The Leaden anal­y­sis of gold

Forbes - - Inside Scoop - BY STEVE FORBES, ED­I­TOR-IN-CHIEF

The re­cently ran an ar­ti­cle trash­ing the idea of a re­turn to a gold stan­dard. A grow­ing num­ber of Repub­li­cans, in­clud­ing pres­i­den­tial hope­ful Se­na­tor Ted Cruz, ad­vo­cate fx­ing the value of the dol­lar to gold.

The Times piece en­cap­su­lates some of the egre­gious myths, mis­un­der­stand­ings and just plain ig­no­rance of what a gold stan­dard is all about.

The pur­pose of a gold stan­dard is to en­sure that a cur­rency has a fxed value, just as mea­sures of time, weight and dis­tance are fxed. We don’t “foat” the num­ber of min­utes in an hour or inches in a foot. Yet, strangely, econ­o­mists be­lieve that con­stantly chang­ing the value of a cur­rency is good for growth.

For a va­ri­ety of rea­sons, which are ex­plained in my new book, Re­viv­ing Amer­ica, and in my pre­vi­ous one, Money, gold keeps its in­trin­sic value bet­ter than any­thing else on Earth. It is to value what Po­laris is to di­rec­tion. The daily dol­lar price changes in gold re­fect chang­ing per­cep­tions in the mar­ket­place about the cur­rent and fu­ture value of the green­back. Gold’s value is un­chang­ing.

A few of the wide­spread mis­con­cep­tions about gold: • Gold re­strains eco­nomic growth. It does the op­po­site. When the value of a cur­rency is stable, in­vest­ment four­ishes—and so does eco­nomic ac­tiv­ity. For in­stance, from about two years af­ter WWII to when we cut the dol­lar’s link to the yel­low metal in 1971, the av­er­age an­nual growth in our in­dus­trial out­put was an as­ton­ish­ing 5%. Af­ter that it slumped to less than half that amount.

Our over­all av­er­age rate of growth since go­ing of gold more than 40 years ago is mea­sur­ably lower than it was be­fore.

Link­ing a cur­rency to gold doesn’t mean “price sta­bil­ity”—it means that prices will re­fect the ac­tual in­ter­play of sup­ply and de­mand. • Gold dan­ger­ously con­stricts the fex­i­bil­ity of au­thor­i­ties to re­spond to crises. No, it doesn’t. Gold­based money has noth­ing to do with the abil­ity of a cen- tral bank to mit­i­gate a fnan­cial cri­sis by act­ing as a “lender of last re­sort.” Dur­ing a panic or time of dis­tress, a sound bank need merely bring col­lat­eral to the cen­tral bank for a short-term loan to weather a tem­po­rary cri­sis. When things calm down, the loan is paid of. • Gold ar­tif­cially con­strains the money sup­ply, thereby hurt­ing the econ­omy. This is a vari­ant on the frst bul­let. Un­der this myth the money sup­ply is tied to the out­put of gold mines. If out­put goes down, so will eco­nomic ac­tiv­ity.

There are two big things wrong with this. Gold isn’t sub­ject to the sup­ply shocks that afect other com­modi­ties. For ex­am­ple, it’s not like wheat, which, once it’s har­vested, is mostly con­sumed. Ev­ery ounce of gold ever brought out of the ground is still with us. An­nual out­put av­er­ages about 1.5% to 2% of the ex­ist­ing sup­ply.

Sec­ond, the amount of gold doesn’t re­strict the money sup­ply any more than the sup­ply of rulers would re­strict the size of a house you might con­struct. It merely en­sures that money has a fxed, stable value. As noted mon­e­tary ex­pert Nathan Lewis has pointed out, from 1775 to 1900 the U.S. grew from a small agri­cul­tural econ­omy of 2.5 mil­lion peo­ple to the world’s might­i­est in­dus­trial na­tion of 76 mil­lion peo­ple. Dur­ing most of that time the dol­lar was fxed to gold. The global out­put of gold went up 3.4-fold, yet the U.S.’ money sup­ply bur­geoned 163-fold.

What vir­tu­ally all econ­o­mists fail to grasp to­day is that you can have a gold-based cur­rency with­out own­ing a sin­gle ounce of gold. We could set the dol­lar/gold ra­tio at, say, $1,100 an ounce. If the price rose above that level, it would mean there was too much money in the econ­omy, and the Fed would tighten. If it dropped be­low, the Fed would ease.

The crux of the gold de­bate is about power: The New York Times and many econ­o­mists like the idea of gov­ern­ment dom­i­nat­ing the econ­omy; hon­est money ad­vo­cates don’t.

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