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Jack Kemp, this writer’s favorite American statesman in the
20th century, wrote an op-ed in the Wall Street
Journal on June 28th called, "Our
Economy Needs a Golden Anchor." This is a big deal,
because a golden anchor would ensure that the U.S. dollar would
maintain its value regardless of time and future circumstances.
Mr. Kemp came to appreciate gold’s importance from Nobel
Laureate Robert
Mundell and Jude
Wanniski, who in turn learned the importance of a golden
anchor from the wisdom of countless thinkers from days long
gone. It is axiomatic that our most precious truths are eternal,
but must be relearned by every new generation. In this way, we
are always standing on the shoulders of giants.
History is filled of examples of governments that
deliberately degrade the value of the currencies in order to
fund a war or other politically appealing projects. It’s easy
to do this: just print a desired amount of currency that they
require without having to tax their subjects. But such policies
cause inflation, as the savings of everyone else in the society
have been diminished in order to serve the interests of
politically powerful.
Today the United States is in the throes of a deflation, as
the Federal Reserve is not injecting sufficient liquidity that
the market is demanding. Although this increases the value of
the dollar in your pocket, the dearth of liquidity has caused
corporate profits, spending and investment to take a nosedive.
Like a mountain climber that does not have enough air to
breathe, the economy does not have enough money to run at full
steam.
Every economy has by definition creditors and debtors.
Debtors benefit from inflation because they have to pay less
money back to their creditors in real terms. Creditors benefit
from deflation because debtors have to pay back more than they
lent in real terms. But a just polity would never favor one of
these groups over the other, but merely create a neutral
platform for both.
More importantly, any benefits to either group would be
obviated by the economic distress that currency instability
brings. If the value of a currency always fluctuates, it
discourages people from taking risks, investing in themselves
and others, and knowing that the fruits of one’s work will be
secure in the future.
A gold standard insures that the value of the currency will
be maintained, because monetary actors will sell bonds and take
liquidity out of the economy when the gold price becomes too
high (inflation), and buy bonds and add liquidity into the
economy is too low (deflation). Simple.
What is the optimum price of gold? Experts disagree, but
almost all of them put it between $300 and $350 an ounce. The
futures market projects gold to be $271 in August. If the
Federal Reserve added sufficient liquidity, the price of gold
would rise to $300; more importantly and consequently, the
economy will thrive once again.
Most professional economists tend to dismiss or deride a
golden anchor because of their training, and because their
scientific and modern assumptions reject ancient ways of
maintaining a currency. But these economists must ask
themselves, "What are the long-term benefits of a currency
that fluctuates in value?" They can’t provide a sound
answer, because there are none. Period.
Treasury Secretary Paul O’Neill said recently that the
recent downturn is a mere pit stop and a long age of prosperity
awaits us. I would agree generally, and I understand why he said
this. Nevertheless, our sub-optimal monetary policy obstructs
this long-term prosperity for the time being. A golden anchor
would guarantee the promise of a new prosperity for all mankind.
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