“Stable money is the key to recovery”
November 18, 2008 – 12:57 pm
The title above comes from this article by Judy Shelton. She’s a regular contributor to the WSJ op-ed page and has long advocated a return to the gold standard. I thought I’d highlight it because another gold standard advocate appeared on a different op-ed page recently (see below). Could the gold standard argument go mainstream?
First, Shelton:
…At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system — anchored by a gold-convertible dollar — ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence…
And Walker Todd, former Federal Reserve Banker on the op-ed page of the CS Monitor:
…A gold standard offers exactly the kind of discipline that’s missing from the Fed. But its impact would be wider: Both in substance and in symbolism, gold provides integrity to the entire global financial system. Governments, however, have historically bridled at the constraint and accountability a gold standard brings. After all, when currency can be exchanged for gold, it’s harder for governments to inflate the money supply, which they’re tempted to do in order to spend beyond their means or cheat on their debts…
There are plenty of “fringe” folks calling for a return to the gold standard. I commented to a friend at a wedding two weeks ago that gold coins are probably one of the safer places to park cash if you fear holding dollars. He laughed at me. (He’s actually a regular reader of the blog.) But I suspect many of my readers might laugh if someone seriously told them to park their savings in gold coins or gold bars. Hell, I would have laughed at the thought of it a couple years ago.
But during 2007, shortly after I published my first op-ed about the credit crunch, I read Roger Lowenstein’s book on the LTCM collapse. When I did, the profound instability of our international monetary order struck me like a freight train. Using the LTCM debacle as exhibit A, Lowenstein explains deleveraging, the process by which levered institutions have to sell assets to raise the capital they need to pay their debts. If too many institutions are in too much debt and have to sell all at once, liquidity evaporates and asset prices collapse.
This is the death sprial scenario for a fractional reserve banking system based on fiat currency.
My concern is that the bailouts will not only fail, they will backfire, leading to a run on the dollar. At that point, the gold standard argument may go mainstream.
5 Responses to ““Stable money is the key to recovery””
Judy Shelton & Walker Todd echo the sentiments of one A. Fekete…whom I happen to believe is right on target. The death spriral to which Shelton refers includes falling interest rates caused by open market operation fraudsters (ie–the FED!) and unregulated, megalomaniacal bond speculators, who work together to purposefully make interest rates fall so that they can make a fortune on shorting the bond market. A gold standard gives conservative investors a place to park their money that isn’t in bonds—and of course this type of system is anathema to our Reaganite ideologues: thay cannot become billionaires so easily.
By Dan W on Nov 18, 2008
Cash is not a store of wealth. The Fed and all other central banks are treating our money as a currency.. that is.. a means of exchanging credit or labor or services for other goods or services. Apparently the Fed will have tripled its balance sheet by the end of December. That means three times the number of dollars kicking around when credit starts flowing and the economy starts to take off again. I truely don’t believe the fed will “mop up” some of this money to prevent inflation. And I think it would be impossible for them to drain out this enormous amount of money in time. They would have to immediately raise interest rates to large double digits, and that would surely break the economy again. It’s like taking away the punch bowl just ast the party is getting started. So back to my point, they only see money as currency. Sure, gas or milk may take twice or three times as many dollars to purchase next year. Who cares… as long as your pay cheque has doubled or tripled. This is great for those who owe debts in yesterday’s dollars. But it means the dollar will loose two or three times its value. Today with asset prices declining because people have to liquidate them to pay off their debts (no, it’s not deflation) the dollar is experiencing bubble demand. When the dust settles and the Fed’s newly created money starts flowing you will see everything shoot up in price. This will prove that your savings will buy less. This means the dollar is NOT a store of value.
Us gold bugs have no room to brag with how things have worked out. However, gold is a store of value and when compared to soy beans well you can easy grow new beans by next year without that much effort. But it takes maybe 10 years to bring a new gold mine on line and much capital for the equipment, infrastructure and labor to produce the gold. The value stored in gold isn’t the flash/bling of its appearance. It is the labor and capital that was spent to make that piece of gold available. Because gold and silver are scarce and expensive to produce that is what makes it valuable. When more dollars are chasing the same amount of gold it will take more to buy that labor & capital required to produce the gold. When it takes more dollars to operate the mine due to depreciated value of the dollar, if the mine can’t turn a profit selling the gold it will simply stop production until gold prices rise to profitable levels. As for the storage of wealth in money… well … for paper money it’s just paper & ink. Now days, they print money via credit transfer to accounts with just a few key strokes. The Fed has been creating billions of new dollars daily!
I am spending my US dollars on assets. Gold and stocks/equities. Just because I know that in a year or two all that newly created cash will depreciate my wealth that is currently denominated in dollars. With people liquidating their assets (to pay their debts) and the resulting price declines this is a great time to buy assets as another means to store your wealth. Yes, stocks are still on the decline. But so are house prices and everything else that’s currently being sold off. You have to sacrifice something to protect yourself from the coming inflation. Of course, if you only have debt and now cash in the bank you don’t have as much to worry about. If that was my case I would actually be cheer leading the inflation. I’m sure the US gov’t loves the idea of paying off all its debts with cheaper dollars.
By bearing01 on Nov 18, 2008
Thanks to bearing01 for taking the time to post that comprehensive essay. I judge the quality of blogs in large part by the quality of the comments they provoke. What you wrote is a perfect example of what I hope top find.
By CB on Nov 18, 2008
I’ll be the unsophisticated contrarian…
If, the dollar was still tied to the “gold standard” as it was pre-FDR, would we have been able to fight WWII?
Would the boom times for the USA that essentially lasted from the 1950’s until now (with relatively minor blips) have occurred?
A fractional banking system is inherently susceptible to abuse but is absolutely necessary to provide the rate of improvement in the amount & quality of human life, world-wide, that we have come to expect in the last 50-60 years.
If ya wanna get right down to it, food & energy are the only commodities that really count.
Who wants to to tie the price of a barrel of oil to a bushel of wheat?
That’s the kind of thing that generates wars.
Yeah, there needs to be some sort of of limiting factor to the creation of “fiat” money, but a gold standard is a 19th century idea of a fix for a 21st century problem.
By shinola on Nov 19, 2008
shinola, I’ve never bought the idea that fractional reserve lending is “necessary” for improving quality of life. Hard work, yes, fraud, no.
By Tesh on Nov 20, 2008