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By Ralph Benko, on 29 March 12
A view from America …
Mitt Romney is the favorite to win the Republican nomination for president. If nominated, the campaign against Obama may well hinge on the dramatically different views on monetary policy between Obama’s Fed chairman, Ben Bernanke, and that of R. Glenn Hubbard. Hubbard is dean of the Graduate School of Business, Columbia University, former Chairman of the President’s council of Economic Advisers, and, with Harvard’s N. Gregory Mankiw, one of Gov. Romney’s most trusted economic policy counselors.
Hubbard, with journalist Peter Navarro, has written an important book: Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity(foreword by public intellectual — and Supply Side doyenne — Amity Shlaes).
This books lays out a credible blueprint for the restoration of American prosperity. Of most striking relevance is the chapter on “Why Easy-Money is a Dead End,” and, in particular, why “The Road to American Prosperity Cannot be Paved with a Cheap Dollar.”
Fed chairmen such as William McChesney Martin and Paul Volcker have fiercely protected the independence of the Federal Reserve and conducted Fed policy with price stability and sound money foremost in their minds. But the United States has also experienced another type of Fed chairman. This type is an activist who strongly believes that monetary policy should be used in a discretionary manner not just to keep the American economy on its basic track but also to fine-tune the economy over the ups and downs of the business cycle.
…
Despite their successes in some important areas, our last two Federal Reserve chairmen, Greenspan and Bernanke, have taught us that there is much truth in what [Milton] Friedman said about the dangers of discretionary activism.
Contrast Hubbard’s hawkish stance against “the dangers of discretionary activism” with Chairman Bernanke’s rhapsody for the exercise of such power in his recent lecture at George Washington University, entitled Origins and Mission of the Federal Reserve .
Here’s Bernanke:
Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy just to stabilize the economy. And in particular, under a gold standard, typically the money supply goes up and interest rates go down in periods of strong economic activity. So that’s the reverse of what a central bank would normally do today. So again, because you had a gold standard which tied the money supply to gold, there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation. Now some people view that as a benefit of the gold standard, taking away the discretion from central banks and there’s an argument for that, but it did have the implication that there was more volatility year-to-year in the economy under a gold standard, and there has been in modern times.
One nostalgically longs for the moment in January 2008, just before the financial markets meltdown and the ensuing Great Recession when the premier chronicler, then and now, of contemporary monetary policy Roger Lowenstein, could write in the New York Times Magazine:
Indeed, the United States has spent only 16 months of the last quarter-century in recession — a vast improvement over previous eras. The recent period has been called the Great Moderation; growth cycles have evened out, and inflation has abated in almost every country around the globe.
…
Perhaps the Great Moderation has been the result of good luck. Or perhaps it has been because of improved management skills —business learning not to overstock inventories, for example. Bernanke has written that it is something else. He sees it as a result, in large part, of better monetary policies. He says that central bankers have finally learned how to guide economies — not with mystique but with economic science. If that is so, we will not need a wizard behind the curtain anymore, only intelligent engineers who can steer markets to a promised land of rational expectations. To prove that he is right, Bernanke will need to minimize or, if possible, avoid the looming recession that looks ever more likely.
The wistful hope that “central bankers have finally learned to guide economies — not with mystique but with economic science” lost all plausibility less than a year after the utterance of the words.
The juxtaposition here of Hubbard’s position with Bernanke’s does not imply any position by Hubbard on whether the classical gold standard might be a suitable mechanism with which to conduct Fed policy with “price stability and sound money foremost” in mind. Yet Hubbard’s exaltation (with a witty wink to Simon and Garfunkel) of William McChesney Martin, who chaired the Fed throughout the Bretton Woods era, surely implies no Bernanke-esque hostility toward gold.
Further, in 1987 Hubbard co-authored an elegant NBER working paper with Charles W. Calormiris, International Adjustment Under The Classical Gold Standard: Evidence For the U.S. and Britain, 1879 – 1914. Hubbard is exceptionally equipped to understand the gold standard’s operations.
Bernanke and Hubbard present diametrically opposing positions. Because monetary policy is the fulcrum of the economy, this matters. Who is right? Among the most trenchant responses to Bernanke’s critique of the gold standard was that of University of Georgia economics professor (and gold standard agnostic) George Selgin, writing at FreeBanking.org:
Bernanke’s discussion of the gold standard is … little more than the
usual catalog of anti-gold clichés …
No mention of the high inflation before 1921–as high as 40%, on an annualized basis, during some quarters; no mention of the record numbers of bank failures throughout the 1914-1930 period; no mention of the sharp recession of 1920-21; and no mention of any possible contribution by the Fed to the stock market boom (or “bubble,” as Bernanke would have it) of the 1920s. Rather less amusing was his quotation of that “famous statement by Andrew Mellon” about liquidating stocks etc.: poor Mellon never said it, in fact: the words were Hoover’s, and were intended as parody. But why waste a perfectly good straw man?
Ben Bernanke presents as an admirable, honorable, elite public servant gamely — valorously, even — attempting to do the impossible: manage monetary policy without a reliable unit of account. Lowenstein calls him “The Hero” in the current cover story (ambivalently entitled “The Villain” in the online version) of the April Atlantic.
Ultimately, Bernanke’s legacy will depend on whether he can fully exit from the mortgage debacle without bequeathing a new one, or lighting an inflationary fire that becomes uncontainable. … For sure, no one knows where either inflation or unemployment will be in five years’ time.
The visceral criticism of Bernanke is hard to fathom, but it is in part the flip side of the enormous trust that we are asked to place in the modern Federal Reserve. At least in the time of Nicholas Biddle, and even during the formative years of the Fed, banknotes, being liabilities, could be redeemed for something of value, usually gold. Now our dollars are exchangeable only for more dollars. This is what alarms the originalists. As the publisher, Bernanke critic, and gold bug par excellence James Grant eloquently put it, ‘We have exchanged the gold standard for the Ph.D. standard, for soft central planning.’
