WHY A GOLD STANDARD NOW? - Craig R.
Smith
WHAT IS A GOLD STANDARD?
The gold standard is a monetary system in which the standard economic unit of
account is a fixed weight of gold. Typically under such a system paper money
circulates as a medium of exchange but it is convertible into gold on demand.
It may be said that the exchange rate between paper money and gold is fixed. When
several nations are on a gold standard then the rates of exchange between national
currencies effectively becomes fixed.
The gold standard limits the power of governments to cause price inflation by
excessive issue of paper currency, although there is evidence that before World War I
monetary authorities did not expand or contract the supply of money when the
country incurred a gold outflow. Theoretically it also creates certainty in international
trade by providing a fixed pattern of exchange rates.
Thus, the gold standard is supported by many advocates of classical economics,
monetarism, and libertarianism. Much of the support for a gold standard is related to
a distrust of central banks and governments, as a gold standard removes the ability
of a government to manage the value of money.
A SOUND BEGINNING
The United States dollar started on a bimetallic standard, which was effectively a
silver standard. This caused the value of the dollar to drop in response to discovery of
silver in the Western United States in the late 19th century. The dispute between a
silver standard, favored by farmers, and a gold standard was a very controversial
topic in the late 19th century.
This dispute was decisively settled when the United States switched to a gold
standard in 1901 under the Gold Standard Act. Starting in 1933, U.S. currency was no
longer directly convertible by individuals to gold and the possession of gold by
individuals for investment purposes was made illegal however, transfers of gold were
still used to settle liabilities between central banks.
Throughout the 1930s, a series of executive orders were written by then-president
Franklin Delano Roosevelt, which essentially criminalized private ownership of gold,
ending its use as a form of tender. In one such instance, signed on April 5, 1933,
Executive Order 6102 set in place policing powers which ultimately led to the
confiscation of all gold owned by private citizens. The United States Congress then
abrogated the United States' use of the gold standard on June 5 that year by enacting
a joint resolution (48 Stat. 112) nullifying the right of creditors to demand payment in
gold. This ban would later be repealed by an act of Congress codified in Public Law
93-373 which went into effect December 31, 1974.
PROPOSALS FOR RETURNING TO A GOLD STANDARD
There are a number of proposals which aim at once again giving gold a role in the
U.S. monetary system, according to Joseph T. Salerno, assistant professor of
economics at Rutgers University.
According to Mr. Salerno, "Although these plans vary significantly in basic conception
as well as institutional details, all but one suffer, to a greater or lesser degree, from
the same fundamental flaw: they leave intact the current government monopoly of
money. For purposes of discussion, these monetary reform proposals may be
grouped under four headings: the gold-certificate reserve, the gold "price rule," the
classical gold standard, and the parallel private gold standard
The Gold-Certificate Reserve
Robert E. Weintraub, senior economist for the Joint Economic Committee, has
proposed the reinstatement of the gold-certificate reserve requirement for Federal
Reserve notes. Under Weintraub's plan, the Fed would be legally required, as it was
prior to 1968, to maintain a reserve of gold certificates whose value, at a stipulated
legal price of gold, would be a fixed proportion of its outstanding note liabilities.
Before 1968, when the legal or "par" value of gold was $35 per ounce, the reserve
requirement was 25 percent, and so, in effect, each dollar of currency in circulation
was "backed" by 25 cents in gold. Weintraub's plan "would require that the Federal
Reserve banks hold at least 9 cents in gold certificates at their legal value [$42.22
per ounce since 1973] behind each dollar of note liabilities in perpetuity." The nine
percent reserve requirement reflects the ratio of par value gold certificates held by
the Fed to its note liabilities prevailing at the end of 1980.
The Gold "Price Rule"
The gold "price rule" denotes the monetary reform proposal put forth in various forms
by a number of supply-siders including Arthur Laffer, Robert Mundell, and Jude
Wanniski. Laffer's detailed formulation of the proposal has also served as the basis of
the Gold Reserve Act of 1980, a bill introduced in Congress by Sen. Jesse Helms.
