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.
Nathan Lewisfor The Daily Reckoning
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.
Thanks Nathan for the post. Very relevant and timely. What do you think of silver in that equation?
Great idea but do you really think the Banksters and Fed are going to allow this? It would make their theft much more transparent….and for that reason it’s never going to happen.
It seems to me that we already have a mechanism to increase and decrease the supply of base money–it’s called a printing press. What is needed, and presumed to be supplied by a so-called Gold Standard, is a means of limiting the supply of base money.
How does a gold standard provide control of the printing press unless each dollar is represented by a specific amount of gold bullion held in trust?
Dear Mr. Lewis,
Changing the World is inevitable. But please be informed as to what you wish. Similar to the American public who voted for “Change” the reality could be unsettling. Since the 1950s, Americans have serially and collectively blamed communists, socialists, hippies, feminists, Mexicans, environmentalists, gays, abortion, entitlements, Japan, China, etc. for their mounting problems; and, like the veritable alcoholic, the real cause of its problems has always assiduously avoided (by virtue of a controlled media and an educational system dependent upon a constant monetary infusion).
Two hundred years after Jefferson’s presidential warnings, America has both the world’s largest banking establishment and the world’s costliest standing army. It would be America itself, not its perceived enemies, who would betray the lofty ideals of the American Revolution by falling victim to the Central Bank. Now we are poised to have the World fall victim to the same infection suffered by the Americans.
Before you go on the mistaken path of assuming a Gold Standard will cure the infestation: educate yourself by watching this YouTube video focusing on the subject of the Gold Standard: http://www.youtube.com/watch?v=U71-KsDArFM
Do you think we went off of the gold standard to suck the rest of the world into using the dollar as a peg? Therefore initiating the dollar as the world currency?
During my National Service – served with the B.A.O.R. (British Army on the Rhine)- we were paid in BAFS (British Armed Forces currency) – a monopoly-like money but which on camp was, to all intents and purposes, real money accepted for all your requirements – cigarettes, beer, cinema tickets, coffee, jam doughnuts, toiletries, repaying debts to comrades etc etc. Were you planning to leave camp for a night on the town then you had to pre-order the necessary Deutsche Marks, which were duly received at the next pay-parade.
The system worked perfectly, which begs the question as to whether a similar setup would work on a larger scale, that is for national currencies to be used within a country’s borders with gold reserved for international trade. Clearly the price of gold would have to be the free-floating market price, not one dictated by bureaucrats and probably used (for added liquidity) in conjunction with Bills of Exchange (redeemable in gold), as espoused by Professor Antal E. Fekete
“How does a gold standard provide control of the printing press unless each dollar is represented by a specific amount of gold bullion held in trust”
The gold standard never operated this way. The gold standard keeps the value of money fixed, while the money supply expands with an expanding economy. You “print money” by creating something out of natural or intellectual resources.
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