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!