Posted on 01/31/2004 10:21:20 PM PST by I got the rope
The growing disillusionment with politically controlled monetary policies has produced an increasing number of advocates for a return to the GOLD STANDARD - including at times president Reagan.
In years past a desire to return to a monetary system based on gold was perceived as nostalgia for an era when times were simpler, problems less complex and the world not threatened with nuclear annihilation. But after a decade of destabilizing inflation and economic stagnation, the restoration of a GOLD STANDARD has become an issue that is clearly rising on the economic policy agenda. A commission to study the issue, with strong support from President Reagan, is in place.
The increasingly numerous proponents of a GOLD STANDARD persuasively argue that budget deficits and large federal borrowings would be difficult to finance under such a standard. Heavy claims against paper dollars cause few technical problems, for the Treasury can legally borrow as many dollars as Congress authorizes.
But with unlimited dollar conversion into gold, the ability to issue dollar claims would be severely limited. Obviously if you cannot finance federal deficits, you cannot create them. Either taxes would then have to be raised and expenditures lowered. The restrictions of gold convertibility would therefore profoundly alter the politics of fiscal policy that have prevailed for half a century.
Disturbed by Alternatives
Even some of those who conclude a return to gold is infeasible remain deeply disturbed by the current alternatives. For example, William Fellner of the American Enterprise Institute in a forthcoming publication remarks "...I find it difficult not to be greatly impressed by the very large damage done to the economies of the industrialized world... by the monetary management that has followed the era of (gold) convertibility... It has placed the Western economies in acute danger."
Yet even those of us who are attracted to the prospect of gold convertibility are confronted with a seemingly impossible obstacle: the latest claims to gold represented by the huge world overhang of fiat currency, many dollars.
The immediate problem of restoring a GOLD STANDARD is fixing a gold price that is consistent with market forces. Obviously if the offering price by the Treasury is too low, or subsequently proves to be too low, heavy demand at the offering price could quickly deplete the total U.S. government stock of gold, as well as any gold borrowed to thwart the assault. At that point, with no additional gold available, the U.S. would be off the GOLD STANDARD and likely to remain off for decades.
Alternatively, if the gold price is initially set too high, or subsequently becomes too high, the Treasury would be inundated with gold offerings. The payments the gold drawn on the Treasury's account at the Federal Reserve would add substantially to commercial bank reserves and probably act, at least temporarily, to expand the money supply with all the inflationary implications thereof.
Monetary offsets to neutralize or "earmark" gold are, of course, possible in the short run. But as the West Germany authorities soon learned from their past endeavors to support the dollar, there are limits to monetary countermeasures.
The only seeming solution is for the U.S. to create a fiscal and monetary environment which in effect makes the dollar as good as gold, i.e., stabilizes the general price level and by inference the dollar price of gold bullion itself. Then a modest reserve of bullion could reduce the narrow gold price fluctuations effectively to zero, allowing any changes in gold supply and demand to be absorbed in fluctuations in the Treasury's inventory.
What the above suggests is that a necessary condition of returning to a GOLD STANDARD is the financial environment which the GOLD STANDARD itself is presumed to create. But, if we restored financial stability, what purpose is then served by return to a GOLD STANDARD?
Certainly a gold-based monetary system will necessarily prevent fiscal imprudence, as 20th Century history clearly demonstrates. Nonetheless, once achieved, the discipline of the GOLD STANDARD would surely reinforce anti-inflation policies, and make it far more difficult to resume financial profligacy. The redemption of dollars for gold in response to excess federal government-induced credit creation would be a strong political signal. Even after inflation is brought under control the extraordinary political sensitivity to inflation will remain.
Concrete actions to install a GOLD STANDARD are premature. Nonetheless, there are certain preparatory policy actions that could test the eventual feasibility of returning to a GOLD STANDARD, that would have positive short-term anti-inflation benefits and little cost if they fail.
The major roadblock to restoring the GOLD STANDARD is the problem of re-entry. With the vast quantity of dollars worldwide laying claims to the U.S. Treasury's 264 million ounces of gold, an overnight transition to gold convertibility would create a major discontinuity for the U.S. financial system. But there is no need for the whole block of current dollar obligations to become an immediate claim.
Convertibility can be instituted gradually by, in effect, creating a dual currency with a limited issue of dollars convertible into gold. Initially they could be deferred claims to gold, for example, five-year Treasury Notes with interest and principal payable in grams or ounces of gold.
With the passage of time and several issues of these notes we would have a series of "new monies" in terms of gold and eventually, demand claims on gold. The degree of success of restoring long-term fiscal confidence will show up clearly in the yield spreads between gold and fiat dollar obligations of the same maturities. Full convertibility would require that the yield spread for all maturities virtually disappear. If they do not, convertibility will be very difficult, probably impossible, to implement.
A second advantage of gold notes is that they are likely to reduce current budget deficits. Treasury gold notes in today's markets could be sold at interest rates at approximately 2% or less. In fact from today's markets one can construct the equivalent of a 22-month gold note yielding 1%, by arbitraging regular Treasury note yields for June 1983 maturities (17%) and the forward delivery premiums of gold (16% annual rate) inferred from June 1983 futures contracts. Presumably five-year note issues would reflect a similar relationship.
