Monday, August 14, 2017

The Return of Sound Money

On Sunday evening, August 15, 1971, President Nixon told the American people the U.S. would “suspend temporarily the convertibility of the dollar into gold or other reserve assets” as a means of defending the dollar against “the speculators.”  This was one part of his New Economic Policy, a phrase borrowed from communist Vladimir Lenin, which included a 90-day freeze on prices and wages, and a 10 percent tax on imports.  Gary North points out that Barron’s editor Robert Bleiberg, in a 1974 speech at Hillsdale College, thought the price-wage freeze was perhaps a ploy to distract attention from the “unthinkable” act of severing the dollar’s last connection to gold.

As North notes, the voters knew nothing about gold and most economists, with their Keynesian pedigree, approved of Nixon’s action.  It wasn’t a high-risk move on Nixon’s part.  

Of course, the promised dollar stability resulted instead in a decade of unemployment and inflation.  According to the BLS, the price level today is six times higher than it was when Nixon slit our monetary throats on a long-ago midsummer night.  Inflation and unemployment began to abate only after President Carter appointed Paul Volcker as Fed chairman in July, 1979.  At a press conference on July 25,
Volcker spoke of price stability.  To his way of thinking, the only way to get price stability was to drive up interest rates to the point where the economy stalled, to where people no longer wanted to buy.  [Paul Volcker, The Making of a Financial Legend, p.64]
To jack interest rates up Volcker hit the brakes on money printing.  Nowhere was there evidence to suggest “the economy is suffering grievously from a shortage of money,” he announced.   [Ibid., p. 67]   Volcker was the Fed’s greatest daredevil:
The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well, which helped lead to the 1980-1982 recession, in which the national unemployment rate rose to over 10%. Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve . . .  (Wikipedia)
His medicine worked.  Inflation peaked at 14.8 percent in March, 1980 and fell below 3 percent by 1983.

While I personally admire Volcker for his courage and refusal to back down under pressure, the problems he was addressing were manufactured by a long trail of corrupt politicians, economic ignorance, and banker perfidy.   

It didn’t begin with Nixon, nor with FDR, who in 1933 made it a felony for Americans to possess gold.  (He at least made it legal to get a drink.)  Neither president showed any sense of how free markets worked.  Neither did their economic advisers.

Two decades earlier, big bankers got Wilson to sign the Federal Reserve Act in late December, 1913, in effect giving them a monopoly printing press for Christmas.  By 1917 the Fed was orchestrating an inflation to support Wilson’s war overseas, while governments suspended gold redemption, either officially or indirectly through appeals to patriotism and embargoes on gold exports.  Without the restraint of gold, governments could afford a long, bloody war that was followed by an even bloodier sequel two decades later.  Today, the US and its perpetual wars are forever indebted to its in-house counterfeiter, the Federal Reserve.

Of course, in war not everyone bleeds, which is why they’re so popular with certain influential parties.  
The normal profits of a business concern in the United States are six, eight, ten, and sometimes twelve percent. But war-time profits -- ah! that is another matter -- twenty, sixty, one hundred, three hundred, and even eighteen hundred per cent -- the sky is the limit. All that traffic will bear. Uncle Sam has the money. Let's get it. 
Of course, it isn't put that crudely in war time. It is dressed into speeches about patriotism, love of country, and "we must all put our shoulders to the wheel," but the profits jump and leap and skyrocket -- and are safely pocketed. (Butler)
Gold can’t pay for meddling government on a large scale, but that’s exactly what most Americans want, not some trifle.  Not that they have much choice today.  

At one time Americans had something close to sound money, but they failed to understand its political implications.  As Ludwig von Mises explains,
The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly-used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system. . . .
The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies. Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money. Viewed in this light, the gold standard appears as an indispensable implement of the body of constitutional guarantees that make the system of representative government function.  (emphasis added)
It’s little wonder why government hates sound money.  But ceaseless propaganda vilifying gold has done its job, as well as the dearth of people old enough to remember what it felt like to walk into a store and buy something with money that wasn’t created out of thin air.

The fatal flaw of all monetary systems, including the gold standard, was the ability of government to control it.  On a free market participants decide what to use for exchanges.  On a free market it’s a democratic decision, not a decree.

Money, besides being the most marketable commodity, should be something government can’t touch.  In this regard, the future looks promising for cryptocurrencies.  

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