According to Laffer's blueprint, at the end of a previously announced transition period
of three months, the Federal Reserve would establish an official dollar price of gold
"at that day's average transaction price in the London gold market." From that date
onward, the Fed would stand ready to freely convert dollars into gold and gold into
dollars at the official price. In addition, "when valued at the official price, the Federal
Reserve will attempt over time to establish an average dollar value of gold reserves
equal to 40 percent of the dollar value of its liabilities."
The Classical Gold Standard
Over the past few years, the case for reinstituting the "classical" gold standard has
been propounded with great vigor and insight by Lewis Lehrman, a businessman and
scholar whose views were influential in formulating the economic policy agenda of
the Reagan administration. Lehrman's writings are heavily influenced by the ideas of
his former teacher, the late French economist and longtime gold-standard advocate,
Jacques Rueff.
Like his mentor, Lehrman advocates a genuine gold standard which "would establish
the dollar as a weight unit of gold." As Lehrman explains: Under the gold standard
there is no price for gold. The dollar is the monetary standard, set by law equal to a
weight of gold. The price of gold does not exist ....Under the gold standard, the paper
dollar is a promissory note. It is a claim to a real article of wealth defined by law as
the standard. (See Fernidand Lips speech below)
The Parallel Private Gold Standard
The most innovative proposal for establishing a gold money involves a wholly private,
"parallel" gold standard which would exist side by side with the already established
government fiat-money standard. Variations on this plan have been proposed by
Henry Hazlitt and Professor R. H. Timberlake. In a nutshell this proposal states that
governments should be deprived of their monopoly of the currency-issuing power.
The private citizens of every country should be allowed, by mutual agreement, to do
business with each other in the currency of any country. In addition, they should be
allowed to mint privately gold or silver coins and to do business with each other in
such coins... Still further, private institutions should be allowed to issue notes payable
in such metals. But these should be only gold or silver certificates, redeemable on
demand in the respective quantities of the metals specified. The issuers should be
required to hold at all times the full amount in metal of the notes they have issued,
as a warehouse owner is required to hold at all times everything against which he
has issued an outstanding warehouse receipt, on penalty of being prosecuted for
fraud. And the courts should enforce all contracts made in good faith in such private
currencies. [MORE ...
RETURN TO A PERSONAL GOLD STANDARD
While the possibility of the enactment of a legal gold standard is presently remote,
gold can nonetheless be used as a standard for your personal economic stability now,
today, by anyone. To do so requires no act of Congress, no court decision, no new
law of any kind.
Anyone who wishes to adopt gold as his own, personal standard can do so
immediately simply by taking a portion of your paper assets and converting them
into physical gold assets, which are personally held. It is just that simple, yet only a
very small percentage of Americans own any gold at all today. But that could all
change overnight.
The decision of Arab policy-makers to sell oil for dollars is now under great pressure. I
do not expect this policy to survive beyond this decade. When Arabs select another
currency, such as the Euro or Gold Dinar, the dollar's monopoly will go the way of all
monopolies and the party will be over for Americans, who have been able to buy the
world's most crucial commodity with fiat money. Fiat money always goes the way of
all flesh. Woe unto the political party whose man is in the White House when this
happens.
"If the foundations are destroyed, what shall the righteous do?"
-Nehemiah
As you can see, the greatest minds our our time all agree that there is an absolute
correlation between our monetary foundation and our moral/spiritual foundation.
That means that, as author/economist RE McMasters once told me in a radio
interview, "Government is Religion applied to economics."
The bottom line ... is that America is in a moral decline today which, in part, is due to
a loss of our religious convictions. My prayer is that WE who hold a deep and abiding
faith in God have eyes to see the damage that a humanistic world view has caused
and, like Nehemiah, will be empowered by the spirit of God to shout to our fellow
countrymen ... "Let us rise up and rebuild this city!" ... one soul at a time ... and one
gold coin at a time.
