The Gold Standard Is Coming
This story appears in the September 24, 2012 issue of Forbes.
Pundits are pooh-poohing the plank in the GOP platform that calls for a commission to examine “possible ways to set a fixed value for the dollar,” declaring it a sop to Ron Paul supporters. And indeed this was a motivation of hard-core political calculators around Governor Romney. But these self-styled, world-weary cynical types didn’t put this item in of their own volition. They went along with it because it was pushed hard by Tea Party groups and several U.S. senators and representatives, as well as Ron Paul devotees.
Gold won’t be a sizzling issue this fall. The economy, entitlements and, possibly, war in the Middle East will dominate headlines. But the yellow metal will be a hot topic in the next 24 months. The commission is going to take on an importance that will astound today’s political punditry, besotted as they are with stale Keynesian quackeries about money, taxes and spending.
Why? Events economic and political. The ever deepening financial crisis around the world will force the new Romney-Ryan Administration to consider–and quickly, too–dramatic measures to deal with the disaster.
The Obama/Bernanke Federal Reserve has been an abysmal failure. No major country’s central bank has been so destructive since the Fed in the 1970s; prior to that, nearly a century ago, it was Germany’s central bank, which created a hyperinflation that helped set up an environment for the Nazi revolution.
Unlike other central bank catastrophes this one, so far, is of a slow-motion variety, which is disguising the immensity of the harm being done.
For the first time in our history our credit markets have been rendered incapable of providing sufficient capital for small- and medium-size businesses, while starving startups and would-be startups of the wherewithal to grow to their full potential.
In order to work properly and productively markets need a reliable pricing mechanism. By manipulating interest rates on such an unprecedented scale the Federal Reserve has effectively destroyed the ability of our credit markets to genuinely price the borrowing and lending of money. Does anyone really believe a 10-year Treasury should yield little more than 1.5% or a 30-year government bond just under 3%?
This point is critical: The Fed’s forced suppression of organic interest rates has made the pricing of credit impossible to figure. And guess what? If you can’t determine the real prices of products and services, you get less–or none–of them. It’s Soviet-style economics.
Say we had market-determined interest rates again. Banks might then have to pay 3% or more on your deposits. Unable to get virtually free money, banks would more actively seek customers for loans. And regulators, who in their current bout of unreasonableness have also suppressed lending impulses, would be more vigorously resisted.
This is why the gold commission will be critical. Under a properly functioning gold standard the Fed’s penchant for rigging interest rates would be sharply curbed, if not eliminated. For instance, let’s say gold was pegged at $1,500 an ounce. If it went above that level our central bank would remove excess money from the markets by selling bonds from its portfolio; if it went below that peg then the Fed would buy bonds to meet the market’s legitimate demands for money. Setting interest rates would no longer work; the Fed would have to let them float.
A stable dollar is absolutely crucial in dealing with our economic woes. Americans instinctively understand that an unstable dollar is a bad thing. Many Tea Party activists, as well as others, are starting to examine the gold issue. The subject is no longer Ron Paul’s monopoly.
For more from this issue’s Fact and Comment see here: TSA Conflict of Interest Would Come As No Surprise To Adam Smith