The central lesson of the Great Recession might be that if men of the intellect and integrity of Greenspan and Bernanke can’t keep the world dollar standard from, dramatically, going off the rails then nobody can. The world needs monetary authorities who must — as part of the system itself —abide by the “rules of the game.” They did so under the classical gold standard. They did so under Chairman Martin. They can do so yet again.
Two good men, Bernanke, from Obama’s camp (though it should be noted that George W. Bush nominated Bernanke to great applause from conservatives who might now be eating their words), and Hubbard, from Romney’s camp, offer two profoundly different policies. The contrast, and the stakes, hardly could be greater. Does America desire the monetary policy, “discretionary activism,” attributable to Mr. Obama? Or does America want “the price stability and sound money” which fairly can be imputed, via Hubbard, to Mr. Romney?
The answer to that question may well determine the outcome of the 2012 election. Of greater importance, the answer may determine the future prosperity of America and the world.
This article was previously published at Forbes.com.
By Ralph Benko, on 14 March 12
In virtually every airport bookstore in America right now you will find a little sleeper of a book in the business section which is as riveting as a thriller and as hard to put down. James Rickards Currency Wars made this reader remember what Secretary of the Navy John Lehman so vividly told Tom Clancy after reading his multi-million-seller Hunt for Red October: “Who the hell cleared this?”
At the end of the Cold, and Middle East, wars, we have entered a perilous new world. Currency Wars is as relevant as tomorrow’s headlines. No sleepy tome on monetary policy, Currency Wars is a white-knuckle exercise. It begins three years ago with a war game carried out by the Pentagon in a secret facility just outside of Washington DC.
The Applied Physics Laboratory, located on four hundred acres of former farmland about halfway between Baltimore and Washington, D.C., is one of the crown jewels of America’s system of top secret, high-tech applied physics and weapons research facilities.
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Preeminent among these more abstract functions is the lab’s Warfare Analysis Laboratory, one of the leading venues for war games and strategic planning in the country. … It was for this purpose, the conduct of a war game sponsored by the Pentagon, that about sixty experts from the military, intelligence, and academic communities arrived at APL on a rainy morning in the late winter of 2009. … [T[he only weapons allowed would be financial — currencies, stocks, bonds, and derivatives. The Pentagon was about to launch a global financial war using currencies and capital markets instead of ships and planes?
Rickards describes this with flair.
The rectangular room has four wall-sized screens at the front end and banks of smaller fifty-inch plasma video screens mounted on the walls along both sides to patch in additional participants from remote locations or to display additional graphics. The seating is tiered with a central trapezoid-shaped table for twelve on the lowest level closest to the wall screens; the trapezoid is flanked by four banks of long tables, two on each side, at a slightly higher level laid out in a chevron pattern around the center.
Shades of Dr. Strangelove! But is it just … a videogame on steroids? Rickards:
China controls almost all of the supply of certain so-called rare earths, which are exotic, hard-to-mine metals crucial in the manufacture of electronics…. In July 2010, China announced a 72 percent reduction in rare earth exports, which had the effect of slowing manufacturing in Japan and other countries that depend on Chinese rare earth supplies.
On September 7, 2010, a Chinese trawler collided with a Japanese patrol ship in a remote island group in the East China Sea claimed by both Japan and China. … When the release and apology were not immediately forthcoming, China went beyond the July reduction in exports and halted all rare earth shipments to Japan, crippling Japanese manufacturers. On September 14, 2010, Japan counterattacked by engineering a sudden devaluation of the Japanese yen in international currency markets. The yen fell about 3 percent in three days against the Chinese yuan.
Nothing virtual about that skirmish. Rickards then walks his readers through a simple history of monetary policy. It starts with the prosperous “Golden Age” of the classical gold standard, proceeds through Currency War I (1921 – 1936), Currency War II (1967 – 1987) and Currency War III (2010 – ). Rickards then takes us inside the “G20 Solution.” This proves a fascinating guide to “what do they really do there,” concluding
Now, in addition to China, the United States and Europe all wanting to weaken their currencies, Japan … found itself in the cheap-currency camp too. Not everyone could cheapen at once; the circle still could not be squared.
Then welcome to Rickards’ chessboard for “The Next Global Crisis.” He first gives “a new version of seventeenth-century mercantilism in which corporations are extensions of state power.” Then he takes his readers on a whirlwind world tour through Dubai, where “Espionage, assassination, gold, currency and an international mix of actors at the crossroads of the world give Dubai its standing as the new Casablanca;” Moscow, from which “energy is a wedge used to forge a regional economic bloc with a regional reserve currency, the ruble;” and Beijing, where “China’s hard asset endgame is one more ticking time bomb for the dollar.”
Penultimate chapters deconstructing “The Misuse of Economics,” treat us to subchapters with excellent titles like “Washington and Wall street — the Twin Towers of Deception” (“Washington and Wall street both have a vested interest in the flawed models from the past.”) and on Currencies, Capital, and Complexity (Epigram: “The difficulty lies, not in the new ideas, but in escaping from the old ones.” — Keynes), a primer on prospect and complexity theory — and why Keynesianism and monetarism both tenaciously hang on, discredited and dysfunctional.
Rickards then goes to the Endgame: Paper, Gold or Chaos. In it, he takes up and dismisses the possibility, prophesized as “a plausible and fairly benign conclusion” by Barry Eichengreen, of multiple reserve currencies. Rickards argues, persuasively, that this overlooks a world where “it will be open season with several central banks invited to (abuse their privileges) at once.” He then makes short work of the most preposterous of the common proposed alternatives to the reserve currency dollar, SDRs. “In the end, the IMF’s plan for the SDR as announced in its blue-print document is an expedient, not a solution. It confronts the imminent sequential failure of fiat money regimes by creating a new fiat money. It papers over the problems of paper currencies with a new kind of paper.”
