortgage-backed securities. it was a great innovation, and is still needed out there- what we don't need are myriad opaque derivative products overly-sliced and hidden.
But the gold standard is yet another inflexible phony panacea, like fixed exchange rates.
Sep '10
Re: Back to the Gold Standard
I totally agree with you on James Grant. I recall a column that you wrote many years ago for NR where you made a passing reference to reading Grant's Interest Rate Observer. It was kind of like seeing somebody reading NR on the subway, you think to yourself, "Ah, a kindred spirit."
Many years ago when Grant's was just getting started (as was I) they used to send out free copies to various folks at the bank where I worked. I was always on the lookout for them, snatching them from trash bins. Later, they began to offer free trial subscriptions, which I would serially start and then (shamefully) cancel when the bill came due.
At last I am at a point where I can afford the fortnightly jolt of financial heterodoxy that I get from Grant's. I will say that it has more than paid for itself throught its investment recommendations.
I attended their conference in the spring of 2009. It was a time that for those who had read him, Jim Grant seemed like a prophet. His publication called much of what happened and called it for the right reasons.
Oct '10
Re: Back to the Gold Standard
Duane Oyen
There is nothing fundamentally wrong with the idea of mortgage-backed securities. it was a great innovation, and is still needed out there- what we don't need are myriad opaque derivative products overly-sliced and hidden.
I remain unconvinced that securitizing mortgages was a laudable financial innovation. In fact, the evidence clearly shows it went horribly wrong. It might be fine in theory, but in practice it was like giving the atom bomb to a pack of spider monkeys.
One of our biggest problems is that the current corporate governance model is a failure and that was one of the major contributing causes of the financial meltdown. I haven't heard any meaningful reform ideas coming out of Congress which means we're setting ourselves up for a repeat performance. There is only so much that regulation can do to mitigate risk in these financial institutions.
Edited on Nov 24, 2010 at 8:09am