There Is No Getting Around Gold

Written By Unknown on Sunday, March 20, 2011 | 7:28 AM


No central bank can manage a currency well enough to replicate the benefits of an independent value behind it whose convertibility conveys a clear signal about the demand for money. There are compelling reasons that gold is this ideal monetary anchor: Its supply grows at a steady rate that over time mirrors long-run economic growth, it cannot be destroyed or easily lost, and it is historically identifiable as money.


Yet most sympathetic politicians, policymakers and academics shy away from embracing gold. A common refrain is lack of voter knowledge, and there is some truth to this. In focus groups of Democrats and Republicans that we observed over the summer in Cincinnati, most participants had come of age after Bretton Woods and therefore had no living memory of gold playing a central role in monetary policy. But they did comprehend the gold standard when it was explained to them (a third session in Cincinnati with Tea Party activists elicited surprising levels of historical knowledge and support).


Even if they have never heard of the price-specie-flow mechanism, voters have an increasing sense of how the gold standard works because there is an intuitive association of gold with money. A system that last fully operated before World War I is more transparent and understandable than the monetary regime we live under today, dictated by central bankers making policy according to their macroeconomic preoccupations. The monetary authorities themselves do not understand the impact of their decisions on the wider world, where foreign central banks recycle excess reserves into U.S. dollar-denominated debt that artificially boosts asset prices and generates recurring bubbles below the radar of inflation.


Floating money was supposed to be an experiment in alleviating the international payments deficit when President Richard Nixon closed the gold window in 1971. What started as something of a desperation measure took on a life of its own and became an entrenched system with the requisite pro-status quo establishment and line of defense.


Despite its well-documented failings, it has been bailed out time and time again by the resilience of the American economy. Even an optimist like Ronald Reagan would have had a hard time believing in 1971 that the U.S. could survive a monetary crisis of the kind that would occur on his watch.


But the tight money fix that he saw through proved to be a reprieve, rather than an antidote, for the dysfunctionality of debt-based managed money. Would-be reformers have tried to devise solutions designed in large part to avoid including gold, but none have caught fire or shown themselves to be as transparent and simple as the gold standard. The only real debate is between paper money and gold-backed money, and it is already getting under way at the highest levels.

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