Rickards offers two scenarios he finds plausible. The first is an orderly return to the gold standard. “Gold is not a commodity. Gold is not an investment. Gold is money par excellence,” says Rickards, echoing Charles De Gaulle who said, as quoted in the New York Fed’s The Key to the Gold Vault:
…there can be no other criterion, no other standard than gold. Yes, gold, which never changes, … which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence.
This reader prefers the analysis of Prof. Lawrence White, of George Mason University, in his excellent Making the Transition to a New Gold Standard as published at freebanking.org, to that of Rickards as to the probable equilibrium price for gold under the gold standard. White’s analysis also is fully consistent with that of iconic gold standard advocate Lewis E. Lehrman (whose eponymous institute this writer advises professionally) as set forth in his 2011 The True Gold Standard. Yet give Rickards full credit for systematically laying out his calculus.
Rickards’ final scenario is full-on economic chaos. Perhaps it is one to be “followed swiftly by the ascent of a new gold-backed dollar emerging phoenixlike from the ashes….” Or perhaps, he observes, it will be followed by “the widespread breakdown of civil order and eventually a collapse of the physical infrastructure.”
Powerful people in Washington, D.C. are reading James Rickards’ Currency Wars. The endgame by no means is predestined. Gold standard advocacy has become a staple of the conservative movement, a rising issue with the Tea Party, a part of the 2012 presidential race, and is becoming almost a commonplace topic in the elite media. In laying out the issues of real money compellingly, James Rickards adds intelligently to the policy debate.
To allow “threats envisioned in the Pentagon’s 2009 financial war game” to become “more real by the day” represents a failure of statesmanship. America looks to Washington to get a grip on restoring the prosperity, security, dignity and liberty that comes with real money. History well may view James Rickards as the Paul Revere of the Currency War, our struggle to re-establish real money — currency convertible to gold at a fixed number of grains. History may even come to hold Currency Wars as important for our era as was the famed Midnight Ride for American Independence.
By Ralph Benko, on 22 February 12
A view from America …
“The gold standard is a modern, digital, information-sharing, global operating standard. Moreover, it is a stable, networking, efficient, price transmission system in the form of a stable international monetary standard,” says Lewis E. Lehrman.
Big media is paying attention to proposals for a new Gold Commission. This concept first was floated by Kentucky Senator Rand Paul and reported by The Weekly Standard. A Gold Commission then was proposed by former House Speaker Newt Gingrich as part of his (winning) campaign for South Carolina. Lehrman (with whose scholarly institute this writer professionally is associated) was mentioned in both instances.
Rep. Ron Paul — now campaigning for president, in large part, on the gold standard — and Lehrman both served on the Reagan Gold Commission. The Commission met well before the good Dr. Milton Friedman distanced himself from the theory known as monetarism. Following a theory much in vogue the majority of the Commission endorsed the paper standard. Dr. Paul and Mr. Lehrman filed a minority report calling for the restoration of a stable dollar defined by law as a certain weight of gold: the gold standard. Republished, The Case for Gold remains readily available from the Mises Institute and the Cato Institute.
The gold standard is no atavism, neither clipper ship nor ox cart. Under the gold standard we will have checking accounts and credit cards and currency, not carry around purses filled with gold coins to make our daily purchases. Legal gold convertibility simply kept, and will again keep, the dollar’s value stable over time. There is as much gold per capita now as there was at the height of the classical gold standard; claims that there is “not enough gold” betray a deep ignorance of the workings of the system.
There are a lot of reasons for taking gold seriously, now. Here are three:
1. The gold standard is Constitutional money; paper is not. The Constitution contemplated money defined as precious metal. As delegate George Read observed at the Constitutional Convention, the power to issue paper money was seen “as alarming as the mark of the Beast in Revelations.”
2. The gold standard will control spending. Congress will spend every cent it can get its hands on. To constrain it we must cut off its access to money. There are only three ways in which it can get its hands on material amounts our money: taxing, borrowing and printing. We must keep up the fight on taxes and borrowing. But the most pernicious way of getting our money is by “printing” it. The gold standard locks away printing press money.
3. The gold standard creates widespread prosperity. As historian Brian Domitrovic wrote:
there is the record of 1878-82 and its own run of some 40% growth. In the four years prior, there had not been a historic collapse in economic growth that made the base year of 1878 low, as was the case in 1933. Rather, in the four years before 1878, growth had come in at 13%; in the previous ten years, growth had totaled 49%. In other words, 1878-82 was a mega-acceleration from a high base.
And after? Over the next decade, another historic expansion of 49%. 49% on top of 40% on top of 49%, 1868 to 1892. That’s registering “the strongest output growth…in US history outside of wartime.”
Regarding policy, there was one major shift that occurred in these heroic years in the latter 19th century. In 1879, the U.S. went back on the gold standard.
“A modern, digital, information-sharing, global operating standard,” says Lehrman. Let’s boot up that commission and take a really close look as to how gold might be the “golden bullet” to get an American economic miracle roaring.
By Ralph Benko, on 13 February 12
A view from America …
243,000 new jobs? This is more than respectable. No unseemly disparagement by Republicans welcome, nor victory lap by Democrats. A pox on both their houses.
Proto-Supply Sider (who, among other things, generously cut oppressive tariffs) King Canute achieved mythic status by ordering the tide to cease rising. What often is forgotten is that he did so to show his sycophants the limits — not extent — of his powers.
