Tuesday, October 11, 2011

A Golden Opportunity

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 standard.
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 participate.
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