There is a palpable glee among some that is evident whenever the price of gold falls.¹ It manifests itself in the media, academia, pundits, and certain segments of the investment world. Paul Krugman becomes orgasmic. A fall in the price of gold justifies their belief that gold is indeed a barbarous relic. (Keynes was referring to the gold standard as barbarous, but the modern-day interpretation has extended to the commodity gold.) If gold is a barbarous relic, then it should have no discernible value and certainly no influence on monetary policy. The proof of its useless value becomes evident by a drop in its price. Academia widely holds the belief that gold has no significance to the monetary realm beyond any other commodity—despite the fact that those countries that linked their currency to gold over a near 300 year span, experienced neither inflation or deflation and registered steady growth. There is no difference in their view between gold, pork bellies, wheat, orange juice, or a loaf of bread. (Warren Buffett famously dismissed gold as a commodity of no utility whose value is an enigma. ”Anyone watching from Mars would be scratching their head.”) If gold is just another commodity, then any commodity can be a standard, or better yet, monetary policy requires no standard. Academic Ph.D’s can create dollars at whim and justify the creation based upon whatever excuse, data, or theory they desire. This is what Jim Grant refers to as the Ph.D standard in reference to current Fed management.
The purveyors of elite monetary control have to dismiss gold’s monetary properties to justify their fiat manipulation. If they can disassociate the price of gold from the results of fiat policy, then gold truly is a barbarous relic. Fiat manipulators then have intellectual backing to create dollars at will based on any desired justification.
Unfortunately for the Fed, fiat advocates, and fellow sycophants, they will never realize their golden Schadenfreude. Gold’s value, despite some wobble, has remained stable for millennia. There is no other monetary standard or hindsight economic data upon which to compare gold. Gold is the monetary Polaris. The Fed controls the dollar’s value through its monetary management. Gold’s stability acts as a signal of Fed error. Changes in the price of gold do not reflect changes in gold’s value. Rather, they reflect the instability of fiat currency that orbits about gold. The unique, monetary properties of gold have relegated gold’s value stable since its first use with the onset of organized economies. History has proven its stability, and mankind has accepted it. Central banks hoard gold not because of Bernanke’s “tradition” but for the same reason as everyone else. Gold’s value remains stable.
The world will work itself back to a gold standard. It has no choice. The current global financial stress is a direct result of central bank manipulation of currency. The vast productive class will always demand stable, honest money over elitist controlled fiat money that benefits the crony, connected, and powerful. Gold is democratic because currency managers cannot manipulate its value. It represents everyone’s economic interests at optimum monetary efficiency. The average life span of a fiat currency is 40 years. We are at the 45 year point. The fiat dollar’s age is showing.
1. The opposite reaction occurs among those who believe that gold is the only true money. A rise in the price of gold validates their belief that the real price of gold should equate to total base dollars divided by ounces of gold held by Treasury and the Fed. This equates to a current gold price of $17,300 per ounce.
Another great post. One quibble I have is the statement that the Fed controls the dollar’s value through its monetary management. Our friend John Tamny makes the case that the Fed’s power here is vastly overstated. It is really the U.S. Treasury that is responsible for the USD’s value. In 1971, it wasn’t the Fed (Arthur Burns) that broke the link to gold in ending the Bretton Woods Agreement but rather the Secretary of the Treasury John Connolly. If a President Trump wished to go back to a gold standard, he could simply tell his Treasury Secretary to set a target and we would effectively be back on a gold standard. What I struggle with is how the Treasury would be able to add/remove liquidity from the system to ensure that the target is maintained. I learned early on, via Jude Wanniski, that the Fed would handle that task. I’d love to read your thoughts.
The President and Treasury Secretary can get the dollar they want. The President could issue an executive order today for a return to a dollar defined at a specific weight of gold. Nixon ended Bretton Woods overnight by executive order. The Fed is composed of bureaucrats who serve at the discretion of government. If a President and Treasury Secretary want monetary policy conducted in a certain way, Fed members have to do so or resign. The Treasury cannot create or extinguish base money. Only the Fed can monetize debt.
The President and Treasury Secretary can also abdicate discretion to the Fed to conduct monetary policy as it desires. Bernanke built his academic and professional career on the theory that the Fed could have prevented the Great Depression by flooding the economy with liquidity. After the financial crisis of 2008, the Fed reaction was a flood of liquidity. I read this as Bernanke’s policy. The Fed balance sheet exploded from $.8 trillion to $4.5 trillion. Again, only the Fed can create or extinguish liquidity.
Greenspan has an understanding of gold and kept it in view during his Fed tenure. The dollar stayed fairly stable around $350. Was this due to the power of multiple Treasury Secretaries or Greenspan? Bernanke has no understanding of gold. Wanniski attempted to tutor the soon-to-be new Fed Chairman Bernanke on the monetary stability of gold. It is clear from their exchange, download here, that gold does not compute in Bernanke’s academic or monetary model.