Tuesday, June 1, 2010

That Four-Letter Word Again

"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. ... But there is an alternative. The US could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons. ... The value of a gold standard was proven in the 19th century. ... Countries that adopted to international gold standard prospered. This remarkably successful monetary system only blew apart with the outbreak of World War I in 1914. The reason it came apart then--and not at other times when countries abandoned the gold standard to finance wars with deficit spending--was that World War I was the first conflict to affect every major economically advanced country in the world. ... This might not have mattered, and the major economic powers might have re-established a monetary system similar to what existed before the war if not for the central reason why political elites dislike the gold standard: It leaves them little room to run the economy and claim credit for its successes. ... But their deeper reason is that they prefer to retain power over the economy that they would not have under a gold standard. ... But foreign central banks don't stack their greenbacks in vaults. They maintain monetary reserves mainly as interest-bearing US government-backed debt securities--in effect, as unsolicited loans to the US government. ... That increase in borrowing capacity creates liquidity that is unrelated to any need of Americans involved in economic transactions. ... The government of Charles DeGaulle, president of France from 1958 to 1969 and a supporter of returning to the gold standard, once assailed this American liquidity advantage as as 'exorbitant privilege.' ... Now Ben Bernanke's Fed is repeating recent patterns of keeping interest rates too low for too long, creating new bubbles and risking a whack-a-mole encore: 1970s-style stagflation. ... The first step in cutting off the addictive flow of foreign central-bank capital to Washington is an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace their dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard. ... Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the [US]", my emphasis, Sean Fieler and Jeffrey Bell (F&B) at the WSJ, 7 May 2010, link:

Absent repealing the Federal Reserve Act any US gold remonitization will be another scam to be reversed at Uncle Sam's whim. F&B work at the American Principles Project. See my 8 January 2009 post:


Anonymous said...

Wouldn't returning to the gold standard neuter all of ZimBen's "liquidity injecting" magic tricks? Wall Street would fight it tooth and nail... a big part of their business is riding the yield curve up and down and intermediating credit...

Political elites like to run to the economy and take credit but most are not smart enough to understand... hence the revered status of Greenspan and Bernanke... no matter what they do they're considered geniuses... duh!

America is driving off the cliff at an accelerating rate... Obama raises taxes and serves one term... OK.

Independent Accountant said...

Returning to the gold standard would put ZB out of business. You can't have a gold standard and the Fed at the same time. Yes, Wall Street favors paper money. Howard Katz has written about this in "The Paper Aristocracy", 1976.