A Golden Anchor for the U.S. Economy
By Scott Gillette
Jack Kemp, this writerís favorite American statesman in the 20th century, wrote an op-ed in the Wall Street Journal on June 28th called, "Our Economy Needs a Golden Anchor." This is a big deal, because a golden anchor would ensure that the U.S. dollar would maintain its value regardless of time and future circumstances.
Mr. Kemp came to appreciate goldís importance from Nobel Laureate Robert Mundell and Jude Wanniski, who in turn learned the importance of a golden anchor from the wisdom of countless thinkers from days long gone. It is axiomatic that our most precious truths are eternal, but must be relearned by every new generation. In this way, we are always standing on the shoulders of giants.
History is filled of examples of governments that deliberately degrade the value of the currencies in order to fund a war or other politically appealing projects. Itís easy to do this: just print a desired amount of currency that they require without having to tax their subjects. But such policies cause inflation, as the savings of everyone else in the society have been diminished in order to serve the interests of politically powerful.
Today the United States is in the throes of a deflation, as the Federal Reserve is not injecting sufficient liquidity that the market is demanding. Although this increases the value of the dollar in your pocket, the dearth of liquidity has caused corporate profits, spending and investment to take a nosedive. Like a mountain climber that does not have enough air to breathe, the economy does not have enough money to run at full steam.
Every economy has by definition creditors and debtors. Debtors benefit from inflation because they have to pay less money back to their creditors in real terms. Creditors benefit from deflation because debtors have to pay back more than they lent in real terms. But a just polity would never favor one of these groups over the other, but merely create a neutral platform for both.
More importantly, any benefits to either group would be obviated by the economic distress that currency instability brings. If the value of a currency always fluctuates, it discourages people from taking risks, investing in themselves and others, and knowing that the fruits of oneís work will be secure in the future.
A gold standard insures that the value of the currency will be maintained, because monetary actors will sell bonds and take liquidity out of the economy when the gold price becomes too high (inflation), and buy bonds and add liquidity into the economy is too low (deflation). Simple.
What is the optimum price of gold? Experts disagree, but almost all of them put it between $300 and $350 an ounce. The futures market projects gold to be $271 in August. If the Federal Reserve added sufficient liquidity, the price of gold would rise to $300; more importantly and consequently, the economy will thrive once again.
Most professional economists tend to dismiss or deride a golden anchor because of their training, and because their scientific and modern assumptions reject ancient ways of maintaining a currency. But these economists must ask themselves, "What are the long-term benefits of a currency that fluctuates in value?" They canít provide a sound answer, because there are none. Period.
Treasury Secretary Paul OíNeill said recently that the recent downturn is a mere pit stop and a long age of prosperity awaits us. I would agree generally, and I understand why he said this. Nevertheless, our sub-optimal monetary policy obstructs this long-term prosperity for the time being. A golden anchor would guarantee the promise of a new prosperity for all mankind.
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