One question I've heard more lately: Now that the gold price is over $1,500 an ounce, shouldn't the U.S. sell its gold reserves—which were mostly acquired from U.S. citizens in 1933 at $20.67 or bought at $35 an ounce under the post-World War II Bretton Woods monetary system?
If, as Lewis E. Lehrman and I haveshown, restoring the gold standard is necessary to sort out the U.S. economic and fiscal mess—specifically, preventing future episodes like the Great Recession of 2007-09, reversing the decline of U.S. international competitiveness and restoring lost Federal budget discipline—the answer is emphatically no: A growing U.S. economy will need more gold, even if the gold price rose no farther.
Yet even if not, the cautionary example of IMF gold sales is also decidedly negative. Since gold was demonetized by international treaty in 1978 during President Jimmy Carter’s administration, various IMF managing directors (mostly French Socialists) have successfully campaigned to sell chunks of the IMF's gold reserves (which were started along with the IMF in 1944). The biggest IMF gold sales occurred in 1976-80 mostly under Jacques de Larosiere, in 1999-2000 under Michel Camdessus, and in 2009-10 under Dominique Strauss-Kahn.
Since each trade essentially sold gold to buy goods to fund the IMF itself and give to poor countries, their wisdom can be gauged by converting U.S. consumer (or producer) prices into gold terms, as in the nearby chart. (Note that the swings were smallest under the gold standard, and greatest since the dollar’s last link with gold was severed in 1971.)
The record might look better decades hence if the gold price plummeted. But at the actual average gold prices of about $228, 232, and $1157, those IMF gold trades have lost about 56%, 77%, and 33% of their respective values so far, adjusted for changes in the U.S CPI.
The clear lesson: It’s far wiser to keep than sell U.S. gold.
Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.
Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.
The new Federal Reserve chairman, Janet Yellen, gave a policy speech today at Chicago, where, in a startling gesture, she mentioned three working individuals by name — Jermaine Brownlee, Vicki Lira, and Doreen Poole. They lost their jobs the Great Recession and have been struggling ever since. It was a refreshing, even affecting demarche by Mrs. Yellen, who has made a return to full employment a public priority. She underscored her sincerity by telephoning Mr. Brownlee and Ms. Lira and Ms. Poole before delivering her speech.
Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.
By John D. Mueller
Who Was Jacques Rueff?
... Trained in science and mathematics at the Ecole Polytechnique, Rueff devoted his first theoretical work to showing that the same scientific method applies to “moral” or “social” sciences like economics as to the physical sciences (Des Sciences Physiques aux Sciences Morales, 1922). In both cases, he pointed out, individual acts can be “indeterminate,” but the pattern of large numbers of individual acts can be predicted as a matter of probability. And so in economics no less than physics, as he later wrote, “A scientific theory is considered correct only if it makes forecasting possible.”
"Forerunners of man lived upon the planet several million years ago. But the unique, modern, social order of man – civilization – emerged only four to five thousand years ago. Historical and archaeological evidence suggests that the institution of money evolved coterminously with civilization. From the standpoint of the 100,000-year history of Homo sapiens, civilization and money are but young and fragile reeds. Today their very existence is threatened by financial disorder."
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