And then, as a sort of follow-up for my previous comments today, I read the
following in today's New York Times. This is a much more powerful piece
than Greider's. It is a piece about the gold standard. For the last 30 or
40 years the New York Times, together with the Wall Street Journal and the
Financial Times has abjured articles about the gold standard. In the last
two or three months there has been what can only be described as a spate of
them, Robert Zoellick's article (he, the President of the World Bank -- in
support of gold as a "reference point") being one of them last week.
(Zoellick's article will, I'm sure, have been explosive in the minds of the
cognoscenti. This one might well be more widely explosive. This is not, as
yet, the editorial policy of the New York Times -- still as yet under the
influence of Paul Krugman -- but it may well be before too long.)
Of course, the following doesn't apply just to the dollar but to all
national currencies which are printed to suit governments' problems.
Keith
<<<<
HOW TO MAKE THE DOLLAR SOUND AGAIN
James Grant
By disclosing a plan to conjure $600 billion to support the sagging
economy, the Federal Reserve affirmed the interesting fact that dollars can
be conjured. In the digital age, you don't even need a printing press.
This was on Nov. 3. A general uproar ensued, with the dollar exchange rate
weakening and the price of gold surging. And when, last Monday, the
president of the World Bank suggested, almost diffidently, that there might
be a place for gold in today's international monetary arrangements, you
could hear a pin drop.
Let the economists gasp: The classical gold standard, the one that was in
place from 1880 to 1914, is what the world needs now. In its utility,
economy and elegance, there has never been a monetary system like it.
It was simplicity itself. National currencies were backed by gold. If you
didn't like the currency you could exchange it for shiny coins (money was
"sound" if it rang when dropped on a counter). Borders were open and money
was footloose. It went where it was treated well. In gold-standard
countries, government budgets were mainly balanced. Central banks had the
single public function of exchanging gold for paper or paper for gold. The
public decided which it wanted.
"You can't go back," today's central bankers are wont to protest, before
adding, "And you shouldn't, anyway." They seem to forget that we are
forever going back (and forth, too), because nothing about money is really
new. "Quantitative easing," a.k.a. money-printing, is as old as the hills.
Draftsmen of the United States Constitution, well recalling the
overproduction of the Continental paper dollar, defined money as "coin."
"To coin money" and "regulate the value thereof" was a congressional power
they joined in the same constitutional phrase with that of fixing "the
standard of weights and measures." For most of the next 200 years the
dollar was, in fact, defined as a weight of metal. The pure paper era did
not begin until 1971.
The Federal Reserve was created in 1913 -- by coincidence, the final full
year of the original gold standard. (Less functional variants followed in
the 1920s and '40s; no longer could just anybody demand gold for paper, or
paper for gold.) At the outset, the Fed was a gold standard central bank.
It could not have conjured money even if it had wanted to, as the value of
the dollar was fixed under law as one 20.67th of an ounce of gold.
Neither was the Fed concerned with managing the national economy. Fast
forward 65 years or so, to the late 1970s, and the Fed would have been
unrecognizable to the men who voted it into existence. It was now held
responsible for ensuring full employment and stable prices alike.
Today the Fed's hundreds of Ph.D.s conduct research at the frontiers of
economic science. "The Two-Period Rational Inattention Model: Accelerations
and Analyses" is the title of one of the treatises the monetary scholars
have recently produced. "Continuous Time Extraction of a Nonstationary
Signal with Illustrations in Continuous Low-pass and Band-pass Filtering"
is another. You can't blame the learned authors for preferring the lives
they lead to the careers they would have under a true-blue gold standard.
Rather than writing monographs for each other, they would be standing
behind a counter exchanging paper for gold and vice versa.
If only they gave it some thought, though, the economists -- nothing if not
smart -- would fairly jump at the chance for counter duty. For a
convertible currency is a sophisticated, self-contained information system.
By choosing to hold it, or instead the gold that stands behind it, the
people tell the central bank if it has issued too much money or too little.
It's democracy in money, rather than mandarin rule.
Today, it's the mandarins at the Federal Reserve who decide what interest
rate to impose, and what volume of currency to conjure.
The Bank of England once had an unhappy experience with this method of
operation. To fight the Napoleonic wars of the early 19th century, Britain
traded in its gold pound for a scrip, and the bank had to decide
unilaterally how many pounds to print. Lacking the information encased in
the gold standard, it printed too many. A great inflation bubbled.
