The Dollar, Gold And The Quality Of Money By Forbes.com | Jul.
18 2011 - 3:37 pm
Is gold money?
That question, directed to Federal Reserve Chairman Ben
Bernanke by Congressman Ron Paul in last week’s hearings
before the House Financial Services Committee, strikes terror
in the heart of all central bankers.
Bernanke looked stunned and then answered, “No: Gold
is an asset.”
The rising price of gold reflects global uncertainties,
he explained. “The reason that people hold gold is
as a protection against what we call tail risks: really,
really bad outcomes.”
The daily headlines report those potential risks: governments
needing bailouts, from Greece to Harrisburg, Pennsylvania;
the possibility that the euro will splinter; runaway deficit
spending in the U.S.
With every headline, it is becoming increasingly apparent
how much the governing class has overreached. Those who
believe in government are simply running out of other people’s
money. For example, President Obama’s call to reverse
the tax break given to owners of corporate jets in his 2009
stimulus bill would supposedly raise $300 million a year
in revenue, enough to cover less than two hours of current
deficit spending. Even if the Federal government could tax
100% of personal income in excess of $250,000 a year, it
would collect little more than half of the revenue needed
to balance the budget.
These real world results mock the conventional wisdom that
given the power to spend, borrow, tax and print money, elite
public servants can manage the economy and protect the average
individual against the vicissitudes of life. Instead, government
itself has become a source of systemic risk, and a direct
threat to our prosperity and liberty.
At the center of this political upheaval is the quality
of money itself. “Is gold money?” is a show
stopper because it raises the questions: “What is
money and what power should government have to manipulate
its value?
The answers to these questions reveal how our most basic
trust in government has been betrayed.
When you or I accept dollars in exchange for providing
goods and services, we do so trusting that when we spend
those dollars, they will be accepted for an equivalent amount
of goods and services. That’s how money frees us from
a barter economy.
Trust is always an assessment of some future action. Making
a grounded assessment requires us to understand who is making
the promise, what action they are promising, and whether
they are sincere and competent to fulfill their promise.
When an individual, company or government has a good credit
rating, we are saying that we trust they will keep their
promise to pay off their debts in the future.
So it is with the value of money. Today Bernanke is making
the promise effectively to “do his best” to
achieve the Fed’s dual mandate of achieving maximum
employment and stable prices.
I do not doubt that Bernanke and his colleagues at the
Fed have done their best. Here are the results:
Three million fewer men and women are
employed today than 2.5 years ago, when the Fed began
an unprecedented era of monetary ease marked by zero interest
rates and two rounds of massive, quantitative easing.
The 12-month advance in the Consumer Price Index has been
above 2% for the past five months, hitting 3.6% for the
12 months ending both May and June. Bernanke promised in
his interview last December on 60 Minutes that the Fed “…would
not allow inflation to rise about 2% or less.” Yet
the Fed has taken no action, nor articulated any policy
change, that would fulfill his promise of price stability.
A
poll conducted by Rasmussen last week indicates that the
American people are losing trust in the Federal Reserve and
in the future value of the dollar. Fifty percent of those
polled reported they are “very concerned” about
inflation, and 79% said they were at least “somewhat
concerned.”
Is gold money? Technically, no, in that gold does not circulate
as a medium of exchange. But, as trust in the paper dollar
continues to erode, and the incompetence of the governing
class to manage the economy becomes more evident by the day,
there is growing interest in and support of making the dollar
as good as gold.
A gold standard works because the U.S. government rather
than the Chairman of the Federal Reserve stands behind a promise
that is explicit — a dollar is worth a fixed weight
of gold. This promise can be verified every minute of the
day by observing the current rate of exchange between the
dollar and gold, and, under a classical gold standard, by
exchanging currency at a national bank for gold coins of a
fixed weight and purity.
In addition, a gold standard provides a transparent set of
practices to keep the promise. A rise in the price of gold
signals too many dollars, triggering quantitative tightening.
A fall in the price of gold signals too few dollars, triggering
quantitative easing. Since these Fed actions are made daily
and at the margin, such adjustments are not disruptive, but
produce stability and trust.
Finally, a gold standard produces trust in the dollar because
gold has the unique characteristic of maintaining its buying
power over time. For example, if today’s dollar were
worth 1/35th of an ounce of gold as it was under the post
World War II Bretton Woods system, a barrel of oil today would
cost less than $3 a barrel, just as it did in the 1950s and
1960s.
Steps to restore gold’s legitimate role as money are
afoot. In Utah, gold and silver coins are now legal tender
and exempt from sales and income taxes. The Swiss Parliament
soon will hold hearings on creating a parallel, “gold
franc.” And, the central bank of Zimbabwe is considering
replacing its worthless currency with a gold-backed Zimbabwe
dollar.
The question: “Is gold money?” terrifies central
bankers because it highlights their inability to provide a
currency that is better than one whose quality is guaranteed
by a fixed rate of exchange into gold. Between Aug. 15, 1971
— the day President Richard Nixon suspended the promise
that a dollar was worth 1/35th of an ounce of gold —
and Feb. 1, 2006 — the day Bernanke was appointed Fed
Chairman — the dollar had fallen to 1/569th of an ounce
of gold. Today, it is worth a teeny tiny 1/1600th of an ounce
of gold.
An acceleration in the dollar’s decline and the inflation,
political and economic turmoil that would follow are among
those “really really bad outcomes” that people
are trying to escape. Restoring the promise that a dollar
is worth a fixed weight of gold would guarantee its value
and eliminate the “tail risk” of monetary disorder
that individuals, businesses and government all over the world
increasingly have reason to fear. The benefits of price stability,
low and stable interest rates, an increase in high paying
jobs and the spread of prosperity would redound to the benefit
of all.