Is There a Silver Lining to the Gold Standard?

Gold Standard Truths and Fallacies

As people debate the Federal Reserve and the Gold Standard, it is helpful to have some real facts, to have a real and valuable debate.

The Gold Standard provides certainty of value to money, but only if if citizens do not “clip” coins.... a process by which metal based currencies become devalued. This is when individuals would shave the edges off gold or silver coins in order to accumulate greater personal wealth. This debases the currency and can be avoided only when gold currencies are provided only in gold/silver backed certificates, or electronically.  Today, marks the first time in mans history that this problem is manageable.

Thus is a real world with real uncertainties, the Gold Standard would provide some increased certainties.


Economic Cycles Defeat the Gold Standard

The Gold Standard has led to many of the great recessions and depressions in American history and in world history. The main issue is it is inflexible, in an economic world that requires adaptation.

The challenge of the Gold Standard is that it prevents expansive monetary policies required in recessions and depressions.                       

Overall the national gold standards died prior to World War II. This enabled nations to expand their money supplies to continue to float their economies. In short, abandoning the Gold Standard enabled most nations to survive WWII when the Gold Standard would have ended their economies.


The Gold Standard and the Great Depression

Prolongation of the Great Depression Some economic historians, such as American professor Barry Eichengreen, blame the gold standard of the 1920s for prolonging the Great Depression.[6] Others including Federal Reserve Chairman Ben Bernanke and Nobel Prize winning economist Milton Friedman place some blame at the feet of the Federal Reserve.[7][8]  

The gold standard limited the flexibility of central banks' monetary policy by limiting their ability to expand the money supply, and thus their ability to lower interest rates. In the US, the Federal Reserve was required by law to have 40% gold backing of its Federal Reserve demand notes, and thus, could not expand the money supply beyond what was allowed by the gold reserves held in their vaults.[9]

In the early 1930s, the Federal Reserve defended the fixed price of dollars in respect to the gold standard by raising interest rates, trying to increase the demand for dollars. Its commitment and adherence to the gold standard explain why the U.S. did not engage in expansionary monetary policy.

To compete in the international economy, the U.S. maintained high interest rates. This helped attract international investors who bought foreign assets with gold. Higher interest rates intensified the deflationary pressure on the dollar and reduced investment in U.S. banks. Commercial banks also converted Federal Reserve Notes to gold in 1931, reducing the Federal Reserve's gold reserves, and forcing a corresponding reduction in the amount of Federal Reserve Notes in circulation.[10]

This speculative attack on the dollar created a panic in the U.S. banking system. Fearing imminent devaluation of the dollar, many foreign and domestic depositors withdrew funds from U.S. banks to convert them into gold or other assets.[10] The forced contraction of the money supply caused by people removing funds from the banking system during the bank panics resulted in deflation; and even as nominal interest rates dropped, inflation-adjusted real interest rates remained high, rewarding those that held onto money instead of spending it, causing a further slowdown in the economy.[11]

Recovery in the United States was slower than in Britain, in part due to Congressional reluctance to abandon the gold standard and float the U.S. currency as Britain had done.[12] Congress passed the Gold Reserve Act on 30 January 1934; the measure nationalized all gold by ordering the Federal Reserve banks to turn over their supply to the U.S. Treasury. In return the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the gold dollar so that it would have no more than 60 percent of its existing weight. Under this authority the president, on 31 January 1934, fixed the value of the gold dollar at 59.06 cents. 