As medieval chronicler Henry of Huntington wrote:
[A]t the summit of his power, he ordered a seat to be placed for him on the sea-shore when the tide was coming in. Then, before a large group of his flattering courtiers, he spoke to the rising sea, saying, ‘Thou, too, art subject to my command, for the land on which I am seated is mine, and no one has ever resisted my commands with impunity. I command you, then, o waters, not to flow over my land, nor presume to wet the feet and the robe of your lord.
The tide, however, continued to rise as usual, dashing over his feet and legs without respect to his royal person.
Then the King leaped backwards, saying:
Let all men know how empty and worthless is the power of kings, for there is none worthy of the name, but He whom heaven, earth, and sea obey by eternal laws.
“Obey … eternal laws.” The business cycle is as sacrosanct as the law of gravity. Utopians sacrifice Virgins and pray (Cut Entitlements!) for Endless Summer; Neo-Keynsians chant mumbo jumbo (Stimulate Aggregate Demand!) and command winter to end. Harry Truman famously once said (long safely retired from the presidency): “My choice early in life was either to be a piano player in a whorehouse or a politician. And to tell the truth, there’s hardly any difference.”
That said, the voters usually give an incumbent credit for the good times and blame for the bad. Politicians eager for office have the street smarts to concoct a good story and look busy. Thus… if it’s springtime for business in America … it’s going to be tough for the GOP to take the White House even by whining loudly that this is a cyclical recovery which the Democrats idiotically delayed.
So if the GOP wants to be competitive in a context of growth it will have to respect the fondest wish of us mere voters: better growth. Citizens are a little like common shareholders. We want the country to prosper, with effort being tightly aligned with reward. This is possible. We mere voters, as it happens, are plenty street smart too.
What does this mean? It means 4+% real growth. That and nothing less will equate to tens of millions of new jobs, a la Reagan and Clinton. It, with a modicum of spending restraint, will balance the budget in 10 years. We voters are a fickle bunch and likely to bolt for a (credible) better gig, no matter how self-satisfied President Obama is.
So, number one, the voters are trying to teach the presidential aspirants that economic stagnation, whether delivered by Pachyderm or Jackass, is not OK. We demand jobs; and job growth is key to balancing both our personal and the federal budget. This is obvious to working (or unemployed) folks but much harder for those who live in a cocoon of economic and social privilege to grasp.
Lesson two? The three first rank macroeconomic variables critical to economic growth are monetary, tax, and regulatory policy. There isn’t anything startlingly different in the positions of the Pretenders to the Throne on tax and regulation. And, except for Dr. Paul who appears to have overshot the mark on popular desire to dissolve the federal government, monetary policy is being marginalized or ignored. Yet honest money was fully half of the Mundell-Laffer Hypothesis, Reaganomics blueprint. Monetary reform has the power to turbocharge economic growth, creating jobs for voters and balancing the budget.
There is at least an even chance that the recovery is here. If so the GOP, whomever it nominates, will not be able to glide into the White House based on a feckless campaign against “Obama’s Prolonged Misery.” That is a very good thing. When we don’t force them to earn their keep the Republicans are as bad as the Democrats. While the business cycle can not be repealed we can avoid policies that flatten the growth and deepen the valleys.
Of all the policy interfaces the government has monetary policy is the most powerful. As my Forbes.com co-columnist Charles Kadlec summarized the findings of an important white paper very recently issued by the Bank of England:
When compared to the Bretton Woods (monetary) system…:
- Economic growth is a full percentage point slower, with an average annual increase in real per-capita GDP of only 1.8%
- World inflation of 4.8% a year is 1.5 percentage point higher;
- Downturns for the median countries have more than tripled to 13% of the total period;
- The number of banking crises per year has soared to 2.6 per year, compared to only one every ten years under Bretton Woods….
Getting monetary policy right used to be, and may again well become, the Holy Grail of economic policy. The “cross of gold” versus McKinley’s “The Gold Standard: Prosperity at Home, Prestige Abroad” was the central issue of 1896 and a pro-vs.-anti gold was a real issue in many of the presidential contests of the first quarter of the 20th century. Monetary policy was the one thing, among a myriad of mistakes, that Roosevelt got right thus ending the Great Depression. Monetary policy was a dramatic part of Nixon’s failed New Economic Policy. Monetary reform was prescribed, and undertaken, as at least as important to Reaganomics as cutting tax rates. The Greenspan Great Moderation provided a context for over a decade of solid growth.
And the Great Recession was caused by the monetary disorders that are, in the end, unavoidable under a pure paper dollar system. To exaggerate only slightly, a fiduciary paper currency administered by elite civil servants is akin to trying to cross a swampland full of landmines at midnight, blindfolded, on a moonless night.
Continue reading at Forbes.com.
By Ralph Benko, on 22 January 12
A view from America …
Published yesterday at RealClearMarkets, as South Carolina’s voters went to the polls.
Two candidates – Newt Gingrich and Ron Paul – are campaigning on the gold standard. Polling, including for South Carolina, shows the gold standard to be a powerful vote getter as my colleague Andresen Blom and I pointed out recently in Roll Call. Both Gingrich and Paul supported gold long before it was cool – each with a record of meaningful support that goes back at least a quarter century.
As it happens, South Carolina has an exceptionally rich history when it comes to an aversion to pure paper money … like Federal Reserve Notes. South Carolina sent four delegates to the Constitutional Convention. History unequivocally shows that all four were anti-paper and pro-gold – and that at least two of them led the fight to use the Constitution to shut the door against paper money.
In the Constitutional Convention Pierce Butler, a distinguished South Carolinian and delegate, seconded the motion to strip the federal government of the power to issue paper money. Madison recorded:
Mr. BUTLER. remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power.
Brigadier General Charles Coteworth “C.C.” Pinckney, also a delegate to the Constitutional Convention from South Carolina, famously, while a prisoner of war, said: “”If I had a vein that did not beat with the love of my Country, I myself would open it. If I had a drop of blood that could flow dishonorable, I myself would let it out.” He was an important member both of the Philadelphia convention and in South Carolina’s ratifying convention.
