Thursday, December 18, 2008

Lehrman on Gold

"The most disturbing aspect of the current financial crisis is that no U.S. official has correctly indentified its primary cause. ... Ignored is the main culprit, the dollar's role as the world's main official reserve currency. ... To understand how the dollar's reserve-currency role helped cause the recent bubbles, and the ensuing crisis in the world's financial system, we must apply the analysis of the great French economist and central banker Jacques Rueff, who was the first to explain the process. As a financial attache in London in the early 1930s, Rueff witnessed the collapse of the post-World War I monetary system. ... Many years later, in the 1960s, Rueff correctly predicted (and tried to prevent) the breakdown of the dollar-based Bretton Woods system. ... As was true in the 1920s and the 1960s, the dollar's reserve-currency role has led to the main pathologies that now plague the world economy: the speculative 'hot money' flows ... Congress's apparently incorrigible fiscal irresponsbility, and the mushrooming U.S. deficit in international trade and payments. The key difference between a reserve-currency system and the gold standard is that foreign-exchange reserves, in the form of government bonds, are not only assets of the national authority that holds them, as gold was, they are also (unlike gold) debts of the country that issues them. ... Congress has become increasingly addicted to reserve-currency finance by a kind of fiscal version of Parkinson's Law: Public spending expands to absorb all available tax revenues. Working in tandem with this is Parkinson's Debt Corollary: Public borrowing expands to absorb all available means of finance. ... How can we end the reserve-currency curse? ... [A] modernized international gold standard", Louis Lehrman (LL) and John Mueller, 4 December 2008 at

LL began saying this in 1980 as did I. I disagree with LL about gold's "price" to effect such a system. LL thinks $1,000 an ounce will do. I think at least $10,000 is required. LL wants to keep the Fed, I say if the Fed stays, the gold standard can't. Paraphrasing Andrew Jackson, "The Fed and no gold, or gold and no Fed". LL's article is worth reading, if for no other reason, the history it gives and the charts it has. LL, welcome to the battle!


Junior said...

So what do you think it is going to take for government to acknowledge the bottom and confess that fractional reserve has been our downfall?

It's just one big game of limbo.

Great post! (as always!)

Anonymous said...

O-Man can limbo pretty low...

What about other countries? China?

Independent Accountant said...

Thanks. The government will never admit anything. While I oppose fractional reserve banking, I think the existence of the Fed is a bigger problem. If you are interested in this area read Murray Rothbard's, "The Mystery of Banking", 1984.