Gold: The Republican Death Wish
The libertarian (Ron Paul) wing of the Republican party desires a complete rethink of US monetary policy, and has succeeded in having a monetary commission added to the GOP platform. Let's take a look at the Paulist ideas.
Among the libertarian desiderata are:
1. Abolition of the central bank.
2. An end to fiat money and a return to a metallic or bimetallic monetary standard.
3. Privatization of currency issuance.
It should be noted that these are not wild and crazy ideas from outer space. The US functioned under similar systems at various times in history:
1. The US was on the gold standard, in various forms and with occasional interruptions, from 1789 until 1971.
2. The US abolished its central bank in 1836 and did not revive it until 1914.
3. Any licensed bank was able to print paper currency from 1789 until 1862.
This shows that these “wild-eyed” ideas have been tried before with reasonable success. The US did exceedingly well under these pre-modern monetary arrangements, experiencing rapid growth with no inflation (that’s right: the price level did not rise from 1789 until 1933). On the other hand, the US experienced wild swings in the business cycle with depressions occurring in every decade. Some of these depressions were as bad as the Great Depression, which was itself caused by the gold standard.
Maybe these periodic depressions of the 19th and 20th centuries were a healthy form of creative destruction. Maybe foreclosed farms and mass unemployment are preferable to modern socialism and “full employment” policies. That could be. But such periodic depressions were politically unpopular then, and are likely to be now. Americans today think that 10% unemployment is intolerable; they may lack the fortitude to accept 25% unemployment for a few years.
The libertarian philosophy is at heart anti-statist, and does not accept the idea that the monetary system should be or needs to be controlled by the state. Libertarians believe that central banks manipulate prices, cause swings in the business cycle and manufacture inflation, all of which they believe could be solved by a return to a metallic standard. Also, if the currency is understood in terms of its value in gold, there is no reason why private enterprises could not issue gold coins or paper money backed by bullion. The government would get out of the money business entirely.
Subscribe to Project Syndicate
Enjoy unlimited access to the ideas and opinions of the world’s leading thinkers, including long reads, book reviews, topical collections, short-form analysis and predictions, and exclusive interviews; every new issue of the PS Quarterly magazine (print and digital); the complete PS archive; and more. Subscribe now to PS Premium.
As I have observed previously, all the world’s problems can be attributed to hard money policies, and gold is the hardest policy of them all. My opinion is no secret: I believe that the libertarian monetary proposals are a prescription for disaster on a scale that we can’t even imagine. I also believe that such policies would do to the GOP what they did to the GOP eighty years ago, and as a God-fearing Republican, I don’t want another twenty years in the wilderness.
History shows that Man does learn from his experience, and the American people have paid a heavy price to learn the following:
1. Soft money is more conducive to economic stability than hard money.
2. The gold standard is inherently unstable and is constantly tested by speculators and foreign central banks.
3. Hard money requires periodic depressions to remain “credible”.
4. The money supply should be controlled by a wise and independent central bank with the dual mandates of low inflation and maximum employment.
5. Wildcat currency printing leads to currency chaos. (Do we really have to relearn that particular chestnut?)
6. Hard money requires flexible nominal wages and incomes, which only exist in fantasyland and Hong Kong.
However, instead of a lengthy examination of each of the libertarian proposals, let’s just examine their central desire: the gold standard.
An ounce of gold is currently worth roughly $1700. To go on gold, Congress would have to pass a law which fixes that price in perpetuity, and provides that no other objectives are to be considered by the monetary authority.
To maintain that fix, the Fed/Treasury would have to:
1. Acquire enough gold to “back” the currency (at least 40% of notes in circulation, but probably a lot more). This would be expensive and would add to the national debt.
2. Stand ready at the gold window to exchange gold for money and money for gold at the fixed price in unlimited quantities at any time.
3. Be prepared to stem a run on the dollar (a “gold drain”) by raising dollar interest rates and reducing the dollar money supply until market actors are induced to buy dollars with gold at the fixed price, even if that requires a major and prolonged deflation/depression.
