Nathan Lewis

Keynesianism has reached its natural extreme. The floating-currency status quo, in place since 1971, is becoming more and more intolerable. Before too long, the soft money fanatics will give way in disgrace, and the hard money traditionalists will begin to get the respect they deserve. We are already on the path to a new gold standard.

At this point, I ask myself: what is the biggest barrier between us today and that happy conclusion? What is the limiting factor? Is it the criminal instincts of today’s politicians? The cow-like acquiescence of the masses? The immense gains still being enjoyed by the bankster class? The endless prevarication of academia’s high priests of Keynesianism? The sycophantic parroting of the establishment spin by the mainstream media?

All of these are important factors. But they are not the most important factor.

The biggest barrier today is – us! The gold standard advocates themselves.

Their motives are pure and their ideals are high. But can they deliver the goods? Do they have the practical, technical knowledge that would allow them to build a world monetary system that could last for a thousand years, and could be implemented with no disruption?

Unfortunately, the answer is “no.” This condition can be remedied. However, it had better be remedied quick, because we don’t have that much time left.

If you had twenty minutes with Barack Obama, Angela Merkel, or Hu Jintao – we will assume they know little about monetary economics – and were asked to explain the basic tenets of a gold standard system, what would you say? Here is what I would say.

Tenet #1: Stable Money is superior to Unstable Money. “Stable Money” is money that is stable in value. Capitalist economies work best with conditions of stable money. “Discretionary” monetary policy doesn’t really solve any problems, and actually causes new ones.

Tenet #2: Gold is stable in value. Unlike other commodities, gold does not go up and down in value. For this reason, it is the premier monetary commodity, and has been for literally thousands of years. Although it is a bit of a stretch to assume that gold is perfectly unchanging in value, nevertheless, after centuries of experience, we have established that it is sufficiently stable in value to serve its purpose as a monetary benchmark. Also, gold is a better measure of stable value than any other available reference or statistical concoction.

Tenet #3: Therefore, if your currency’s value is pegged to gold, that currency will be as stable as gold. A gold-value peg is the best means to accomplish our goal of stable currency value. For the last 500 years, every government that has wished to implement a stable-currency policy has used some variant of a gold standard. It is proven, it works, and there is no need to invent another, inferior solution.

Tenet #4: A token currency, whether coins or notes, can be pegged to gold via the adjustment of supply. “Supply” is technically known as “base money,” which consists of notes, coins, and bank reserves. If the currency’s value sags below its gold peg, then supply is reduced. If the currency’s value is higher than its gold peg, supply is increased. No gold bullion is needed to maintain this peg – only a mechanism to increase and decrease the supply of base money. Central banks accomplish this today by buying and selling government bonds in “unsterilized” transactions. This is effectively the same as currency board systems in use today.

Tenet #5: A “lender of last resort” can be provided within the context of a gold standard. The original “lender of last resort,” or what we today call a central bank, was the Bank of England during the 19th century. The Bank of England was also the world’s premier champion of the gold standard. The Federal Reserve was originally constituted in 1913 to serve as a “lender of last resort” within the context of a gold standard system, and did so for 58 years until 1971. Central banks’ original purpose was perverted during the 20th century due to the rise of Keynesian soft-money ideology, causing them to come into conflict with the proper operation of a gold standard system.

These tenets probably seem familiar, and, except perhaps for the last one, not very controversial. However, in my view, today’s gold standard advocates have not properly internalized and mastered these core concepts. I suggest that they do so as quickly as possible.

When people who are unfamiliar with monetary economics listen to the speech and arguments of today’s gold standard advocates, I think they get the impression that the gold standard advocates have a tendency towards ideology, and a rather poor grasp of practical issues. They might not be able to explain why, but for some reason, it seems like the gold-standard advocates don’t have all their ducks in a row.

There’s a simple reason for this: it’s true! However, once the gold standard advocates expand their understanding and master the core concepts, this quality would also become apparent in their speech. The lay observer would have a different impression – that the gold standard advocates have a viable alternative, and are able to deliver on their promises with complete expertise and understanding.

We need a small group – perhaps twenty people, in the English-speaking world – who have achieved this level of mastery. We fall somewhat short of that today, but this problem is easy to remedy.

It’s hard to change the world. But, it is not too hard to change yourself. Start with this, and the rest will follow.

Regards,

Nathan Lewis
for The Daily Reckoning

Nathan Lewis

Nathan Lewis was formerly the chief international economist of a leading economic forecasting firm. He now works for an asset management company based in New York. Lewis has written for the Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and authored Gold: The Once and Future Money.

Recent Articles

It’s Time to Buy Microcaps for Double-digit Gains

Greg Guenthner

Yup, small-caps are setting up for a comeback year. In fact, I believe they'll retake a leadership role in the markets in 2015. So now's your chance to set yourself up for potentially massive gains before these stocks start grabbing headlines again. Or... you can simply wait until some ex-purt on CNBC or Fox recommends them - and miss out on half the party. Your choice...


Can Money Printing Cause Deflation?

Marc Faber

"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...


How Low Will Oil Go – And What Can You Do?

Matt Insley

The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”


Cuba’s Berlin Wall Moment

Peter Coyne

Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...


The $4 LED Trend You Don’t Want to Miss

Chris Mayer

The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.


Forget the Oil Crash – Crush the Market With Biotech Stocks

Greg Guenthner

The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.


How to Make the Casinos Pay You for a Change

Greg Guenthner

It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.