The True Gold Standard (Second Edition)
August 15, 2012 marked the 41st anniversary of the "temporary suspension" of the gold standard by President Richard Nixon. It is of interest to read the reminiscences of Paul Volcker, who, as under-secretary of the Treasury for international monetary affairs under Mr. Nixon, was at Camp David and participated in the deliberations and execution of the closing of the gold window.
In 2000 Paul Volcker spoke to an interviewer for PBS's Commanding Heights:
INTERVIEWER: Were you at Camp David the weekend when gold convertibility was suspended?
PAUL VOLCKER: Yes, I indeed was.
INTERVIEWER: What was the atmosphere like?
PAUL VOLCKER: It was a little bit mixed. Arthur Burns, who was then chairman of the Federal Reserve Board, argued strenuously enough to suspend gold convertibility. He was really the only one who vigorously took that view. I think most of the rest of us who were involved thought the time had come and some approach had to be taken, and that the only practical move internationally was to suspend gold convertibility, which would lead to a depreciation of the dollar. It was not a permanent solution, in my mind, but it was a necessary transitional step. The president, I think, had become pretty well convinced before he was up there. The surprise to me was the way it was politically shaped, with Mr. Nixon and Mr. Connally presenting it to the world as a great triumph. This was America exhibiting its strength and power, dealing with speculative pressures in an appropriate way and seizing the moment to deal with the price question at home, and at the same time there was actually a tax reduction on there. The economy responded favorably; the stock market responded favorably. There had been very ominous predictions of what would happen to the stock market. The stock market went up instead of down.
INTERVIEWER: You led the charge against the gold standard. Do you feel that some sort of fixed exchange rate should be used?
PAUL VOLCKER: I certainly agree with more stable exchange rates. What we are seeing and will see is that some economies will search for some way to get some stability and they will be driven a bit to abandon their own currency. You already see that going on with half a dozen or a dozen countries around the world that are either adopting the dollar or adopting the euro or adopting a currency board which comes close to the same thing other countries are talking about. It's not so easy for countries sitting out there in Asia that have no natural anchor, so to speak. They have very diversified trade. It's a fairly easy question for Mexico. It's got big political questions that are very heavily [reliant] upon the United States anyway, and a lot of feeling in Mexico [is] they'd be better off using the dollar. There's some merit to that, and we're being pushed in that direction. The big countries are relatively self-satisfied. You may see the world breaking up into regional currency zones. I don't think we're going to go to a gold standard.
Mr. Volcker is one of the great monetary technocrats of our era. That said, his views were greatly influenced by a top-down economic philosophy that has fallen out of consensus. For example, he observed, in the same interview, that
INTERVIEWER: What seems to have happened over the last 15 or 20 years is that there's been a huge retreat of governments from the commanding heights of economy. Is that fair?
PAUL VOLCKER: Yes. One of the things that occupies me and one of my big concerns has always been monetary policy. The importance of government and the importance of good government are somewhat related to the inflation point. There's been enormous erosion of trust in government generally, including, in the United States, a lack of confidence in the government. It's hard to get people, good people, to serve in government. The United States always has a healthy skepticism about government, but it erodes into a cynicism, which isn't very healthy. I find myself getting cynical about it. Now, of all people, I spent 30 years in government, and I have great respect for the importance of government, and when I become cynical about it, it's a bad sign. Part of the difficulty may well be that there was too much hubris, [the] feeling the government could do everything and do it well and getting [control of] the parts of the economy that it turns out they couldn't do so well. They tried to do too much too soon and get into areas where performance fell way short of reasonable expectations, and now we've had a reversal, which I think to a considerable extent is a reaction of that and [is] probably healthy.
INTERVIEWER: But you feel it's gone too far?
PAUL VOLCKER: The reverse movement? I don't think it's going too far.
The restoration of governance of monetary policy from the Federal Open Market Committee to the broad markets via readoption of the classical gold standard may not be a trend that Mr. Volcker foresees -- or would even welcome -- but it is fully in line with the repudiation of central planning in all other sectors. The readoption of the classical gold standard is central and necessary to the restoration of monetary and financial order to America and the world.
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The Gold Standard Now
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