Here, at the South Carolina ratification debate, is what Gen. Pinckney had to say about paper money:
With regard to Mr. Lowndes’s question ‘What harm had paper money done?’ General Pinckney answered, that he wondered that gentleman should ask such a question, as he had told the house that he had lost fifteen thousand guineas by depreciation; but he would tell the gentleman what further injuries it had done – it had corrupted the morals of the people; it had diverted them from the paths of honest industry to the ways of ruinous speculation; it had destroyed both public and private credit, and had brought total ruin on numberless widows and orphans.
Charles Pinckney, C.C.’s cousin, Senator and Member of the House of Representatives, 37th governor of South Carolina, progenitor of 7 South Carolina governors, had this to say in South Carolina ratifying convention:
If we consider the situation of the United States as they are at present, either individually or as the members of a general confederacy, we shall find it extremely improper they should ever be intrusted with the power of emitting money, or interfering in private contracts; or, by means of tender-laws, impairing the obligation of contracts.
I apprehend these general reasonings will be found true with respect to paper money: That experience has shown that, in every state where it has been practised since the revolution, it always carries the gold and silver out of the country, and impoverishes it–that, while it remains, all the foreign merchants, trading in America, must suffer and lose by it; therefore, that it must ever be a discouragement to commerce–that every medium of trade should have an intrinsic value, which paper money has not; gold and silver are therefore the fittest for this medium, as they are an equivalent, which paper can never be–that debtors in the assemblies will, whenever they can, make paper money with fraudulent views–that in those states where the credit of the paper money has been best supported, the bills have never kept to their nominal value in circulation, but have constantly depreciated to a certain degree.
John Rutledge, who served as the fourth South Carolina delegate to Philadelphia, spoke at a special session of the South Carolina legislature in September 1785 called by the governor to address a debt crisis:
as not wishing to waste time ‘in fruitless and unavailing discussion of’ paper money schemes that ‘could answer no good purposes, whatever.’ He called an emission of paper currency ‘ludicrous, because it was not in their power to establish funds for its redemption.’ Depreciation was inevitable. There ‘could not possibly be … any public benefit from such a scheme.’
South Carolina has a noble heritage when it comes to fighting paper money and standing for constitutional money with integrity: gold and silver. Are its citizens still made of the same stuff as Pierce Butler, John Rutledge, and Charles and CC Pinckney?
We now know the result: a decisive victory for Gingrich (though a disappointing fourth place for Paul).
By Ralph Benko, on 28 December 11
A view from America, previously published at Forbes.com …
The world dollar standard’s death certificate arrives in the mail this week. The Bank of England — “the Old Lady of Threadneedle Street” — one of the most staid, cautious, and dignified entities in the world of monetary policy — signals that the fiduciary currency standard ushered in on August 15, 1971 is, empirically measured, far inferior to the (dilute form of the) gold standard erected at Bretton Woods. Fellow Forbes.com columnist Charles Kadlec thoroughly reprises and analyzes the facts submitted to a candid world by the Bank of England in a paper to be officially published December 20, 2011.
The Bank of England’s Financial Stability Paper No. 13, Reform of the International Monetary and Financial System, reported at Bloomberg BusinessWeek and reviewed here, is being seen by many monetary policy observers around the world as the “coroner’s report” on the death of the world dollar standard.
What’s next? Presciently, at the watershed October 5-6 Heritage Foundation Conference on a Stable Dollar: Why We Need It and How to Achieve It, Forbes’ editor-in-chief Steve Forbes called for escalating the discourse from “whether” we should restore the gold standard to “how” to do so. The floodgates open.
In the second half of 2011 monetary policy scholars, policy virtuosi, financiers and activists have issued over half a dozen books and important monographs on the very subject heralded by Forbes whose call was seconded by Heritage’s president, Dr. Ed Feulner in an influential Washington Times op-ed:
That’s why we should welcome a debate about the role of the Fed and what our monetary policy should be. But we have to ask the right questions. … Should we fix the dollar price of gold? … ‘If the defect is inflation and an unstable dollar,’ asks Lewis Lehrman of the Lehrman Institute, ‘what is the remedy?’ We can’t answer that without a robust and full discussion. Let’s hope the hard questions being asked now about the Fed touch off a much-needed debate.
This, together with ongoing efforts by The Lehrman Institute and by its strategic partner, the American Principles Project (with both of which this writer has a professional association) laid the groundwork for another critical development: putting monetary reform at the core of the agenda of the conservative movement. The largest and most influential umbrella group of conservativism is the Conservative Action Project. This convened 100 leading conservatives at a summit this month. President Reagan’s Counselor and the 75th Attorney General of the United States, Edwin Meese, III, presided and the Project issued, last week, A Conservative Consensus for 2012.
This, which fairly may be considered the consensus conservative platform, calls for Growth, Family, Strength and Accountability. The first element of the very first item on the agenda includes a call to “encourage sound monetary policy, thereby helping the economy grow and create more jobs.” Many conservatives take these words to mean going forward to gold.
But how?
Earlier this autumn, Lewis E. Lehrman published the fruit of 40 years of study and thought, study that began with his tutelage by French monetary statesman Jacques Rueff, of The True Gold Standard — A Monetary Reform Plan Without Official Reserve Currencies. It was lauded by TV journalist Lou Dobbs as “a compelling read and a compelling architecture for a way forward,” by Federalist Society co-founder and Bradley Foundation “Genius Award” winner David McIntosh as “a must read for policy makers,” by financial journalist James Grant as “The answer, brilliantly expounded….” The New York Sun’s Seth Lipsky summarized its essence:
… a transition in which, on the date that Congress authorizes the resumption of unrestricted convertibility between dollars and gold, Federal Reserve Bank notes and American dollar bank demand deposits would be ‘redeemable in gold on demand at the statutory gold parity,’ … the minting by the Treasury and authorized private mints of what Mr. Lehrman calls ‘legal tender gold coin in appropriate denominations, free of any and all taxation,’ … an international monetary conference ‘to provide for the deliberate termination of the dollar-based official reserve currency system and the consolidation and refunding of foreign official dollar reserves,’… the establishment by the conference of gold as ‘the sole means by which nations would settle residual balance of payments deficits,’ … and steps to ‘uphold stable exchange rates and free and fair trade — based on the mutual convertibility to gold of major currencies.’