A Risk of Exchange Loss
The exchange risk of the Treasury gold notes, of course, is the same as that associated with our foreign currency Treasury note series. The U.S. Treasury has, over the years, sold significant quantities of both German mark - and Swiss franc denominated issues, and both made and lost money in terms of dollars as exchange rates have fluctuated. And indeed there is a risk of exchange rate loss with gold notes.
However, unless the price of gold doubles over a five-year period (16% compounded annually), interest payments on the gold notes in terms of dollars will be less than conventional financing requires. The run-up to $875 per ounce in early 1980 was surely an aberration, reflecting certain circumstances in the Middle East which are unlikely to be repeated in the near future. Hence, anything close to doubling of gold prices in the next five years appears improbable. On the other hand, if gold prices remain stable or rise moderately, the savings could be large: Each $10 billion in equivalent gold notes outstanding would, under stable gold prices, save $1.5 billion per year in interest outlays.
A possible further side benefit of the existence of gold notes is that they could set a standard in terms of prices and interest rates that could put additional political pressure on the administration and Congress to move expeditiously toward non-inflationary policies. Gold notes could be a case of reversing Gresham's Law. Good money would drive out bad.
Those who advocate a return to a GOLD STANDARD should be aware that returning our monetary system to gold convertibility is no mere technical, financial restructuring. It is a basic change in our economic processes. However, considering where the policies of the last 50 years have eventually led us, perhaps there are lessons to be learned from our more distant GOLD STANDARD past
So why again is the gold standard a bad idea?
Are you able to state it in your own words without referring to a century-old speech?
You've read the speech and don't understand WHY it's so famous, or why it's pertinent to this discourse?
Why don't you explain it?
I was unaware of the speech, as I suspect many other FReepers were.
Gold, like cowery shells and salt ( yes SALT, which for millennia was more precious than gold! )have been used as money or to back paper currencies ( in China, for example ),is as worthless or precious aas the times dictate. Today, what you and your bunch call " fiat money " isz as valuable, or not, as the world's populace says it is.
I get paid to teach, so either pay me, or do your own damned scut work. I'm not here to give you the education you managed to nolt get, one way or another.
Thanks for the smart aleck reply.
Why don't you go screw yourself?
Now gold ... gold takes a hammering and can always be worked back into shape, spilled on. I can gild a lily and capture it's beauty forever -- but salt the lily and it shrivels up.
Salt has been valuable at times and places ... yet it is not a repeat store of value. Once used, it is gone. Gold is used, recovered, re-used. While it glitters and is very durable, gold is the most humble of metals for all the beating it can take --- and recover from.
And it was Bryan who brought on many a continuing misery:
That is a very good point. I don't recall many Jews trying to smuggle salt out of Germany.
And it was Bryan who brought on many a continuing misery:
Like I told him (or someone else) earlier, his "famous" speech was mostly rheotoric and did not make a compelling case for anything.
As for Bryan himself, he was wrong on several issues, but at least he had the courage to resign from Wilson's cabinet over the Lusitania coverup.
I guess I'm still an idiot though because I didn't know that William Jennings Bryant gave a famous speech 100 years ago.
“They may pass a law to issue paper money, but twenty laws will not make the people receive it. Paper money is founded upon fraud and knavery.” George Mason
“It will have the most salutary influence on the credit of the United States to remove the possibility of paper money.” James Wilson
“We may one day become a great commercial and flourishing nation. But if in the pursuit of the means we should unfortunately stumble again on unfounded paper money or similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy.” George Washington
“A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army. We must not let our leaders load us with perpetual debt.” Thomas Jefferson
You would end up being paid in a check drawn on the bank. It would only be usefull if you deposited it in another bank or negotiated it in trade with someone for goods. I don't think you have the right to demand 'cash' any more, and the supply of 'cash' is being constatnly diminished as a percent of the overall money supply. Think Argentina.
But it also gives the Feds the power to go into debt which is precisely what our currency is today, an instrument of taxpayer indebtness.
Hamiliton already had Central Banking in mind when he edited the Constitution. He put a good deal of nasty little surprises in there.
Precisely my point - your figures are fine. The point I'm making is that for gold to serve as a hedge against inflation, to serve as a currency that acts to keep the price of goods and services steady, it should track the CPI fairly closely. IOW, it should go up and down in relative lockstep with consumer prices, but it doesn't and it didn't - the price of gold rose much faster than the price of consumer goods, and as a result, a gold-based currency would not have held consumer prices steady. In fact, the result would have inevitably been forty years of widespread and crippling deflation, particularly since about 1970 or so - compare CPI to gold for the period since 1970, and you'll see what I mean.
And as bad as rampant inflation can be, rampant deflation is just as bad - if not worse, considering how much our economy is debt-driven. By switching to a gold-based currency, you're not going to hedge against currency swings, you're really just trading one set of inflationary pressures for another.
No, thank you - I, like most people who don't currently own gold, am not interested in plans that result in my instant impoverishment by the stroke of a pen...
Q: What can you tell me about the amount of United States gold reserves?
A: The United States Mint is the custodian of the Government's gold reserves. The bulk of the United States gold stocks are stored at the Fort Knox Bullion Depository. The Mint also stores some gold at its facilities in Philadelphia, Pennsylvania; Denver, Colorado; San Francisco, California, and at the West Point Bullion Depository. You may be aware that United States gold reserves are valued, by statute, at $42.2222 a fine troy ounce. If it were valued at the current market price, the value would be considerably higher. You can review information about the most recent holdings of gold and other reserve assets in the Press Release section.
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