Interesting opinion from Jack Kemp regarding a return to the gold standard...
interactive.wsj.com
June 28, 2001
Our Economy Needs
A Golden Anchor
By Jack Kemp. Mr. Kemp, co-director of Empower America, was the
Republican vice-presidential nominee in 1996.
How many more dashed hopes and false recoveries must we experience
before politicians and monetary authorities accept the fact that our inability
to manage fiat currencies is causing the global economic slowdown? They
keep waiting for interest-rate reductions to kick in, yet more than six
months after the Fed began lowering rates the economy continues to
weaken. Waiting for the recently enacted tax cuts to provide "stimulus" will
prove futile as well. The economy does not suffer a lack of consumer
demand, and more money in people's pockets will not revive the supply
side of the economy.
Unprecedented Experiment
Ronald Reagan once said he knew of no great nation in history that went
off the gold standard and remained great. Since Aug. 15, 1971, when the
U.S. ceased to redeem dollars held by foreign governments for gold, we
have put that thesis to the test. For the first time in human history, not a
single major currency in the world was linked to a commodity. Economist
Milton Friedman called the situation "unprecedented" and said it is "not a
long-term viable alternative." "The world," he said, "needs a long-term
anchor of some kind."
In the short term, at least, he was
vindicated. In creating a world monetary
system of floating fiat currencies with the
stroke of a pen, President Nixon
touched off world-wide inflation that
lasted through the '70s and early '80s.
Yet America recovered to preside over
the demise of world communism, and
overcame the rising inflation and
unemployment of "stagflation" to enjoy
an unparalleled 18-year economic
expansion. Today, the U.S. is at the
pinnacle of its power and enjoying its greatest prosperity ever.
Were Messrs. Reagan and Friedman wrong? I don't think so. If the U.S.
has so far come out on top in this experiment, it is only because other
countries' economies have suffered even more from floating currencies.
Once the U.S. government ceased redeeming gold at $35 an ounce, its
price quadrupled on world markets to $140 to reflect the dollar's
diminished value. By breaking the gold link, the Nixon economic team
forced the unwanted liquidity pouring out of the Fed -- which had thus far
built up in the Eurodollar market and the portfolios of foreign central banks
-- to remain inside the U.S. economy where it would manifest itself in price
inflation. Robert Mundell was the first to predict, in January 1972, there
would soon be a dramatic rise in the price of oil, with general inflation to
follow.
Where the rest of the economics profession blamed the Arab oil-producing
states for quadrupling the oil price in 1973, Mr. Mundell and those
supply-siders who followed his intellectual lead knew that gold's
quadrupling had led the way. Tax rates rose through "bracket creep,"
capital formation stopped in its tracks, and it soon took two workers to
produce the same income that one had brought home before the
experiment. The stagflation that had its roots in leaving the gold standard
was compounded when Congress and three different presidents tried to
fight it with wage and price controls and high marginal tax rates.
But discretionary monetary policy is Janus-faced, and instead of too much
liquidity in the world economy we now have too little. Deflation began in
1996 when the Fed tightened monetary policy to combat some inflation it
had created attempting to offset the economic drag of the Clinton tax
hikes. A rising dollar then caused the dollar pegs of emerging economies to
snap, set off the Asian, Brazilian and Russian economic meltdowns, and
caused the price of oil and other commodities to collapse. Oil producers
took a two-year holiday from drilling, which in turn created an oil shortage
and drove energy prices sky high.
Now, the energy-price hikes are working their way through the economy
and are misconstrued by the Fed as inflation. Once again, central bank
errors in the discretionary management of floating fiat currencies have put
the entire world economy at risk.
The Fed has cut interest rates 275 basis points since the start of the year,
but the price of gold is still down to about $272 from $385 in 1996, having
fallen $5 yesterday alone on the Fed's announcement that it was lowering
the fed funds rate another 25 basis points. Commodity prices are near their
lowest levels in 15 years, and the foreign-exchange value of the dollar has
risen against all major currencies since the Fed began its
interest-rate-easing cycle.
Without a gold standard, the Fed has no means of determining how much
liquidity markets demand, and all it does by targeting interest rates is guess
how much liquidity to inject or withdraw to counteract mistakes it made
earlier. The Fed may be on its way to mimicking the mistakes the Bank of
Japan made when it lowered interest rates to zero, all the while prolonging
and deepening Japan's monetary deflation.
This is no way to manage a currency. It's obvious that we have
accumulated a long series of small deflationary errors by the Fed that are
dragging down the U.S. economy and helping depress world commerce.
It's time to restore a golden anchor to the dollar before our luck runs out
and we suffer a real economic calamity.
The Fed may yet get lucky with its rate cuts, although the Bank of Japan
never did. The only certain way to end this deflation is to have the Fed
stop targeting interest rates and begin targeting gold directly -- not by
"fixing" the price of gold by administrative fiat as some people mistakenly
characterize it, but rather by calibrating the level of liquidity in the
economy, over which the Fed has exclusive and precise control, to keep
the market price of gold stable within a narrow band closer to $325 than
$275.
There is nothing mysterious about how gold could be used as a reference
point or how a new monetary standard for a new millennium would work.
It would simply mean the Fed would stop guessing how much liquidity is
good for the economy and allow the market to make that decision for it.
With the dollar defined in terms of gold and with American citizens free to
buy and sell gold at will, the Fed would forget about raising or lowering
interest rates and simply add liquidity (buy bonds) when the price of gold
tries to fall and subtract liquidity (sell bonds) when it tries to rise. Markets
would determine interest rates.
The paper dollar would once again be as good as gold -- no more, no less.
There would be no need for the U.S. government to maintain a large stock
of gold or to redeem gold and dollars on demand since people would be
free to do so on their own in the marketplace. As long as the Fed
calibrated its infusions and withdrawals of liquidity by the market price of
gold, the world would be free of monetary inflations and deflations caused
by the whims and errors of central bank governors, as was the case for
more than 200 years when the private Bank of England managed the
pound sterling in exactly that way.
Nothing Simpler
The good news is that this could all be done easily, if President Bush and
Treasury Secretary Paul O'Neill could work out an accord with Alan
Greenspan. That accomplished, I believe Britain would soon follow to
make the pound as good as gold and avoid having to adopt a sinking euro.
There is nothing simpler than a gold standard, as Alexander Hamilton
pointed out when he persuaded the first Congress to adopt one. Just as
President Nixon took us off with an executive order, President Bush can
put us back on with the stroke of a pen. It would be politically popular, as
ordinary people benefit most. At Camp David in 1971, as President Nixon
signed the papers, he is reported to have said: "I don't know why I'm doing
this. William Jennings Bryan ran against gold three times and he lost three
times."
KJC |