Other noteworthy works on how to restore the gold standard promptly followed. These include monographs by George Mason University’s Prof. Lawrence H. White recently presented at the 29th Annual Monetary Conference of the Cato Institute, entitled Making the Transition to a New Gold Standard, and extensive and erudite testimony shortly preceding Lehrman’s book by Dr. Lawrence Parks, executive director of the Foundation for the Advancement of Monetary Education, at a September 13 hearing of Dr. Ron Paul’s subcommittee on Domestic Monetary Policy entitled “Road Map to Sound Money.”
Continue reading at Forbes.com.
By Ralph Benko, on 20 November 11
A view from America, previously published at Forbes.com
This column debuted a year ago and proceeded to make a troubling announcement: World peace has broken out. The political implications of world peace are dramatic — but difficult to credit.
A year later, however, the Annunciation of the Peace has turned into something of a cottage industry. The AP’s Seth Borenstein reports:
We’ve never had it this peaceful. That’s the thesis of three new books, including one by prominent Harvard psychologist Steven Pinker. Statistics reveal dramatic reductions in war deaths, family violence, racism, rape, murder and all sorts of mayhem. In his book, Pinker writes: ‘The decline of violence may be the most significant and least appreciated development in the history of our species.’
The reduction in world mayhem seems alien. TV news and newspapers present freighted drama, not dry facts. That obscures the trend. Also, a dramatic peace trend sounds implausible to those habituated to war.
But scholars of such matters observe that the number of war battlefield deaths has dropped by a factor of 1,000, falling from 500 per 100,000 in prehistoric times, to 60-70 in the 19th and 20th century (notwithstanding epic wars) to… less than one such death per 300,000 now in the 21st. Genocide deaths have dropped by well over a factor of 1000 from 1942 to 2008.
The number of republics has quintupled in just 65 years; the number of authoritarian regimes has dropped from 90, 35 years ago, to 25. In England, murder fell by a factor of 100 from the Middle Ages until today. The trends are much broader than this and although a single nuclear exchange or terrorist incident could skew the numbers, even such a horrific tragedy, Heaven forbid, would not skew the secular trend.
Much of this is documented in Steven Pinker‘s book The Better Angels of Our Nature: Why Violence Has Declined, Joshua Goldstein’s Winning the War on War, and in a new study by the Human Security Report Project.
In short, it is becoming nearly irrefutable that peace has broken out. To proponents of human flourishing in liberty, dignity and prosperity, this is wonderful news. To the political class, not so much.
The late Randolph Bourne wrote an essay, posthumously published in 1918, entitled “War is the Health of the State.” Bourne observed:
Government is obviously composed of common and unsanctified men, and is thus a legitimate object of criticism and even contempt. If your own party is in power, things may be assumed to be moving safely enough; but if the opposition is in, then clearly all safety and honor have fled the State. … ….
In a republic the men who hold office are indistinguishable from the mass. Very few of them possess the slightest personal dignity with which they could endow their political role; even if they ever thought of such a thing. And they have no class distinction to give them glamour. In a republic the Government is obeyed grumblingly, because it has no bedazzlements or sanctities to gild it. …
The moment war is declared, however, the mass of the people, through some spiritual alchemy, become convinced that they have willed and executed the deed themselves. They then, with the exception of a few malcontents, proceed to allow themselves to be regimented, coerced, deranged in all the environments of their lives….
The citizen throws off his contempt and indifference to Government, identifies himself with its purposes, revives all his military memories and symbols, and the State once more walks, an august presence, through the imaginations of men.…
All of which goes to show that the State represents all the autocratic, arbitrary, coercive, belligerent forces within a social group, it is a sort of complexus of everything most distasteful to the modern free creative spirit, the feeling for life, liberty, and the pursuit of happiness. War is the health of the State.…The rulers soon learn to capitalize the reverence which the State produces in the majority, and turn it into a general resistance toward a lessening of their privileges.”
Continue reading …
By Ralph Benko, on 18 August 11
A view from America, previously published at Forbes.com on August 15th
Is it possible that the ghastly unemployment, stagnant growth (and possible double-dip recession), and financial market convulsions all can be traced back to one single decision? Perhaps.
Monetary policy is the most recondite yet most pervasive and powerful of economic forces. Keynes, in The Economic Consequences of the Peace, wrote, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
The converse also is true. Restoring real monetary integrity engages all the hidden forces of economic law on the side of prosperity. And forces for monetary reform are very much in motion.
The dollar has fallen in value by more than 80% from the day when Richard Nixon took the world off the tattered remnants of the gold standard. Aug. 15 marks the 40th anniversary of the avowedly “temporary” abandonment of the gold standard by President Richard Nixon.
“Closing the gold window” was part of a series of dramatic but shocking and destructive tactics by Washington, including wage-price controls, a tariff barrier, and other measures, all leading to economic and financial markets hell. All such measures save one stand discredited. The only piece of the Nixon Shock still in force was the piece most ostentatiously designated as temporary. Nixon: “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold….”
