The author of the article comes up with ten reasons why the American people should support the creation of a "gold commission." These reasons include the gold standard being key to achieving a period of sustained, real economic growth and the gold standard reducing the risk of recessions and financial crises.
8/27/2012 @ 4:11PM
The Republican Party Platform’s call for the creation of a commission to evaluate restoring the link between the dollar and gold may prove to be the biggest upside surprise of the 2012 Presidential contest. If successful, a serious effort to chart a responsible path toward making the dollar as good as gold would provide the linchpin to restoring economic growth, low unemployment, entitlement reform and, as a consequence, balance to the federal budget.
Yet, reaction to the gold plank in the proposed Republican Party Platform has been greeted by the predictable hostility of the “experts” whose comments the press dutifully reports. What has gone largely unreported are ten reasons the American people should support the creation of a “gold commission.”
1) A gold standard is key to achieving a period of sustained, 4% real economic growth.
The U.S. dollar was created as a defined weight of gold and silver in 1792. As detailed in the booklet, The 21st Century Gold Standard (available free at http://agoldenage.com), I co-authored with fellow Forbes.com columnist Ralph Benko, a dollar as good as gold endured until 1971 with the relatively brief exceptions of the War of 1812, the Civil War and Reconstruction, and 1933, the year President Franklin Roosevelt suspended dollar/gold convertibility until January 31, 1934 when the dollar/gold link was re-established at $35 an ounce, a 40% devaluation from the prior $20.67 an ounce. Over that entire 179 years, the U.S. economy grew at a 3.9% average annual rate, including all of the panics, wars, industrialization and a myriad other events. During the post World War II Bretton Woods gold standard, the U.S. economy also grew on average 4% a year.
By contrast, during the 40-years since going off gold, U.S. economic growth has averaged an anemic 2.8% a year. The only 40-year periods in which the economic growth was slower were those ending in the Great Depression, from 1930 to 1940.
2) A gold standard reduces the risk of recessions and financial crises.
Critics of the gold standard point out, correctly, that it would prohibit the Federal Reserve from manipulating interest rates and the value of the dollar in hopes of stimulating demand. In fact, the idea that a paper dollar would lead to a more stable economy was one of the key selling points for abandoning the gold standard in 1971.
However, this power has done far more harm than good. Under the paper dollar, recessions have become more severe and financial crises more frequent. During the post World War II gold standard, unemployment averaged less than 5% and never rose above 7% during a calendar year. Since going off gold, unemployment has averaged more than 6%, and has been above 8% now for nearly 3.5 years.
Between 1947 and 1967, there was only one currency crisis involving the British pound, and no major bank failures in the United States. By contrast, during the last four decades under a paper dollar, the world has suffered through 12 financial crises beginning with the oil shock of 1973 and culminating in the financial crisis of 2008-09, and now the sovereign debt crisis in Europe.
Claims that the gold standard “caused” the Great Depression are a gross simplification. First of all, after World War I, the world abandoned the classical gold standard in favor of a managed system which Fed Chairman (then Professor) Ben Bernanke in a 1996 article he co-authored in the Quarterly Journal of Economics called a “structurally flawed and poorly managed international gold standard.” Second, in his 2000 article, “A Reconsideration of the Twentieth Century,” Nobel Laureate Robert Mundell explained: “Monetary deflation was transformed into depression by fiscal shocks.” Those included the Smoot-Hawley tariffs and a more than doubling of personal income tax rates in a futile effort to balance the budget.
3) A gold standard would restore rising living standards to the middle-class.
When the dollar was as good as gold, the middle class prospered. Between 1950 and 1968, real median incomes of males climbed to $32,310 (in 2009 dollars) from $19,989 or 2.7% a year.
Under the paper dollar, ever penny of nominal pay increases has been taken away by the debasement of the dollar. In 2009, real median income for males was $32,184, virtually the same as 41 years earlier. If the economy had grown at 4% a year since 1971, the income of the average family would be nearly $70,000, or about 50% higher than it is today.
4) A gold standard would restore long-term price stability.
Our paper dollar has lost more than 80% of its value since the link to gold was severed. Think of that. Two dimes in 1971 could buy more than a dollar bill can buy today.
Moreover, the Fed’s official policy is to increase the price level by 2% a year, or another 50% over the next 20 years.
By contrast, making the dollar as good would mean that a dollar saved today still would be worth roughly a dollar when it was spent, whether that be 10, 20 or even 30 years from now. Throughout history, gold has had the remarkable attribute of maintaining its purchasing power in terms of other goods and services. For example, an index of commodity prices was the same in 1933 as it was in 1792.
5) A gold standard would stop the rise in energy prices.
If the dollar/gold link had not been broken in 1971, a dollar would still buy 1/35th of an ounce of gold and the price of oil would be little changed at less than $3 a barrel. Or, if the dollar were still worth 1/350th of an ounce of gold as it was on average during the 1990s, a barrel of oil today would still cost about $20, just as it did then, and the price of a gallon of gasoline would be about $1 a gallon.
