A New Monetary Order

According to a study of 775 fiat currencies by Michael Hewitt, the average shelf life of a fiat currency is 27 years.  The fiat dollar is at the 46 year point.  It has long passed its value freshness date and is ready for replacement by a dollar that maintains its value.  This is becoming increasingly evident across all segments of the economic and financial world.  Greenspan, in an interview with World Gold Council, expressed his limited understanding for the necessity of a return to a gold standard.  Trump and Cruz, the last two candidates standing in the Republican primary field, not coincidently, stated that a return to a dollar backed by gold was under policy consideration. The financial media is increasingly considering the historic properties of gold and its role as a monetary standard.  The Financial Times on March 21, 2017 published an article entitled, If you like the Euro, why not just call for a global gold standard?  It makes the point that if Europe benefits from a common currency, why wouldn’t the world benefit from the common currency of a gold standard?  This is exactly what happened from 1870-1914 in the great age of globalization under the largely voluntary global classical gold standard.  The Kemp Foundation on April 20, 2017 held a forum on a return to a monetary system based upon stable exchange rates with contributors Robert Mundell, James Baker, Paul Volcker, and Judy Shelton, among others.  The late Jack Kemp well understood gold’s role and remained a constant proponent throughout his political career for the return of monetary stability based on gold.

Why is the world returning to gold?  The effects of the great liquidity flood experiment introduced by Bernanke and exported to the world’s central banks is ending with an economic whimper among seriously bloated and unmanageable central bank balance sheets.  The result is global stagnation, unsustainable debt, and income inequality.  The productive and middle class decline while the crony, connected, and speculator pilot fish feed off the whale of monetary chaos.  

Central banks have no idea how to extricate themselves from their liquidity flood.  The Fed is gingerly tap dancing about the idea of normalization without any real clue of how to get there.  The current plan is to stop rolling over maturing debt at some point based upon an undefined moving goal post of data determination.  The Fed only need shrink its balance sheet by the ridiculous sum of $2.0 trillion, the amount of excess reserves, to regain normalization.  Any rise in interest rates during this process will add to the national debt burden that appears unsustainable, absent a return to significant growth rates.

Interest in a gold standard is returning because it works.  There is a 300 year history of stable money, lack of inflation or deflation, and sustained growth during gold standard years.  What is missing is a lack of education and understanding of how a gold standard works.  There are many fallacies involved with gold that are constantly repeated and accepted as conventional wisdom.  What is universally and inherently understood, regardless of academia’s purposeful dismissal of gold, is that gold maintains its value.  This knowledge alone is enough to begin the debate for a return to a monetary standard based upon gold’s universally understood stability.

What a gold standard does not do is compensate for economic distress from depression and war.  A gold standard is not an economic cure-all.  A gold standard merely allows the monetary realm to operate at peak efficiency.  The Great Depression occurred under the stability of a gold standard when Congress enacted the Smoot-Hawley tariff wall that caused a global economic contraction.   A decade of follow-on tax hikes, socialist policy, and currency devaluation ensured that a correctable economic contraction became the Great Depression.  The U.S. financed World War II under a gold standard at a 2 percent rate.  At the end of WW II, the U.S. remained on a gold standard, the war effort was demobilized, government spending vastly reduced—to the consternation of Keynesians who predicted a demand-side depression–taxes were cut, and the economy boomed.  The debt from WW II was manageable under a gold standard combined with pro-growth fiscal policy.  The same is true today for our seemingly unmanageable debt if the U.S. once again adopts the correct monetary and fiscal policies.

There are two essential requirements for a gold standard, and I would add a third.

  1. The currency manager must link the dollar to gold at a fixed dollar weight of gold.  This is a required foundation for a return to a gold standard, and it is critical that this is accomplished correctly.  The fixed dollar weight of gold is the optimum price of gold where debtors and creditors are in balance.  If the dollar is fixed incorrectly, the debtor class or creditor class will be harmed and will soon find political venues to pull apart the dollar gold link.  An improper dollar gold link will cause economic distress or blow up a gold standard before it gets started.  This happened in the U.S. after the Civil War when the devalued greenback was restored to the pre-war parity value of $20.67/oz—William Jennings Bryan’s cross of gold—and in Great Britain after World War I when it attempted to restore the pound at the pre WW I parity point.  Today the dollar price of gold, based on duration of debt, is at equilibrium with the optimum price of gold at approximately $1200.  This provides a unique window where a return to a gold standard is extremely easy.
  1. The currency manager must establish a mechanism to maintain the dollar’s parity point with gold.  If the dollar loses value relative to gold, the currency manager must reduce base money until the parity point is regained.  Similarly if the dollar increases in value relative to gold, the currency manager increases base money until the dollar is again in parity with the price of gold.  This is currency management based upon automaticity.  Under a gold standard the Fed will return to functionaries who maintain the dollar price of gold and act as lenders of last resort as established in the original legislation that created the Fed.  The Fed as monetary mad scientists and masters of the universe will dissolve into a bad memory.
  1. The additional requirement I consider essential is universal convertibility.  A gold standard must allow ordinary citizens everywhere to convert their dollars to gold at the fixed price.  This keeps government and the currency manager honest.  If Bretton Woods had universal convertibility, it never would have reached the breaking point in 1971 where Nixon’s advisors recommended severing the dollar link to gold at $35/oz.  A gold standard should allow any citizen in the world to convert surplus dollars to gold at Treasury or a national bank.  If the Fed simply maintains the parity point, there is never a necessity to prefer gold to a dollar that is good as gold.        

A gold standard is democratic while fiat currency is elitist.  When everyone can participate in setting the price of gold by demanding or supplying dollars, it is more likely that the world’s citizens will find and maintain the optimum price than if we give a handful of unelected bureaucrats that power.  Under our discretionary fiat system, whose interests does the privately held Fed ultimately represent?

3 Comments

  1. Craig Hill

    The reason the currency has lasted this long is because every major economy in the world has embraced fiat and thus no currency alternative exists for the currency to collapse against. Would the dollar collapse against the fiat Euro? I think not. Would it collapse against the fiat Yen? I also think not. That’s what makes the situation able to continue but it’s also the fact that makes the situation so darn dangerous. Should any one of the major currencies have a confidence crisis, the others will follow suit and global trade would come to a standstill. This situation is without precedent in world history.

    What the dollar is able to collapse against is hard assets and commodities. However, the deflationary forces at work have kept this possibility from becoming reality by and large. It has happened though against new automobiles, most foods, healthcare and housing. It has also collapsed against equity prices. So far, and much to my bewilderment, precious metals have not helped to protect as their prices have come down from the 2011 highs. While I firmly believe they will eventually return to their true value, I am at a loss for when that will be. In the meantime, I continue to eat my own cooking and buy precious metals as “PART” of my overall planning.

    Craig Hill
    The Gold Planner, Inc.

    Reply
    1. Michael Kendall (Post author)

      True, the dollar remains the cleanest dirty shirt in the fiat closet. A legislative repeal of gold and silver “collectibles” capital gains taxation is the easiest solution to introduce gold based money competition with the dollar.

      While the Fed’s balance sheet is large, around $2.0 trillion of it remains locked out of the economy as excess reserves. Until the Fed normalizes, it only loosely controls excess reserves through interest payments and regulatory authority. The unstable relationship between base money supply, demand, and excess reserves is driving the POG.

      Reply
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