The downward movement in the gold price brings to mind the old miner's ballad, Oh My Darling Clementine.
In a cavern, in a canyon,
Oh my darling, oh my darling,
Light she was and like a fairy,
Drove she ducklings to the water
Ruby lips above the water,
Of course, demonetized gold merely is a commodity, and a nonindustrial one at that, with all of the speculative aspects this implies. Under the classical gold standard, the value of the dollar is meticulously defined by a fixed weight of gold and the problems associated with a fiduciary monetary policy are resolved. Meaning, no more "Ruby lips above the water, Blowing bubbles, soft and fine...." Whether dotcom, real estate, or any other manifestation of the bubbles, and boom and bust cycle, associated with fiduciary paper money.
What were what Keynes called the “vague and jejune meditations” of Churchill’s advisors from the “imaginary academic world?”
What persuaded Churchill to undertake the catastrophic blunder, in 1925, of resuming the gold standard at a dramatically overvalued pre-war parity? Doing so triggered a sharp recession, a million unemployed, the General Strike of 1926, and almost ended Churchill's political career.Keynes, in ““The Economic Consequences of Mr. Churchill”:
What they ought to have said, but did not say, can be expressed as follows:—
"To begin with, there will be great depression in the export industries. This in itself will be helpful, since it will produce an atmosphere favourable to the reduction of wages. The cost of living will fall somewhat. This will be helpful too, because it will give you a good argument in favour of reducing wages. Nevertheless, the cost of living will not fall sufficiently, and, consequently, the export industries will not be able to reduce their prices sufficiently until wages have fallen in the sheltered industries. Now wages will not fall in the sheltered industries merely because there is unemployment in the unsheltered industries, therefore you will have to see to it that there is unemployment in the sheltered industries also. The way to do this will be by credit restriction. By means of the restriction of credit by the Bank of England you can deliberately intensify unemployment to any required degree until wages do fall. When the process is complete the cost of living will have fallen too, and we shall then be, with luck, just where we were before we started.
"We ought to warn you, though perhaps this is going a little outside our proper sphere, that it will not be safe politically to admit that you are intensifying unemployment deliberately in order to reduce wages. Thus you will have to ascribe what is happening to every conceivable cause except the true one. We estimate that about two years may elapse before it will be safe for you to utter in public one single word of truth. By that time you will either be out of office or the adjustment, somehow or other, will have been carried through."
Although the great French economist Jacques Rueff emphatically (and to his own regret posthumously, in a 1947 article in the Quarterly Journal of Economics) disputed Keynes General Theory, Rueff too sensitively was attuned to the humanitarian problems risked by the overvaluation of gold. Rueff applauded FDR for revaluing in line with general commodities prices — thereby immediately (if temporarily, due to an ensuing policy error by the US Treasury) — from $20.67 to $35 under the guidance of agricultural economist George Warren.And proponents of restoring a modern, 21stcentury, gold standard such as Reagan Gold Commissioner Lewis E. Lehrman, founder and chairman of the Lehrman Institute, propound a mechanism to define the rebooting of the definition of the dollar in a manner meticulously designed not to replicate Churchill’s blunder but rather to generate a climate of equitable prosperity for American working families.
Lord Keynes, wrote, in 1925, “The Economic Consequences of Mr. Churchill” — a trenchant critique of Churchill’s 1925 resumption of the gold standard at pre-war parities (around 10% above prevailing price levels).
Image courtesy of Wikipedia
He, explicitly, therein, was not critiquing the gold standard itself. In speculating about how Chancellor Churchill could have been so ill advised, he wrote:
“I think that the minds of his advisers still dwelt in the imaginary academic world, peopled by City [ed. Note: the then-equivalent of Wall Street] editors, members of Cunliffe and Currency Committees et hoc genus omne, where the necessary adjustments follow "automatically" from a "sound" policy by the Bank of England. …
Their arguments—if their vague and jejune meditations can be called such—are there for any one to read.
As Lehrman Institute founder and chairman Lewis E. Lehrman repeatedly has observed, the only legitimate grounds for evaluating policy reside in “the laboratory of human history.” The “imaginary academic world” as indicted, quite percipiently, by Keynes, provides neither necessary nor sufficient framework.
George Gilder, the living author most quoted by President Reagan, has published a new and amazing work, Knowledge and Power: the Information Theory of Capitalism and How It Is Revolutionizing our World.
Gilder, author of Microcosm and Telecosm (among other works) universally is considered the most high tech of the supply side thinkers. He often is referred to as a "Futurist." The website of the Discovery Institute, which Gilder co-founded, observes:
"Mr. Gilder pioneered the formulation of supply-side economics when he served as Chairman of the Lehrman Institute's Economic Roundtable….”
Gilder, on whom Wired did a cover story, enjoys well-earned prestige in the realm of digital technology. Thus his endorsement — and the reasons for his endorsement — of the gold standard carries with extra credibility. Gilder’s Futurist cred decisively refutes those who wish to consign the gold standard to the era of ox-carts and clipper ships. He writes:
“Could it be that the fundamental cause of the [2008 financial] crisis was that the monetary system, alone among the structures of capitalism, lacks a low-entropy physical layer?
“Over the centuries of monetary history, the remedy for unstable money has always been gold. Critics who say the gold standard has been eclipsed by an information standard based on the Internet do not grasp the essence of information theory, which measures the information content by its ‘news’ (expressed in digital form as unexpected bits or entropy). It takes a low-entropy carrier to bear a high-entropy newsworthy message.
“The 130,000 metric tons of gold that has been mined in all of human history constitutes the supreme low-entropy carrier for the upside surprises of capitalism. Without guidance from gold, currency markets are subject to political high entropy. They resemble a communications system without a predictable carrier that enables the information to be distinguished from the noise in the line.
“…Without a baseline of gold, entrepreneurship in the world economy degenerates into the manipulation of currencies for the interests of profiteers and government insiders. This is a pathology of capitalism ….” (p. 122)
Gilder offers the gold standard as, for technical reasons, crucial to a civilized prosperity. Those who oppose the restoration of the classical gold standard must begin to realize that caviling "antique!" no longer represents, in serious debate, a credible refutation of its proponents.
Walter Kirn, novelist, essayist and critic, presents a memoir of having been gulled by impostor Christian Karl Gerhartsreiter, a/k/a "Clark Rockefeller" in the June 10 & 17, 2013 of the New Yorker.
While I waited for it, drinking cold coffee in my messy office above a Western-clothing store, I asked Clark what he did for work. My professional hunch was that he did nothing at all, which is how I was thinking by that point, as a novelist who was currently stranded between books and was far too caught up in that other fiction, a life.
"At present, I'm a freelance central banker," he said.
I asked him to explain.
"Think of a country's money supply as a lake or a river behind a dam," he said. "Think of me as the keeper of that dam. I decide how much water flows over its lip at what velocity, and for what duration. The trick is to let through sufficient water to nourish and sustain a country's 'crops,' but not so much that it floods the fields and drowns them." I later ran this metaphor past someone better equipped than I was to judge its merits, who deemed it "brilliant."
"Which countries," I asked Clark, "do you do this for?"
"At the moment? Thailand."
"That's a lot of responsibility."
"Which countries before Thailand?"
In Kirn's exquisitely turned phrase:
The classical gold standard is based on rules with intrinsic integrity.
The "pretence of knowledge," in Hayek's immortal phrase, intrinsic in the fiduciary management of a currency, really does present as a "weakness for monogrammed hustlers full of tea and toast."
Bravo to Walter Kirn.