Suspending convertibility was no trivial matter. Nixon speechwriter William Safire recalled: “On the helicopter headed for Camp David, I was seated between [Herb] Stein and a Treasury official. When the Treasury man asked me what was up, I said it struck me as no big deal, that we would probably close the gold window. He leaned forward, put his face in his hands, and whispered, ‘My God!’ Watching this reaction, it occurred to me that this could be a bigger deal than I thought….”
It proved to be a very big deal. How ironic that the most staunch defenders of a pure paper standard, the sole remnant of Nixonomics, are a few influential “progressives” such as Paul Krugman, Joseph Stiglitz and Thomas Frank. Call them “the Nixonians.” The poor jobs growth and stagnation of today’s “world dollar standard” are not, unsurprisingly, dissimilar to the results of the Nixon Shock.
There is ample evidence that restoring gold convertibility would put the world back on the path of jobs, growth, and a balanced federal budget. Politicians do not like messing around with monetary policy. But gold, recently rediscovered by the Tea Party, has an impressive technical, economic, and political pedigree. Gold convertibility has a very well established track record of job-creation, properly applied, during many eras.
The silver lining to the whipsawing Dow is that it makes politicians open to new ideas, even new old ideas. Monetary statesmen from Alexander Hamilton forward have faced circumstances far more dire than those of today and turned things around. Modern example? The German economic miracle, the Wirtschaftswunder.
That miracle was founded in currency reform. On the very day when Ludwig Erhard’s currency reform was put into place, the economic paralysis ended. The “rightest” economist of the 20th century, Jacques Rueff, wrote (with André Piettre) about the turnaround beginning on the very day of the reform:
Shop windows were full of goods; factory chimneys were smoking and the streets swarmed with lorries. Everywhere the noise of new buildings going up replaced the deathly silence of the ruins. If the state of recovery was a surprise, its swiftness was even more so. In all sectors of economic life it began as the clocks struck on the day of currency reform. Only an eye-witness can give an account of the sudden effect which currency reform had on the size of stocks and the wealth of goods on display. Shops filled with goods from one day to the next; the factories began to work. On the eve of currency reform the Germans were aimlessly wandering about their towns in search of a few additional items of food. A day later they thought of nothing but producing them. One day apathy was mirrored in their faces while on the next a whole nation looked hopefully into the future.
Rueff took a similar approach, including a dramatic currency reform, to reviving the French economy. As economist and Lehrman Institute senior advisor John Mueller summarizes:
Despite the unanimous opposition of his cabinet, de Gaulle adopted the entire Rueff plan, which required sweeping measures to balance the budget and make the franc convertible after 17.5% devaluation – though not without qualms. ‘All your recommendations are excellent,’ de Gaulle told Rueff. ‘But if I apply them all and nothing happens, have you considered how much real pain it will cause across this country?’ Rueff replied, “I give you my word, mon General, that the plan, if completely adopted, will re-establish equilibrium in our balance of payments within a few weeks. Of this I am absolutely sure; I accept that your opinion of me will depend entirely on the result.’ (It did: ten years later, de Gaulle awarded Rueff the medal of the Legion of Honor.)
Today, on this the 40th anniversary of the closing of the gold window, a group of Americans issued a statement reading, in its conclusion:
[W]e support a 21st century international gold standard. America should lead by unilateral resumption of the gold standard. The U.S. dollar should be defined by law as convertible into a weight unit of gold, and Americans should be free to use gold itself as money without restriction or taxation. The U.S. should make an official proposal at an international monetary conference that major nations should use gold rather than the dollar or other national currencies to settle payments imbalances between one another. A new international monetary system, based on gold, without official reserve currencies, should emerge from the deliberations of the conference.
Many of the signatories are associated with the American Principles Project, chaired by Sean Fieler, and the Lehrman Institute (with both of which this writer is professionally associated), chaired by Lewis E. Lehrman. Signatories also include such important thought leaders as Atlas Foundation’s Dr. Judy Shelton and Forbes Opinions editor John Tamny.
Politicians may have forgotten the power that real money, such as currency convertible into gold, has to reverse an economic crisis. But the people have not. Earlier this year, the government of Utah restored, to international attention, the recognition of gold and silver coins as legal money. Now news emerges that the largest and most respected political party in Switzerland is supporting the work of the Goldfranc Association, led by citizen Thomas Jacob, to introduce a gold-convertible Swiss franc as a parallel currency.
Proponents are using the Swiss political process to put the creation of a gold franc in the Swiss Constitution. Jacob finds himself in the very distinguished company of Rueff and Erhard.
While London burns Switzerland thrusts gold-based currency reform toward the center of the international debate on how to rescue the euro, end the debt crisis, and turbocharge economic growth and job creation with integrity, not Nixonian manipulation.
Will a world Wirtschaftswunder — an economic miracle — follow a restoration of gold convertibility? History shows how practical such a miracle can be.
By Ralph Benko, on 2 August 11
A view from America, originally published at Forbes Blogs.
The signals were crystal clear that even without a deal Washington absolutely was not going to default. Being Washington it had to strut and dramatize. Assuming that the free market is even half as smart as we think, the bond markets would have come undone assuming even a hint of the U.S. falling into arrears with creditors. Instead, Bloomberg.com’s headline on Saturday spoke volumes: “Treasury Yields Tumble to 2011 Lows.”
Wall Street was just watching Washington’s Big Sitcom and passing the popcorn. Bloomberg, again, already had reported that reassurances had gone forth from the Treasury to the Big Banks that the federal government is not so stupid as to stiff its creditors. Treasury would apply the necessary cash receipts to paying its interest when due. According to Bloomberg’s Peter Cook and Cheyenne Hopkins:
The U.S. Treasury will give priority to making interest payments to holders of government bonds if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official.
It is inconceivable that any administration, especially one as fecklessly beholden as this one, would entertain, even momentarily, the idea of alienating its lenders. Wall Street got this early.