That’s right. The entire rise in the price of oil and gasoline over the past 40 some years is not due to a shortage of energy, or greedy energy companies, or the power of oil sheiks. All of it is due to the debasement of the dollar. Making the dollar as good as gold would stop the rise in energy prices over the next 40 years, just as it would have over the past 40 years.
6) A gold standard would be a powerful force for restoring fiscal balance to federal state and local governments.
Making the dollar as good as gold would not by itself restore fiscal balance. But, the higher growth associated with the gold standard would more rapidly increase the tax base, thereby increasing the revenue for all levels of government without raising tax rates. For example, if the U.S. economy over the past 40 years had grown at the 4% rate common under the gold standard, the Gross Domestic Product today would be closer to $23 trillion than $15 trillion. Even if federal tax revenues were at today’s depressed 16% of GDP, the revenue on that extra $8 trillion of economic activity would total more than $1.2 trillion a year, more than enough to balance the budget.
In addition, the gold standard would restore a general sense of accountability to government at all levels. Under the paper dollar, the Fed has not accounted for its role in debasing the dollar or creating the very economic and financial crises it claims would be even worse if it did not have the flexibility to further manipulate interest rates and the value of the dollar. Spending, too, has lacked accountability as politicians have come to rely on the Fed’s ability to print money to guarantee an apparent endless capacity to borrow. A dollar as good as gold would restore integrity and accountability to government at all levels.
7) A gold standard would help save Medicare and Social Security.
One of the key reasons those approaching or in retirement oppose any change in Medicare is their well grounded fear the continued devaluation of the dollar will rob them of the value of their savings, making it impossible to afford medical care, food and shelter. Making the dollar worth a weight certain in gold would reduce this fear by protecting the value of our savings. It would also make it easier to analyze and understand the implications of any change to Medicare or Social Security, thereby reducing the risk of any such change.
In addition, the sustained 4% growth generated by a gold standard would produce the ever larger tax base needed to sustain the promise of these entitlements to senior citizens, a promise that is sure to be broken at the less than 3% growth under today’s paper dollar system.
8) A gold standard would empower Main Street over Wall Street.
The paper dollar has produced greater uncertainty and increased volatility in financial and commodity markets. Greater uncertainty and volatility creates the need for hedges and derivatives, and all other exotic financial instruments that are the source of great profits and extraordinary incomes by those on Wall Street who know how to create and trade such instruments, and the rich who have access to such hedging strategies.
The certainty and stability that are the hallmarks of a gold standard would shift economic rewards back to those who make things and build businesses, the individuals and families who can be found in communities throughout the land.
9) A gold standard would increase the liberty of the American people.
The increase in prosperity and financial security provided by a dollar as good as gold goes to the heart of our ability to take care of ourselves, and to be free of dependence on government to protect us from the turmoil and debauchery of a paper dollar.
A dollar as good as gold rewards frugality and thrift. Once free of the uncertainty of the paper dollar, individuals would be empowered to save for a home, a business, a child’s education and their own retirement. A dollar steady in its value also would restore integrity to private markets in general and financial markets in particular. No more would inflationary and deflationary shocks disadvantage lender or borrower and create the financial crises that put all at risk as they have now for more than 40 years under the paper dollar.
10) Creation of a gold commission will provide the forum to chart a prudent path toward a 21st century gold standard.
Restoring the link between the dollar and gold requires care and prudence. Setting the rate of exchange too high would produce a general inflation, while setting the price too low would trigger a general fall in wages and prices. In addition, the creation of a modern gold standard would require a revamp of the Federal Reserve’s operating procedures to ensure coherence between the Fed’s open market operations and maintaining the dollar’s value as a weight certain of gold. It would also require international consultation and coordination with other major currencies, including the euro, British pound, Japanese yen and Chinese yuan.
These risks are lower than those generated by the unstable and unsound paper dollar system. They can be managed and the challenges of implementing a modern gold standard can be met if the transition is gradual and transparent and, most of all, if markets are used to establish the final rate of exchange between the dollar and gold such that overall prices remain near today’s levels, and there is no forced reduction in wages.
What the critics of the gold standard refuse to admit is that, for all of its faults, the performance of the U.S. economy under a gold standard is far superior to the paper dollar system loved by those who believe in government power and economist, who believe in the ability of elites, such as themselves, to manage the economy by manipulating the value of the dollar. The 40-year experiment with a paper dollar has failed to produce the higher growth rates, less unemployment, milder recessions and increased financial stability that were and even today are promised by its advocates.
The American people deserve better. They deserve a dollar as good as gold. The historical record is clear. The Republican Party’s call for establishing a gold commission is the first step toward a new golden era for the American people and the world economy.
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