By Robert Romano
Ever since the U.S. gold standard was weakened in 1913 with the
creation of the Federal Reserve system, then again during the Great
Depression, when the domestic supply of gold was confiscated in 1933,
and finally eliminated all together by Richard Nixon in 1971, when
international convertibility was suspended, debate has raged over
whether we are better off with the system that replaced it: The dollar
Or, more specifically, the debt standard.
The debt standard
Now, instead of the expansion of gold stocks, the contraction of new
debt — by governments, financial institutions, businesses, and
consumers — is the primary mechanism by which new dollars are created.
Conversely, debt repayment decreases the money supply, leading to
deflation, an economic malady policymakers have ever since the
Depression era sought to avoid.
For that reason, politicians have almost always sought to avoid
repayment at any cost, instead causing a perpetual expansion of debt on
all fronts to fund everything imaginable — war, entitlements, corporate
and social welfare, you name it. This has been used as a means of
facilitating inflation — incentivizing deficit-spending by government,
credit expansion by financial institutions, and excessive leveraging by
households, all in order to expand purchasing power.
This has led to the explosion of the national debt to over $14.7
trillion, helped facilitate the uncontrolled credit bubble of the 1990’s
and 2000’s that finally wrecked the global economy in 2008, and today,
still haunts us in the form of Europe’s sovereign debt crisis. It has
caused a 95 percent devaluation of the dollar from its levels in the
1910’s, eroding the purchasing power of American families, furthering
incentivizing the contraction of yet more debt.
Restoration of value
Now, 40 years later, after the gold standard’s demise, the nation is
coming to a moment of reflection — to examine the fallout of that
decision, and the chaos that has reigned ever since.
“The problem is that we have severed money from value,” Americans for
Limited Government (ALG) President Bill Wilson observed recently,
adding, “To get back to price stability and robust economic growth, we
must restore money as a reliable store of value.” But how?
One author may have an answer. Lewis Lehrman of The Lehrman Institute has
penned a new book, The
True Gold Standard, to provide a basis for restoring
convertibility — both at home and abroad — of dollars into a fixed
weight of gold, defined by law.
Today, dollars, and dollar-denominated assets — such as U.S.
treasuries — are held in reserve by foreign governments and financial
institutions all over the world. That system, writes Lehrman, must come
to an end.
Lehrman points to the explosion of the nation’s balance of payments
deficit with foreign nations — the trade deficit plus financial
transfers — and extreme budget deficits as primary evidence that the
world’s dollar standard system is a failure. By establishing the dollar
as the word’s reserve currency, other nations were incentivized to
depreciate their own currencies, cheapening the value of their exports.
Writes Lehrman, “since World War II, free trade has often been at the
expense of United States businesses, manufacturing, and labor,”
adding, “In the long run, free trade without stable exchange rates is a
fantasy.” Harsh words, but they are not without basis. After all, the
U.S. cannot control the value of foreign currencies, leaving the
nation vulnerable to what Lehrman termed “mercantilists” who know how
to game the system to their advantage.
He writes, “Under the world dollar standard, other nations gain
desired reserves only as the U.S. becomes an increasingly leveraged
debtor through balance-of-payment deficits.”
Instead, under an international gold standard, trade could be
facilitated without these structural imbalances with a single,
agreed-upon unit of measurement to the mutual benefit of all who
Get full story here.