4. In emergencies, be prepared to borrow in foreign currency in order to buy gold to meet the market’s demands for redemption in gold. (With fiat money, the US never has to borrow in foreign currency.)
5. Subordinate (i.e., completely ignore) all other monetary objectives except the gold price; no more employment mandate.
By adopting the gold standard, the US would surrender monetary sovereignty and would lose all control over monetary policy. It wouldn’t matter who was the Fed chairman, or who sat on the FOMC, since they would have no discretion. The only monetary matters to be discussed would be the techniques to be used to maintain the $1700 price. The foreign exchange value of the dollar would be almost completely outside of the government’s control; only the price of gold would be stable. Politicians would no longer be able to criticize the Fed or its policies, because they would be set by law. The president would have little reason to talk to the Fed chairman since there would be nothing to talk about, even if there were 25% unemployment, because the US was on the gold standard by law.
The gold standard cannot operate if it is not 100% credible. Imagine that Zimbabwe declared tomorrow that henceforth the value of the Z$ would be fixed at one ounce of gold, and that the Reserve Bank of Zimbabwe stood ready to exchange gold at that price for Z$. If I gave you Z$10 million, would you keep it, or jump on the next flight to Harare to exchange it for gold?
If a country’s gold price is believed to be immovable, markets will know better than to speculate against it, because the speculator will always lose. To build the standard’s credibility, the country must be able to demonstrate that it won’t cut and run at the first sign of distress. An example of this is the HKMA which has pegged the HK$ to the US$ for the past thirty years. No one has ever made a penny speculating against the peg, even when the HK economy was under considerable stress. The HKMA can impose periodic deflations because HK is not a democracy.
The less credible the gold peg, the more the nation must be prepared to suffer to demonstrate the peg’s credibility. When the UK pegged sterling to the DM in 1992, all it took was for George Soros to appear on the horizon for the government to panic and devalue. When the UK was forced off gold in 1931, the betrayal of a sacred compact with millions of people, many people felt that it was the end of civilization. That’s how hard a peg has to be; almost if not literally a constitutional amendment.
So, it’s 2018, Romney is still president, and the US is irrevocably on gold at $1700 by law and by constitutional amendment. The Balanced Budget Amendment is in force, and unemployment has risen to 14%. The US has asked for a “gentlemen’s agreement” that foreign central banks won’t present dollars for gold, but the ECB insists on redeeming $100B in gold because it is “rebalancing its international reserves”. By surrendering $100B worth of bullion, the dollar’s gold cover falls below its statutory minimum and the US experiences a “gold crisis”.
Despite the high unemployment rate, the Fed raises the funds rate to 17%, hoping to attract a dollar inflow. However, at that moment, Vice President Ryan off-handedly questions the gold standard in a TV interview, causing a global dollar run. The Fed must now act decisively to stem the run and to prove its credibility and fortitude. The funds rate is raised to 21% with guidance indicating that it is expected to remain at that level for one year. GM and Ford go bankrupt and liquidate; GE requires an emergency loan from the Federal Recovery Board; and unemployment hits 19%. President Romney declares a State of Emergency, and announces a “Voluntary Wage Reduction Plan”, calling on employers to reduce wages in lieu of layoffs. Federal salaries are cut by 15%.
I don’t need to go on, because we’ve been there before, under President Hoover. The above nightmare ends when the next president raises the price of gold by executive order and “suspends” convertibility for an indefinite period.
My point is that a successful gold standard requires either a dictatorship or Finnish-like national cohesion, both of which we lack. The American people have never taken kindly to a depression, and depression has always caused political and social turmoil.
The gold standard is not an experiment we need to try because we’ve already tried it. And it’s always been the Republicans who have tried it, and the Democrats who have fought it (e.g., W.J. Bryan, FDR). Just for the sake of the preservation of capitalism and free enterprise in one country, let’s not drive the bus over that cliff again!