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How To Make The Dollar Sound Again

James Grant on the Fed’s latest monetary alchemy, known as QE II:

The intended consequences of this intervention include lower interest rates, higher stock prices, a perkier Consumer Price Index and more hiring. The unintended consequences remain to be seen. A partial list of unwanted possibilities includes an overvalued stock market (followed by a crash), a collapsing dollar, an unscripted surge in consumer prices (followed by higher interest rates), a populist revolt against zero-percent savings rates and wall-to-wall European tourists on the sidewalks of Manhattan.

As for interest rates, they are already low enough to coax another cycle of imprudent lending and borrowing. It gives one pause that the Fed, with all its massed brain power, failed to anticipate even a little of the troubles of 2007-09.

On a return to the gold standard:

Gold is a metal made for monetary service. It is scarce (just 0.004 parts per million in the earth’s crust), pliable and easy on the eye. It has tended to hold its purchasing power over the years and centuries. You don’t consume it, as you do tin or copper. Somewhere, probably, in some coin or ingot, is the gold that adorned Cleopatra.

And because it is indestructible, no one year’s new production is of any great consequence in comparison with the store of above-ground metal. From 1900 to 2009, at much lower nominal gold prices than those prevailing today, the worldwide stock of gold grew at 1.5 percent a year, according to the United States Geological Survey and the World Gold Council.

The first time the United States abandoned the gold standard — to fight the Civil War — it took until 1879, 14 years after Appomattox, to again link the dollar 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.

That humbling chore completed, the delegates could get down to the technical work of proposing a rate of exchange between gold and the dollar (probably it would be even higher than the current price of gold, the better to encourage new exploration and production).

Other countries, thunderstruck, would then have to follow suit. The main thing, Mr. Bernanke would emphasize, would be to create a monetary system that synchronizes national economies rather than driving them apart.

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.

That last bit is a reference to a recent paper by one of the legions of economists at the Federal Reserve who turn out research with little or no practical application.

Read the whole thing here.