Main Street got this too. Even Washington got this. Still… our leaders have a primal need to posture and shake their fists at one another. Nobody exemplified this better than House Minority Leader Nancy Pelosi in her “other-worldly,” in the words of journalist Mark Tapscott, declamation that “We’re trying to save life on this planet as we know it today.” Pure soap opera.
The reality? Politicians will spend every penny they can get their hands on. They always have. They always will. We the voters reward them (re-election!) for spending. We punish them (defeat!) for frugality. Our leaders may be crazy. They are not stupid. Consider this peek by financial guru John Mauldin about his recent meeting with 10 U.S. Senators to discuss his book Endgame. “They all noted that their mail was running 100 to 1 against cutting Medicare. Every one of them.”
Mauldin, despairingly, envisions a Value Added Tax as the desperate alternative to Depression 2.0 which he predicts is the consequence of not getting the deficit under control (something which, of course, The Deal does not really do). But there is an alternative to the VAT: serious spending restraint plus growth. One of the smarter GOP economists out there, Ike Brannon, has written trenchantly:
The primacy of economic growth in generating tax revenue cannot be overstated: the fastest post-war increases in tax revenue growth occurred in 1997-2000 and 2004-2007, when revenues went up by nearly 50% in each instance. Tax rates did not go up at all during that time — the rapid increase in revenue occurred because we were in a sustained period of strong economic growth.
It is necessary to restrain and valuable to cut excessive federal spending. This columnist is for rolling spending back to 2006 levels: Take That! But the only proven way to eliminate the deficit is through spending restraint plus growth. The fight, the one that really matters, is about how to get growth. Almost unnoticed, conservatives are close to winning this argument.
The right believes in free markets: low tax rates, a stable (ideally gold convertible) dollar, free trade, mild regulation. Worked for Reagan. Worked for Clinton. Both created many millions of jobs by unleashing free market forces: firming up the dollar, cutting or maintaining low marginal tax rates, deregulating business, freeing trade, reforming welfare.
The left believes that the way to create economic growth and jobs is by (now seriously unpopular) government spending. This is called Keynesianism. Hayek on Keynes: “He was a very great man, but I don’t think he was a great economist.”
Keynes did not end the Depression. As it happens, George Warren did. Who? Cornell University Professor George Warren persuaded FDR, against the advice of all of his experts, to rectify the pent-up deflationary pressures caused by the gold-exchange standard. How? Devalue the dollar from $20.67 to $35 an ounce. This process was heretical to the Establishment (the patrician Dean Acheson, FDR’s Treasury Undersecretary, resigned over it), and conducted somewhat out of the public eye in rather inscrutable ways:
One morning, as Roosevelt ate eggs in bed, he and Secretary of the Treasury Henry Morgenthau decided to change the ratio between gold and paper dollars. After weighing his options, Roosevelt settled on a 21 cent price hike because ‘it’s a lucky number.’ In his diary, Morgenthau wrote, “If anybody ever knew how we really set the gold price through a combination of lucky numbers, I think they would be frightened.”
It worked. The Depression lifted. Employment began to grow.
Meanwhile Keynes was in the public eye. The arch-proponent of deficit spending had been proved prophetic in predicting the damage inflicted on the world economy by the Versailles reparations. Also Keynes was master of Narrative. He could turn a memorable phrase. (“I work,” he wrote in a letter to his then-lover Duncan Grant, “for a Government I despise for ends I think criminal.”)
The left, charmed and mesmerized by Keynes, attributed the lifting of the depression to Keynes’s deficit spending formula rather than to its true source, monetary reform. Much of the left still labors under the misimpression that the Great Depression was caused by a breakdown of the gold standard. It was not. As Ben Bernanke publicly noted, it was caused by the breakdown of (what Jacques Rueff called) its “grotesque caricature,” the gold exchange standard. The left labors under the misimpression that what ended the Great Depression was deficit spending, doctrinally embracing “cargo cult economics.” Keynes, a true humanitarian who hated dogmatism, almost certainly would have been appalled by his ardent modern acolytes.
There are grounds to believe that President Obama, more (not unlike FDR) of a pragmatist than an ideologue, is bailing on the left. He was assured by his advisors that gargantuan deficits would create jobs and growth. He engaged in an orgy of spending with gusto and a confident expectation of a rip-roaring economy to carry him triumphantly to a second term.
Instead Obama got 1.3% economic growth rates, the economy teetering on the edge of a double dip, an unemployment rate over 9%, and shrill claims from the hard left that mere near trillion dollar deficits simply are not enough. These claims have the same inherent level of credibility as those of 9/11 “truthers” and UFO-abductees. As the New York Times’ Jackie Calmes reported on July 30:
However the debt limit showdown ends, one thing is clear: under pressure from Congressional Republicans, President Obama has moved rightward on budget policy, deepening a rift within his party heading into the next election.
Entering a campaign that is shaping up as an epic clash over the parties’ divergent views on the size and role of the federal government, Republicans have changed the terms of the national debate. Mr. Obama, seeking to appeal to the broad swath of independent voters, has adopted the Republicans’ language and in some cases their policies, while signaling a willingness to break with liberals on some issues.
It is highly likely that, the curtain having fallen on the “Debt Ceiling” melodrama, a new consensus for growth along free-market, rather than deficit spending, lines readily is visible. “Keynesianism” (a one-word contradiction in terms) was given a fair trial, failed, and lies utterly discredited as a job generation strategy. Meanwhile the GOP has begun, through figures such as House Majority Leader Rep. Eric Cantor, to explore some credible free market growth proposals. Just add some gold convertibility and voila!
To paraphrase Dr. Martin Luther King, the arc of the federal spending universe is long, but it bends toward restraint. Serious spending restraint, and preferably real cuts in the warfare/welfare State, plus strong growth through free market policies is the new consensus. It is a consensus that even President Obama shows signs of finding irresistible.
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