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Keynesianism
has reached its natural extreme. The floating-currency status quo, in place
since 1971, is becoming more and more intolerable. Before too long, the soft
money fanatics will give way in disgrace, and the hard money traditionalists
will begin to get the respect they deserve. We are already on the path to a
new gold standard.
At this point, I ask myself: what is the biggest barrier between us today and
that happy conclusion? What is the limiting factor? Is it the criminal
instincts of today’s politicians? The cow-like acquiescence of the
masses? The immense gains still being enjoyed by the bankster class? The
endless prevarication of academia’s high priests of Keynesianism? The
sycophantic parroting of the establishment spin by the mainstream media?
All of these are important factors. But they are not the most important
factor.
The biggest barrier today is – us! The gold standard advocates
themselves.
Their motives are pure and their ideals are high. But can they deliver the
goods? Do they have the practical, technical knowledge that would allow them
to build a world monetary system that could last for a thousand years, and
could be implemented with no disruption?
Unfortunately, the answer is “no.” This condition can be
remedied. However, it had better be remedied quick, because we don’t
have that much time left.
If you had twenty minutes with Barack Obama, Angela Merkel, or Hu Jintao
– we will assume they know little about monetary economics – and
were asked to explain the basic tenets of a gold standard system, what would
you say? Here is what I would say.
Tenet
#1: Stable
Money is superior to Unstable Money. “Stable Money” is money that
is stable in value. Capitalist economies work best with conditions of stable
money. “Discretionary” monetary policy doesn’t really solve
any problems, and actually causes new ones.
Tenet #2: Gold is stable in value. Unlike other commodities, gold does
not go up and down in value. For this reason, it is the premier monetary
commodity, and has been for literally thousands of years. Although it is a
bit of a stretch to assume that gold is perfectly unchanging in value,
nevertheless, after centuries of experience, we have established that it is
sufficiently stable in value to serve its purpose as a monetary benchmark.
Also, gold is a better measure of stable value than any other available
reference or statistical concoction.
Tenet #3: Therefore, if your currency’s value is pegged to gold,
that currency will be as stable as gold. A gold-value peg is the best means
to accomplish our goal of stable currency value. For the last 500 years,
every government that has wished to implement a stable-currency policy has
used some variant of a gold standard. It is proven, it works, and there is no
need to invent another, inferior solution.
Tenet #4: A token currency, whether coins or notes, can be pegged to
gold via the adjustment of supply. “Supply” is technically known
as “base money,” which consists of notes, coins, and bank
reserves. If the currency’s value sags below its gold peg, then supply
is reduced. If the currency’s value is higher than its gold peg, supply
is increased. No gold bullion is needed to maintain this peg – only a
mechanism to increase and decrease the supply of base money. Central banks
accomplish this today by buying and selling government bonds in
“unsterilized” transactions. This is effectively the same as
currency board systems in use today.
Tenet #5: A “lender of last resort” can be provided within
the context of a gold standard. The original “lender of last
resort,” or what we today call a central bank, was the Bank of England
during the 19th century. The Bank of England was also the world’s
premier champion of the gold standard. The Federal Reserve was originally
constituted in 1913 to serve as a “lender of last resort” within
the context of a gold standard system, and did so for 58 years until 1971.
Central banks’ original purpose was perverted during the 20th century
due to the rise of Keynesian soft-money ideology, causing them to come into
conflict with the proper operation of a gold standard system.
These tenets probably seem familiar, and, except perhaps for the last one,
not very controversial. However, in my view, today’s gold standard
advocates have not properly internalized and mastered these core concepts. I
suggest that they do so as quickly as possible.
When people who are unfamiliar with monetary economics listen to the speech
and arguments of today’s gold standard advocates, I think they get the
impression that the gold standard advocates have a tendency towards ideology,
and a rather poor grasp of practical issues. They might not be able to
explain why, but for some reason, it seems like the gold-standard advocates
don’t have all their ducks in a row.
There’s a simple reason for this: it’s true! However, once the
gold standard advocates expand their understanding and master the core
concepts, this quality would also become apparent in their speech. The lay
observer would have a different impression – that the gold standard
advocates have a viable alternative, and are able to deliver on their
promises with complete expertise and understanding.
We need a small group – perhaps twenty people, in the English-speaking
world – who have achieved this level of mastery. We fall somewhat short
of that today, but this problem is easy to remedy.
It’s hard to change the world. But, it is not too hard to change
yourself. Start with this,
and the rest will follow.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at bookstores
nationwide, from all major online booksellers, and direct from the publisher
at www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.
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