6      Eichengreen, Barry (1992) Golden Fetters: The Gold Standard and the Great Depression,
       1919–1939. Preface.
7      Speech by Ben Bernanke to the Conference to Honor Milton Friedman at University of Chicago,
        November 8 2002.
8      WorldNetDaily, March 19 2008.
9      The original Federal Reserve Act provided for a note issue which was to be secured ... 
        by a 40% reserve in gold
10     "FRB: Speech, Bernanke-Money, Gold, and the Great Depression -March 2, 2004". 
        Federalreserve.gov. 2004-03-02. http://www.federalreserve.gov/boarddocs/speeches
        /2004/200403022/default.htm. Retrieved 2010-07-24.        
11     "In the 1930s, the United States was in a situation that satisfied the conditions for a liquidity 
         trap. Over 1929–1933 overnight rates fell to zero, and they remained on the floor through 
         the 1930's."
12     The European Economy between Wars; Feinstein, Temin, and Toniolo

Source: Wikipedia 


In short, introducing the Gold Standard during America's greatest recession since the Great Depression does not seem like a great recipe for economic recovery, and should be rightfully relegated to the "Barney Frank School of Economics". 


Gold Standard Advocates Lack 
Global Monetary & Economic Understanding.

While few conservatives support global governance, we all seek to exert the greatest American power overseas, at the lowest cost, in order to stabilize our failed world that constantly exists on the brink of total self-destruction.  The pre-Barney Frank American Dollar did exactly that.

In fact, pre-Barney Frank, the global America dollar had a negative cost. That is, America was free, and in fact encouraged, to run trade and budget deficits to support expanding more dollars overseas which were required by nations with expanding currencies.

International trade requirements mandate expanding Dollar Reserves by nations by requiring all oil international purchases be done in American Dollars.  All IMF transactions must be done in dollars, etc. 

We saw this post Cold War when growing Eastern European and ex Soviet puppet states sucked up dollars like Hoover vacuums. Most used dollars to conduct most transactions because their own currencies had been destroyed by socialism. So, they needed free and easy dollar reserves, which we were happy to provide.

Thus, America had achieved what no other nation in history had achieved, a system of tribute for its international governance. Finally, America did so not by forcing begrudging member states, but by their encouragement and demands. 

Historically, when Bretton Woods collapsed, nations began pegging their currencies to the dollar - requiring higher dollar reserves - in order to stabilize currencies and trade.  This reduces trade risk and international risk exposure. This is Dollarization.

This fostered greater economic integration, and lower currency transaction costs, which also foster trade growth.

Dollar deficits means America is able to purchase goods and services from other nations, while incurring effectively no national costs, especially in today’s electronic currency environment.


Dollarization has One Requirement

Dollarization requires only that America be reasonably responsible in its economic and Federal Budgetary management.  It does not require America be exceptional, or even marginally as responsible as other nations.  America only needs to be one step above a drunken sailor ..... and maybe two steps above a Barney Frank.

America, governed by both Democrats and Republicans were able to do this for two generations, until Republicans gained true political control of Washington DC. At this point, they acted like Democrats, and Democrats turned treasonous for the sole purpose of regaining their political position.

Thus, Barney Frank was able to acheive what Osama Bin LAdin could only dream of.... destroying western economy and civilization by destroying the western financial system.


Keep The Debate Alive

We can readily see the failings of the Gold Standard. But, we should keep the debate alive. The issues brought up by politicians like Ron Paul are very real, and Americans now know the utter catastrophic failings of the “Barney Frank School of Monetary and Bank Management”.

But, politicians are like old dogs. They have to be reminded daily of their training, and responsibilities, lest they forget.  The threat of a Gold Standard kills Liberal Treason, because it prevents such scandalous waste.  For no other reason, than preventing such Barney Frank treason, should we keep this debate alive.

E Pluribus Unum!

The Unanimous Declaration of Independence of the Thirteen United States of America

The Unanimous Declaration of Independence
of the Thirteen United States of America

When, in the course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the laws of nature and of nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness. Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security. --Such has been the patient sufferance of these colonies; and such is now the necessity which constrains them to alter their former systems of government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute tyranny over these states. To prove this, let facts be submitted to a candid world.

He has refused his assent to laws, the most wholesome and necessary for the public good.

He has forbidden his governors to pass laws of immediate and pressing importance, unless suspended in their operation till his assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other laws for the accommodation of large districts of people, unless those people would relinquish the right of representation in the legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved representative houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the legislative powers, incapable of annihilation, have returned to the people at large for their exercise; the state remaining in the meantime exposed to all the dangers of invasion from without, and convulsions within.

