In Defense of the Gold Standard

America built its wealth on the gold standard

The gold standard is not perfect.  No monetary policy is.  Its flaws include natural monetary fluctuations of inflation and fluctuations of deflation without any control by the elites in the banking industry or the government.  Its strengths include allowing natural monetary fluctuations of inflation and fluctuations of deflation without any control by the elites in the banking industry or the government.  It is, however, the least imperfect and the most populist monetary policy.  And the need to return to it is urgent.

Why is it the least imperfect?

Under a gold standard, the free market incentivizes a balance of trade because price adjustments take place that incentivizes Americans to export and import at the same rate.

The reason for this, in shorthand, is that if a country is running a trade surplus with the United States (selling more goods to the US than buying of US goods), that country would end up with more dollars and Americans would end up with more products at the end of the transaction.  This is because that products could be made more cheaply for American consumers in this unnamed country than goods could be made in America.

The surplus of American dollars into this country would be redeemable for gold (the whole point of the gold standard).  Thus, in effect, any country running a trade surplus with the US would be increasing the amount of gold in its country.  However, a swift increase in the amount of gold in a country operating on the gold standard drastically drives up the cost of making goods in that country.  Thus, the “cheap” advantage the country would have on the US would be neutralized in the trading process itself.  The market actually anticipates this and thus creates incentives to maintain an international balance of trade.

This is why before we departed from the true gold standard under Franklin Delano Roosevelt, the U.S. was the greatest exporter in the world.  The automotive industry, the steel industry, and a thousand other “export” industries were thriving.  Towering skylines were rearing up all across the United States.  Ironically, these are the very industries where private sector unions (some of FDR’s strongest supporters) thrive.

On April 5, 1933, President Roosevelt issued Executive Order 6102 “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the Continental United States.”  This was unprecedented federal intrusion into property rights according to many Constitutional scholars.  Why would President Roosevelt destroy the gold standard which America had ridden to become the dominant economy in the world?

The answer is simple.  Roosevelt could not afford to remain on it.

The New Deal had a vision of a deficit-based federal government that would spend America out of the Great Depression by launching on countless great projects and financing one great entitlement — Social Security.  He also believed America needed to be in a position to spend its way out future depressions.  In order to pay for his vision, Roosevelt believed that the United States would have to run a trade deficit.  When foreign merchants and governments ended up with stashes of American dollars from trade with private American merchants, the United States government would sell them American bonds.

To be fair to Mr. Roosevelt, the New Deal designed Social Security, the first entitlement (and the most well-designed of the Big 3), under the assumption that the United States would be dealing with ongoing demographic growth.  Mr. Roosevelt could not and did not envision a post Roe v. Wade America where the population was in an ongoing aging spiral.

This demographic winter has begun to hit and is forcing entitlement programs to eat up unmanageable portions of the federal budget.  The federal government is having to finance larger and larger portions of the budget with overseas bond investment.  Incentives are increasingly there for the US to run a larger and larger trade deficit.

Many American Fortune 500 companies and their investors realized that incentives were growing to export to the United States rather than to export from the United States.  Now, calling AT&T is likely to get someone in India rather than Texas.  A Nike factory would lead you to Brazil rather than Ohio.  Cashing in on this reality has benefited the investor class but harmed the wage-earning class as their jobs are outsourced.  This has created a growing gap between the rich and the poor that numerous politicians on the Left have used as the authority for exacerbating the deficit issues feeding the problem.

If we returned to the gold standard, then the market would suddenly incentivize American exports.  Hedge funds, mutual funds, and investors with mobile assets would rush to invest in a suddenly booming American export industry returned from the dead.  Fortune 500 companies would find that it was no longer in their financial interest to service American clients from overseas.  Jobs and American investment money would rush back to the United States.  Federal revenue would increase on account of export-based growth but Congress would no longer have a credit card to spend more than it took in.  Would there be periods of deflation and inflation, with little central control to fix it?  Yes.  But America can no longer afford to have its own investor class not investing in the United States.

Why is it populist?

It would benefit the populace but, more importantly, it would remove the power of the Federal Reserve.  Right now, Fed Chairman Ben Bernanke is expected to operate with both the insight and the morality to monetarily manage the entire United States economy with no check on his power.  According to populist philosophy, no man should be entrusted with that level of responsibility.  Monetary decisions should be left to the populace.

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