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Return to the Gold Standard: a Plea for Sanity

February 6, 2012

Jay O’Connor ’12

            Given the current turmoil in world financial markets regarding national debt levels, inflationary monetary policy, and the ever encroaching powers of the U.S. government in the global economic system, a drastic change is necessary. As the scope of our national government’s ability to mandate economic policy begins to far exceed the levels desired by the Framers, it is increasingly necessary return to a competitive free-market ideology which puts the people at the cornerstone of national economic stability. I believe a sweeping ideological policy shift must take place in order to correct the deficiencies of the current system. One plausible remedy with the capacity for such a task is a return to the gold standard. In order to understand why a return to a fixed exchange rate via gold is necessary, consider the detrimental effects of a free floating economy.

            In 1971, President Nixon sensed a national loss of faith in the U.S. government’s ability to cut its rising budget and trade deficits, a feeling that is familiar to many today. In response, Nixon attempted to combat the 1970 inflation rate of 5.84% by giving the central bank the ability to manipulate this rate. Coined “The Nixon Shock,” a series of economic measures unilaterally cancelled the direct convertibility of the U.S. dollar to gold and ended the existing Bretton Woods system of international financial exchange. This end to the gold standard had a widespread economic impact. By creating a floating exchange rate, Nixon hoped to soften the impact of international economic shocks that could potentially hurt the domestic economy. He believed that the Fed would have an increased ability to manipulate that economy through monetary policy; inflationary or deflationary. The shift from a fixed exchange rate to a floating exchange rate open to international market volatility presented an inherent political “tri-lema”; a government cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy, and must therefore choose to control two and leave the third to market forces. By removing the dollar’s direct price relation to a pre-determined weight in gold, the value of the dollar became subject to other influences, including international foreign exchange markets. As a result, the stability of our currency, and subsequently our economy, could fall prey to the volatility of international finance.

            In the recent economic recession, the Federal Reserve Bank, part of the federal government, has exercised its ability to manipulate our monetary policy. Objectivists and neo-liberalists generally fear the monopoly that the central bank has over determining the value of the dollar. For example, recent monetary manipulations include inflationary stimuli like TARP, QE1, and QE2. Considering the fact that, as of 2009,  more than 3 trillion dollars are traded in the foreign exchange markets on a daily basis, negative investor sentiment can result in a “run on the dollar.” Because of this increased market volatility, the Fed deemed it necessary to intervene. Alan Greenspan called for a return to gold in a 1966 report titled Gold and Economic Freedom, in which he described supporters of fiat currencies, or monetary values derived from the state, as “welfare statists” intent on using monetary policies to finance deficit spending.  At a conceptual level, the central bank took control of the economic efficiency and productivity of the country. Businesses around the country could no longer provide national economic stability. Some might say that Nixon’s relinquishing of the Gold Standard was planned obsolescence—that it could work soundly until international market forces drastically increased the volatility of our domestic economy, necessitating “welfare statist” remedies and requiring a return to the gold standard. Considering this arguably flagrant abuse of the national government’s power and authority, what advantage does a fixed exchange rate offer for national economic stability and free-market efficiency?

            According to Lew Rockwell, American libertarian and proponent of the Austrian School of Economics, pegging the American dollar to gold would curtail central bank activity in the open market. It would limit the flexibility and authority of central banks by making them unable to stimulate growth or affect inflation. The beauty of a true gold standard is that it puts the control of money back into the hands of citizens so that real value is exchanged for real value. It is a system of ownership and trade that cannot be manipulated to exploit its owners. The savings of individual citizens would be backed by “the full faith and credit” of gold, something that is, in turbulent times, more certain than the American government. The gold standard also limits government to only what is has; a fixed source of gold and, subsequently, a fixed amount of money. Additionally, gold is liquid, stable, fungible, and marketable,  all qualities that make it efficient in foreign exchange markets.

            The most undeniable advantage of a gold standard is long-term dollar stability. By equating the dollar with a fixed amount of gold, the power of the government to decrease the value of the dollar through excessive issuance of paper money is limited. The central bank would no longer be able to “counterfeit” bills in efforts to stimulate the economy. Further, a gold standard provides a fixed exchange rate, reducing uncertainty in international trade. With the United States fixed to gold, other countries would follow suit and value their currencies in relation to the U.S. dollar. A global fixed exchange rate is most attractive to emerging markets and developing countries whose economies do not share the complexities of the U.S.’s because using a currency pegged to gold to pay for imports reduces the money supply of importing nations, reducing price levels for general goods and services, in turn making them more competitive in a global market.

         Finally, returning to the gold standard would inevitably check government deficit spending. For a country with almost $16 trillion in outstanding debt, this is a remarkably attractive characteristic. If the dollar is linked to gold, the amount of debt that the government can issue is limited to the amount of gold it has. Subsequently, central banks are prevented from using monetary policy that decreases the value of their existing debt through currency devaluation. In a global economy where countries frequently leverage their economies by foreign direct investment and the buying of foreign debt, gold would provide a safety valve. Egregious debt in one country couldn’t send the rest of the developed world toppling like dominos.

            In a world where trillions of ethereal dollars are traded daily, gold acts as the only tangible adhesive holding the system together. An international system deeply rooted in trade, foreign direct investment, bilateral agreements, and multilateral unions, is obligated to turn to a stable institution for economic exchange. Governments must exert a  responsible amount of influence over monetary policy; a return to the gold standard is an ideal check on the complexities of modern government and modern finance. Stability can best be achieved by returning to a gold standard valuation for the dollar. 

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