The True Gold Standard (Second Edition)
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 have shown, 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.
Oct 20, 2014
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Key Monetary Writings
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Why the Gold Standard?