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Almost everything that people say about the gold
standard today is baloney. One of the most popular items in the baloney
store is the notion that
a gold standard system causes “balanced trade.”
The United States used a gold standard system for
182 years. So, we should know what the answer is, right? Does a gold standard lead to ”balanced
trade”? Did the
U.S. have “balanced trade”
for 182 years straight?
You already know the answer,
don’t you? It’s a total fantasy.
During most of the 19th century – the gold standard years
– the U.S. experienced capital inflows, or what is known as a “current account deficit.” In the 1830s, the U.S. imported an average of $125.4
million per annum. By the last decade
of the 19th century, this
rose to $3,071.4 million per annum.
Why was this? The U.S. was a good place
to invest, so Europeans invested there.
In fact, all trade is “balanced.” That’s what trade is: the exchange of items
of equal value.
However, we have some funny terminology
in this regard. For some reason, when a person trades goods for goods, that’s “balanced,”
but when they trade goods for financial assets of some sorts, primarily bonds, that’s “unbalanced.”
Why would anyone buy our
bonds? For most countries, it
is difficult to get foreigners to buy bonds denominated in local currencies. They only want bonds denominated in major international currencies,
like the dollar or euro. Why
is this? Because nobody trusts the Vietnamese dong or the Hungarian
forint. Would you buy a promise to deliver ten million Paraguayan guarani ten years from
now? Me neither, except at a very
good price perhaps.
Now, let’s say you have a bond denominated in a reliably gold-linked currency like the U.S. dollar of the 19th century.
After the dollar had been
pegged to gold for over a hundred
years in 1900, a German or Belgian investor could buy a ten or thirty-year bond and be reasonably sure that it would be
worth something ten or thirty years from the date of purchase. The currency was stable, and didn’t fluctuate against the gold-linked European currencies.
Investors would pay a high price
(low interest rate) for something like that. And, the bond sellers, or
borrowers, would also be able to borrow more when interest rates were low.
In other words, having a gold-linked currency made the selling of
bonds, or equities, also known as international capital flows,
much more attractive. The great
era of the worldwide gold
standard, in 1870-1910, was
a time of internationalization, free movement of capital, and high levels of investment in emerging markets.
Since international capital flows
is another term for a “trade imbalance,” we see that the gold standard
system actually “promoted
trade imbalances,”
to use that weird terminology. In other words, people were happy to invest in foreign countries because they had reliable gold-linked currencies.
We see that both borrowers
and lenders benefit when they do business in a highly reliable currency. That is why the country with the best
international currency typically
becomes the world’s
top financial center. When
everyone wants to borrow and lend in gold-linked British pounds, then
London is the world’s
financial center. After a
series of devaluations beginning in 1914, people’s opinion of the British pound waned, and the U.S. dollar became
more attractive.
The U.S. dollar today is
not a particularly reliable
currency. What do you think the U.S. dollar is going to be
worth in ten or thirty years? Hard to say, isn’t it? Thus, many
people throughout the world are searching
for a new currency to serve as the premier
international currency. Unfortunately,
they haven’t found an alternative.
Whatever country provides
people what they want – a reliable currency – will become the world’s new financial center. Historically,
the most reliable currency was always the gold-linked currency. The purpose of a gold
standard system was to create
the most stable and reliable
currency possible.
Theoretically, there might be a way
to make a currency even more stable and reliable than using a gold standard system. Alas,
in five hundred years of trying, nobody has found such a system. Actually, there wasn’t really any need to look for an
alternative, because the gold standard systems of Britain or the U.S. didn’t cause any problems
that needed fixing. They pretty much
worked as advertised.
There are only two reasons why we
don’t use gold standard systems
today. One is that we have become enamored of the idea of trying to solve economic problems with currency manipulation. This is what Ben Bernanke talks about all the time. It’s
what people in Britain talked about – just before the British pound became
the world’s former leading
international currency. It is
totally antithetical to
the goal of creating a stable, neutral,
predictable currency.
The other reason is that people don’t know how to do it. They are still bogged down in laughable
nonsense like “a gold standard causes balanced trade.” The fact that, as I mentioned, the historical
record shows the complete opposite condition, does not seem to bother these people. They repeat the same platitudes decade after decade, oblivious to historical
reality.
Before we are going to have a golden
alternative to the endlessly-abused dollar, we will need
to have some people who
know how to play this game. It’s not actually that hard. I predict that the first major
country to assimilate this
knowledge will be China, and that – after a period of turmoil and transition perhaps
– the Chinese yuan will
become the world’s
premier gold-linked currency.
The financial capital of the 21st century will be Shanghai.
Nathan Lewis
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