The Gold Standard: Can't Live With It, Can't Live Without It

Let me state at the outset the thesis of this essay: Gold remains the only standard by which the global financial system’s currencies can uniformly be measured throughout history, and is indeed the most basic and reliable benchmark of value for everything from commodities to T-bills.

The disinformation campaign initiated by president Nixon in 1971, subsequently confirmed and endorsed by congress, was nothing less than a Orwellian-esque attempt at doublespeak to obscure the act of abolishing the global commitment to the gold standard for what it really was: the default by the United States, in effect, on its $3.8 billion deficit in trade.

The brainwashing job perpetrated by Universities and so-called economists since then on the general public is impressive in its scope and downright awesome in its scale. These days, if you voice any kind of support for the idea of a return to the gold standard, you’re dismissed as a quaintly naïve boob with no firm grasp on the realities of our complex global financial system.

Certainly a return to a monetary standard in gold is now impossible, for the revaluation of currencies that would occur would effectively bankrupt a good portion of the G7 nations. If you think of gold as Tier 1 capital, and currency as leveraged derivatives (which is essentially what they are), most sovereign banks would miserably fail the Tier 1 capital ratio requirements of today. It would make the current liquidity crisis insignificant.

So we’re in a position now where we have no choice but to continue with our delusion, for correcting the compounded follies of our past would be too painful, or at least, that’s the way its going to play, regardless of a minority’s desire for a more responsible approach to accounting. We are the quaintly naïve boobs.

I’ve read two publications this week that have made reference to the fiscal discipline enforced by the International Gold standard, and neither author qualifies as boobs to anybody, as far as I know.

Nor are they fringe publications, the first article appearing in Harpers Magazine, admittedly a good deal to the left of center politically, but venerable and respected as an American literary institution nonetheless.

In the February issue the cover story is titled, “The Next Bubble”, and it is written by Eric Janszen, who, among other things, the “entrepreneur-in-residence” at Trident Capital, a $1.6 billion venture capital firm that’s been around since 1993, and survived the tech bubble, exiting most of their positions at the peak.

He makes the case that we are at the mercy of the FIRE economy, which is one whose pillars are Finance, Insurance and Real Estate.

According to Mr. Janszen:

FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals. With FIRE leading the way, the United States, free of the international gold standard’s limitations, now had great flexibility to finance its deficits with its own currency.

The stipulation is that the existence of a gold standard would prevent such hyper-inflationary events as bubbles, because you can’t fabricate currency when its tied to how much gold is on hand to back it.

The second instance of the lament for the gold standard days came from widely respected Portfolio Strategist Don Coxe, Chairman and Chief Strategist of Harris Investment Management, and Chairman of Jones Heward Investments. Mr. Coxe has 27 years experience in institutional investing, including a decade as CEO of a Canadian investment counseling firm and six years on Wall Street as a 'sell-side' portfolio strategist advising institutional investors.

His reference to the International Gold Standard was made in this statement from his monthly Basic Points letter, which is distributed to Bank of Montreal institutional, corporate and sovereign clients.

He says, referring to Alan Greenspan’s inheritance of Paul Volcker’s legacy:

Greenspan’s good luck was compounded when (1) the West won the Cold War, removing the inflationary impact of war and of major expenditures in preparing for war; and (2) from the 1990s advent of the freest global trading environment since the late 19^th Century when British free trade, backed by the British navy and firm reliance on the gold standard, had kept inflation rates near zero.

Again, the existence of the gold standard is acknowledged as a natural inhibitor to the inflationary potential of currency expansion.

And its hardly credible that the populist notion that gold is nothing more than a “barbarous relic”, economically speaking, is an accident.

John Maynard Keyens, in his 1924 tome entitled “Monetary Reform” said,

The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

In truth, the gold standard is already a barbarous relic.

The War has effected a great change. Gold has become a managed currency. Consequently, gold now stands at an artificial value, the future course of which depends on the policy of the Federal Reserve Board of the United States. The value of gold is no longer the result of the gifts of Nature and the judgment of authorities and individuals acting independently. In truth, the gold standard is already a barbarous relic.'

He essentially mapped out the blueprint by which the FIRE economy could be perpetrated on the global consumer. Remove gold from the equation, and you can print as much currency as is needed.

Sure, a return to the gold standard is about as practical as wishing for a return to the days of the horse and carriage. But wouldn’t it be ideal if the fiscal discipline afforded by a gold standard could somehow be the next invention out of Wall Street?

Comments

[robert.bohrer]

I am flabbergasted by the number of people who do not realize the destructive effects of inflation of the money supply. Most seem to think that constant inflation can go on forever, and that indeed, we will always only go up up UP! The problem, however, are those expectations themselves - IF the public and those at the top believe we should always only go up, when bubbles are created by excessive inflation, their judgement is that something is wrong and the FED needs to fix it. Of course, the FED's power boils down to two basic actions: the creation and destruction of money - and we all know where the FED's propensities lie...

[hsofiak]

Simply said, Nixon's chose Gold over the USD. For Nixon, Gold was the real money. Gold is still the real money.

[Nick T]

In a world where Wall Street is seen as the guiding light for the ills, or well being of the econoomy it is clear that we must, above all else, educate the people.
The FED must be eliminated. We must find a way to return to the gold standard, or suffer the spiraling effects of an inflationary recession, one that started years ago.
Maybe it is impractical, or at least it appears to be, but the downside to living with a fiat monetary system is that the wealthy will at some point own everything, and the majority will live at the whim of greedy and selfish people.
One way or the other the next few years are not going to be pleasant.

[flow5]

The Pentagon was soley responsible for the dollar decoupling from gold.
An operating old standard creates, or is associated with, many advantages: 1) stable foreign exchange rates; 2) free multilateral clearing of currencies among nations; 3) the maximization of multilateral foreign trade; and, 4) relatively stable price levels e.g., no chronic inflation. All that is required to achieve this economic utopia is a 1) world free of major wars, depressions and cartels (OPECs); 2) markets with downward price flexibility, that is , true price competition; 3) creditor nations which impose no significant restraints on imports; 4) monetary authorities who abide by the “rules of the game”, i.e., the central banks expand credit (create commercial bank legal reserves) when gold stocks expand, and vice versa; 5) monetary authorities who restrict the expansion and contraction of central bank credit within a very narrow range, thus preventing the commercial banks from creating an unsupportable volume of credit money (transaction deposits); and, finally, 6) a world where the reserve currency countries (those countries whose currency serves as a store and standard of value as well as a transactions currency) never operate with chronic deficits in their balance of payments.

[AmesTiedeman]

People need to understand the reason we went off the Gold Standard:

WE RAN OUT OF GOLD. WE DID NOT HAVE ENOUGH TO KEEP PRINTING MORE MONEY.

The question is was it the right thing to do? Where would the capital come from to finance the growth from 1974 to now?