GOLD STANDARD AND THE FEDERAL RESERVE
In a recent opinion by Sebastian Mallaby, published in the Washington Post, the author and columnist says the following:
“Money is an abstraction, a political confection, a set of castles built on air. No wonder it makes people feel queasy. Gold is tangible, immutable, somehow reliable and real; there will always be people who believe in it. But the truth is that modern central banking is one of those elite inventions that generally works. The gold standard has given way to the PhD standard, and we are all the better for it.”
In his article, Mr Mallaby presents his arguments as to the reason and logic that a gold standard will not work and that it is an idea which is out of date and inferior to the current system, i.e., “modern central banking”.
The opinions are a response to statements made by Judy Shelton, currently under consideration for appointment as one of the seven governors on the Federal Reserve Board.
Mr. Mallaby refers to former President Reagan’s “nostalgia” abut the gold standard as being “curious” and says that “survival of this sentiment in 2019 is even more baffling”.
He goes on to state that “…the Fed has a remarkably good record in delivering price stability”. Seriously?
In the lifetime of the Federal Reserve, the U.S. dollar has lost more than ninety-eight percent of its value. Is the fact that it costs sixty times more today than it would otherwise without the the effects of inflation a sign of “a remarkably good record in delivering price stability”?
Further, why is it necessary to manage and administer price stability? It is necessary for central banks because they are the ones who create and foster instability in prices.
Inflation is the debasement of money by government. It leads to a loss in purchasing power in currencies and price instability. The effects of this inflation are cumulative, volatile and unpredictable.
All governments, with the help of their central banks, inflate and destroy their own currencies. It is intentional and ongoing.
“Modern central banking” embodies operation and actions that are refutations of fundamental economic law.
Paper currencies are substitutes for real money. They have no intrinsic, or inherent value. Paper money is a debt, an I.O.U that is irredeemable, except for more money substitutes.
These things are also true of any amounts of dollars (or other currencies) that are held in the form of credit (U.S. Treasury securities, for example) and are denominated in dollars.
Ms. Shelton and others have suggested that fixing the dollar’s value to a specific quantity of precious metal will keep the Fed from creating money at will. No, it won’t.
Sorry goldbugs. If that were true, then it would have been entirely unnecessary for President Roosevelt to declare it illegal for U.S. citizens to own gold. And for President Nixon to refuse further convertibility of U.S. dollars into gold by foreign governments.
Those executive orders were the result of people’s preference to hold gold, rather than paper dollars. The reason for their preference was because the dollar was no longer “good as gold”, regardless of fixed ratios, or any supposed backing by gold.
That is because the government continued to issue dollars, paper money, that was in excess of the amount of gold which was used for the backing. It is called counterfeiting.
That does not mean that a gold standard cannot work. It can work. And it is certainly preferable to fiat money and modern central banking. And sooner is better than later.
But there are problems which seem to escape the proponents of a sound-money system.
One is the fact that, as with all illnesses, a recovery period is necessary. A withdrawal period might be a better term.
One hundred years of illness will require a long period of withdrawal. And it will be very severe. That is due to the fact that most of the inflation effects by the Fed are built into unrealistically high prices for nearly everything we buy and sell. Also, most of those prices and nearly all economic activity today are supported and funded with credit.
The credit is in the form of mortgages, student loans, auto loans, business and corporate loans, leveraged investments, etc. And the credit is growing exponentially.
Our financial and economic systems are top-heavy and will likely collapse under their own weight. That is what happened in 2007-08. Then the Fed rescued us.
Per Mr. Mallaby, “Without the Fed’s prodigious quantitive easing the economic recovery after the 2008 crisis would have been even more sluggish.”
The 2008 crisis would not have just “been even more sluggish”. It would have led to a full-scale depression. And we would likely still be mired in it, deeply. Which nobody wanted, then; nor do they want it today, or ever. I get that.
When people get sick, they generally don’t want to do what they need to do in order to get better. Rather than let nature take its course and have the body heal itself, they resort to drugs and other quick fixes.
Then they resume some mediocre level of activity, and go back to whatever they were doing before they got sick. In many cases they suppress the symptoms that indicate the system is purging itself and ridding the body of toxins. But the pathogen which might be the cause of the illness doesn’t go away. It remains in the body in a relatively dormant state until it awakens sometime later in full fury.
The Fed’s response to the 2008 crisis was similar to a drug addict who is hooked on higher and higher doses. When his body rejects further infusions (voluntarily or not) he enters into a period of withdrawal. If he refuses further ‘fixes’ he has the possibility of healing himself and curing his addiction. But it will be difficult. And it will take time.
The Fed responsed to the 2008 crisis with “more of the same”. Rather than face an undetermined period of withdrawal and potential healing, the patient received huge repeated doses of a similar drug that had been made available since 1913, and coincided with the origin of the Federal Reserve.
In support of the supposedly valiant efforts by the Federal Reserve in their response to the 2008 crises, Mr. Mallaby said that “the alleged downside of QE — a surge in inflation — has failed to materialize”.
With all due respect to Mr. Mallaby, the inflation did materialize. And it was huge. The combination of cash and credit issued to stave off economic collapse was the inflation.
The effects of that inflation – higher prices – also showed up. Stock prices have quadrupled since their lows in early 2009. House prices have recovered and exceeded previous high points from a dozen years ago. In some cases, house prices have doubled from their recession lows. And the levels of outstanding credit are at all-time highs.
As long as governments issue fiat money, there will always be inflation and currency manipulation. And the intent and actions (including inflation and currency manipulation) of governments and their respective central banks are attempts to control economic activity out of self-interest and perpetuation of power.
We don’t need “a global monetary system tethered to gold”. We need the freedom for participants in all trades and transactions to accept or refuse whatever form of money they choose.
Gold is real money. It has earned that distinction over five thousand years of recorded history.
It is real money because it meets the test of qualifying criteria: it is a medium of exchange, a measure of value, and a store of value. Nothing else meets the test.
Whether it is recognized officially by governments or not, whether a gold-standard monetary system is in place or not, gold is money. It is real money, original money.
Therefore, editing Mr. Mallaby’s summation from his article, here is a more factual and suitable conclusion for this author’s opinions:
“Paper money is an abstraction, a political confection, a set of castles built on air. No wonder it makes people feel queasy. Gold is tangible, immutable, always reliable and real; there will always be people who know and understand this. The truth is that modern central banking is one of those elite inventions that is guaranteed to fail; all similar attempts in history have also failed. Unfortunately, the gold standard has given way to the PhD standard, and we are all the worse for it.”
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