He has endeavored to prevent the population of these states; for that purpose obstructing the laws for naturalization of foreigners; refusing to pass others to encourage their migration hither, and raising the conditions of new appropriations of lands.

He has obstructed the administration of justice, by refusing his assent to laws for establishing judiciary powers.

He has made judges dependent on his will alone, for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance.

He has kept among us, in times of peace, standing armies without the consent of our legislature.

He has affected to render the military independent of and superior to civil power.

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his assent to their acts of pretended legislation:

For quartering large bodies of armed troops among us:

For protecting them, by mock trial, from punishment for any murders which they should commit on the inhabitants of these states:

For cutting off our trade with all parts of the world:

For imposing taxes on us without our consent:

For depriving us in many cases, of the benefits of trial by jury:

For transporting us beyond seas to be tried for pretended offenses:

For abolishing the free system of English laws in a neighboring province, establishing therein an arbitrary government, and enlarging its boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule in these colonies:

For taking away our charters, abolishing our most valuable laws, and altering fundamentally the forms of our governments:

For suspending our own legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated government here, by declaring us out of his protection and waging war against us.

He has plundered our seas, ravaged our coasts, burned our towns, and destroyed the lives of our people.

He is at this time transporting large armies of foreign mercenaries to complete the works of death, desolation and tyranny, already begun with circumstances of cruelty and perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the head of a civilized nation.

He has constrained our fellow citizens taken captive on the high seas to bear arms against their country, to become the executioners of their friends and brethren, or to fall themselves by their hands.

He has excited domestic insurrections amongst us, and has endeavored to bring on the inhabitants of our frontiers, the merciless Indian savages, whose known rule of warfare, is undistinguished destruction of all ages, sexes and conditions.

In every stage of these oppressions we have petitioned for redress in the most humble terms: our repeated petitions have been answered only by repeated injury. A prince, whose character is thus marked by every act which may define a tyrant, is unfit to be the ruler of a free people.

Nor have we been wanting in attention to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our separation, and hold them, as we hold the rest of mankind, enemies in war, in peace friends.

We, therefore, the representatives of the United States of America, in General Congress, assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the name, and by the authority of the good people of these colonies, solemnly publish and declare, that these united colonies are, and of right ought to be free and independent states; that they are absolved from all allegiance to the British Crown, and that all political connection between them and the state of Great Britain, is and ought to be totally dissolved; and that as free and independent states, they have full power to levy war, conclude peace, contract alliances, establish commerce, and to do all other acts and things which independent states may of right do. And for the support of this declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our lives, our fortunes and our sacred honor.

New Hampshire: Josiah Bartlett, William Whipple, Matthew Thornton

Massachusetts: John Hancock, Samual Adams, John Adams, Robert Treat Paine, Elbridge Gerry

Rhode Island: Stephen Hopkins, William Ellery

Connecticut: Roger Sherman, Samuel Huntington, William Williams, Oliver Wolcott

New York: William Floyd, Philip Livingston, Francis Lewis, Lewis Morris

New Jersey: Richard Stockton, John Witherspoon, Francis Hopkinson, John Hart, Abraham Clark

Pennsylvania: Robert Morris, Benjamin Rush, Benjamin Franklin, John Morton, George Clymer, James Smith, George Taylor, James Wilson, George Ross

Delaware: Caesar Rodney, George Read, Thomas McKean

Maryland: Samuel Chase, William Paca, Thomas Stone, Charles Carroll of Carrollton

Virginia: George Wythe, Richard Henry Lee, Thomas Jefferson, Benjamin Harrison, Thomas Nelson, Jr., Francis Lightfoot Lee, Carter Braxton

North Carolina: William Hooper, Joseph Hewes, John Penn

South Carolina: Edward Rutledge, Thomas Heyward, Jr., Thomas Lynch, Jr., Arthur Middleton

Georgia: Button Gwinnett, Lyman Hall, George Walton

Source: The Pennsylvania Packet, July 8, 1776