Later a parliamentary inquest determined that no institution should again
be entrusted with such powers as the suspension of gold convertibility had
dumped in the lap of those bank directors. They had meant well enough, the
parliamentarians concluded, but even the most minute knowledge of the
British economy, "combined with the profound science in all the principles
of money and circulation," would not enable anyone to circulate the exact
amount of money needed for "the wants of trade."
The same is true now at the Fed. The chairman, Ben Bernanke, and his
minions have taken it upon themselves to decide that a lot more money
should circulate. According to the Consumer Price Index, which is showing
year-over-year gains of less than 1.5 percent, prices are essentially stable.
In the inflationary 1970s people had prayed for exactly this. But the Fed
today finds it unacceptable. We need more inflation, it insists (seeming
not to remember that prices showed year-over-year declines for 12
consecutive months in 1954 and '55 or that, in the first half of the 1960s,
the Consumer Price Index never registered year-over-year gains of as much
as 2 percent). This is why Mr. Bernanke has set out to materialize an
additional $600 billion in the next eight months.
The intended consequences of this intervention include lower interest
rates, higher stock prices, a perkier Consumer Price Index and more hiring.
The unintended consequences remain to be seen. A partial list of unwanted
possibilities includes an overvalued stock market (followed by a crash), a
collapsing dollar, an unscripted surge in consumer prices (followed by
higher interest rates), a populist revolt against zero-percent savings
rates and wall-to-wall European tourists on the sidewalks of Manhattan.
As for interest rates, they are already low enough to coax another cycle of
imprudent lending and borrowing. It gives one pause that the Fed, with all
its massed brain power, failed to anticipate even a little of the troubles
of 2007-09.
At last week's world economic summit meeting in South Korea, finance
ministers and central bankers chewed over the perennial problem of
"imbalances." America consumes much more than it produces (and has done so
over 25 consecutive years). Asia produces more than it consumes.
Merchandise moves east across the Pacific; dollars fly west in payment. For
Americans, the system could hardly be improved on, because the dollars do
not remain in Asia. They rather obligingly fly eastward again in the shape
of investments in United States government securities. It's as if the money
never left the 50 states.
So it is under the paper-dollar system that we Americans enjoy "deficits
without tears," in the words of the French economist Jacques Rueff. We
could not have done so under the classical gold standard. Deficits then
were ultimately settled in gold. We could not have printed it, but would
have had to dig for it, or adjusted our economy to make ourselves more
internationally competitive. Adjustments under the gold standard took place
continuously and smoothly -- not, like today, wrenchingly and at great
intervals.
Gold is a metal made for monetary service. It is scarce (just 0.004 parts
per million in the earth's crust), pliable and easy on the eye. It has
tended to hold its purchasing power over the years and centuries. You don't
consume it, as you do tin or copper. Somewhere, probably, in some coin or
ingot, is the gold that adorned Cleopatra.
And because it is indestructible, no one year's new production is of any
great consequence in comparison with the store of above-ground metal. From
1900 to 2009, at much lower nominal gold prices than those prevailing
today, the worldwide stock of gold grew at 1.5 percent a year, according to
the United States Geological Survey and the World Gold Council.
The first time the United States abandoned the gold standard -- to fight
the Civil War -- it took until 1879, 14 years after Appomattox, to again
link the dollar to gold.
To reinstitute a modern gold standard today would take time, too. The
United States would first have to call an international monetary
conference. A chastened Ben Bernanke would have to announce that, in fact,
he cannot see into the future and needs the information that the
convertibility feature of a gold dollar would impart.
That humbling chore completed, the delegates could get down to the
technical work of proposing a rate of exchange between gold and the dollar
(probably it would be even higher than the current price of gold, the
better to encourage new exploration and production).
Other countries, thunderstruck, would then have to follow suit. The main
thing, Mr. Bernanke would emphasize, would be to create a monetary system
that synchronizes national economies rather than driving them apart.
If the classical gold standard in its every Edwardian feature could not,
after all, be teleported into the 21st century, there would be plenty of
scope for adaptation and, perhaps, improvement. Let the author of "The
Two-Period Rational Inattention Model: Accelerations and Analyses" have a
crack at it.
-----
James Grant, editor of Grant's Interest Rate Observer, is the author of
"Money of the Mind."
Keith Hudson, Saltford, England
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