The True Gold Standard (Second Edition)
Key Writings: Domitrovic on the Gold Standard
Last week, the House Financial Services Committee held hearings on Federal Reserve reform. Maybe the Fed could explicitly follow monetary policy rules, or become subject to conventional audits, or be the subject of a commission reflecting on its hundred-and-one years of performance. These were some of the ideas floated. Warhorses including the old International Monetary Fund hand Simon Johnson were there to say no way: everything will go haywire if you change a thing with the Fed.
Sure, Professor Johnson. Rules, for example. These could turn out to be scary. Back when the Fed had to think about things like gold-cover ratios, all the economy had to show for it was postwar prosperity after World War II, the most legendary experience of economic abundance the world has ever seen.
In 1980, that terrible year of stagflation, when Ronald Reagan was gaining the Republican nomination for president, dueling editorials appeared in the Wall Street Journal about “The Battle for Reagan’s Soul.” The first, by that title, came from neo-conservative sage Irving Kristol, who alerted readers that an effort was on by the establishment to capture Reagan. Individuals like Alan Greenspan, one supposes, and other Nixon-Ford leftovers were counseling Reagan not to strive to get everything he wanted. In the interest of a balanced budget and defense buildup, said prudence, he should go easy on tax cuts and even a stringent monetary policy.
Lewis E. Lehrman, the raconteur entrepreneur, piled on with “Stop the Battle for Reagan’s Soul.” Just do it all, Lehrman said, implying cut taxes, strong defense, robust trade, modest safety net, spare regulation—and gold-based money. Lehrman’s logic: if you do it all, you’re likely to get everything. If you do a little, here comes nothing.
The musty old document that supposedly governs this country, the Constitution of the United States put into practice way back in 1789, makes no provision for the governmental institution that has proven the most influential of our time: the Federal Reserve. About the only clause in the whole multi-page document that might even remotely pertain to authorizing a Federal Reserve is this expression from Article 1, Section 8:
“The Congress shall have Power To….coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures….”
That’s it. You can search the document up and down for lines referring to the monetary authority of the country, and all that will turn up is stuff on Letters of Marque, Presidential Electors, and permission to tax slave imports up to $10 per.
It is not the case that banking, much less “central banking”—or paper money for that matter—did not exist 225 years ago, such that the Founders could have authorized a Fed had they ever heard of such a thing. Paper money was a “warehouse receipt” for gold or silver coin (or bullion) that an institution kept because it was more convenient for the owner of the money to conduct affairs without hauling precious metals around on one’s person.
The big run-up in the price of gold that has been a constant in this millennium finally broke a bit in 2013. From the peak of some $1850 per ounce (achieved in 2011), gold closed this past year around $1250, a decline of about a third. As we rounded into 2000 now nearly a decade and a half ago, gold was barely $300 per ounce.
Last year, the healthy phenomenon of asset-shift was at work. Investors piled out of the hedge that is gold into stock shares, which is to say titles to companies that are out there in the economy trying to do something productive. The more this process goes on, the more the world’s capital will be put to good use.
A question has haunted the aftermath of the Great Recession: where is all the inflation? If the Federal Reserve is going to spike the money supply most massively in the context of minimal economic growth, as it has since 2008, it would seem that a severe price inflation must ensue. Yet the consumer price index has grown at merely 1.5% for the past five years.
Back in the “stagflation” era, the 1970s and early 1980s, and cued up by President Nixon’s taking the dollar off gold in 1971, the Federal Reserve printed money like never before. Inflation duly roared. From 1971 to 1981, the CPI leapt a phenomenal 125%, 8%-plus per annum. And in the nine years after the 1973 peak, economic growth averaged less than 2% per year.
Economic stagnation plus Fed activism equals stagflation: we saw it all thirty-five years ago. What gives these days? Why only half of the stagflation bargain?
The recent break in the gold price, in which the king commodity has completed a 20% drop since the high point of late last year, holds a clue.
In the 1970s, “inflation” was a general phenomenon, one of whose manifestations was an increase in that pet statistic of the government’s, the CPI. However, the main way that investors responded to the Fed blowouts of the era was not to bid up consumer prices or anything like that, but to get their holdings out of asset classes that brought dollar returns.
BY BRIAN DOMITROVIC: