Is a New Gold Standard the Answer?

By: Alex Wallenwein | Wed, Nov 12, 2003
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Ordinarily, euro vs dollar' thinking holds that the days of the gold standard are over - for good. This is so because the 'euro model' for future national or even regional currrencies (sufficiently explained in previous essays) strikes a workable compromise between the need for gold as the supreme value-standard on the one hand, and the convenience and flexibility of fiat money on the other.

However, in the case of the United States and its economic (and therefore national) future as the issuer of a gold-negative fiat currency, there may well be cause for the re-introduction of an actual classical gold standard with full convertibility of paper into gold at a legislatively fixed rate. This is a position that is normally anathema to proponents of 'euro vs dollar' thinking. However, as will be shown, this can in fact work, but it will only work if a number of additional measures are taken.

Unfortunately, these additional measures, in today's political reality, have about the chance of the proverbial 'snowball in Hell' of being passed through our in principle unequalled, but in reality utterly subverted and corrupted political process.

But since this is a purely theoretical article, and because it's so much fun to do this, let's look at the options anyway. Maybe, after enough economic hardship and other pain has been inflicted on Americans by our unprincipled leaders, a sufficient number of US voters come to the realization that this is the only practical way out, and force some of our politicians to "amend their evil ways." I am a die-hard optimist.

Before I get to what these additional measures are, I want to present the reasons why - ordinarily - a classical gold standard cannot work in a world that is in the process of adopting the 'euro model'. (Please note that this is not to say that the world is necessaily about to adopt 'the euro' as such, but only the principle on which the euro is built, i.e., allowing the price of gold to rise freely against fiat, while the fiat currencies - of whatever country - are set up to benefit from such a rise, rather than to be threatened or destroyed by it.)

Again, it is generally doubtful that a gold-backed currency in the traditional sense can still work in a world where the euro-model has introduced a currency that is "backed" by gold - not in the sense of a legislatively fixed paper-to-gold ratio, but in the sense of reacting positively to a higher market gold price, rather than negatively, like the dollar is doing today.

As we have seen during the run-up to Franklin D. Roosevelt's gold confiscation in 1933, even a gold-backed currency can be over-printed and over-issued, and with enough pressure applied by the banking elites, can lead to exactly what FDR did. (A complete list of reasons why such a confiscation-effort is in principle still possible, but cannot be effective in a 'euro vs dollar' environment - and is therefore highly unlikely - is available to full-year subscribers of the Euro vs Dollar Currency War Monitor for free).

In 1933, bank-runs by Americans were imminent because people got wind that the banks had been inflating the paper-dollar far past their ability to redeem bank notes for gold, as they were then legally required.

Instead of risking a normal, healthy, banking "catastrophe" where depositors come and rightfully demand their property, leading to the ruin of many an overly profligate bank, FDR did what politicians always seem to do: bow to the pressure of the money interests, and rather than letting the banks bleed for their unjustified largesse in issuing paper notes, made sure it was the American people who "took it on the chin."

Rather than allowing the wrongdoing banks to suffer from the consequences of their own abuses, FDR, through executive decree, forced Americans to turn in their gold for paper, and simultaneously made sure through his "emergency legislation" (31 USC Section 5117) that the gold Americans turned over to the banks (in essence, to the federal reserve system) would immediately be added to the US gold stock and would thus become the property of the United States. In essence, FDR, being the socialist he was, nationalized all private US gold holdings.

All this happened despite a gold standard (which goldbugs always say is supposed to keep the bankers and politicians "honest"). This makes it clear that a gold standard by itself is no guarantee at all that such things will not happen again - unless additional measures are taken.

But, back to the original issue:

Why a gold standard no longer works in a euro vs dollar environment:

In this new (euro-style) monetary system, paper is allowed to freely depreciate against gold until it finds its free-market equilibirium, since the euro (or any other such currency) issuer's gold reserves rise in value with a rising gold price.

When in one country (i.e., the US), paper and gold are legislatively fixed to be exchangable at whatever ratio, while gold is allowed to freely rise in terms of all other currencies, the result would be an effective price-ceiling on gold inside the US, which inevitably leads to shortages very quickly (a la the California energy crisis).

In such an environment, the US dollar would rise sky-high against other currencies, since here in the US, it would take only the legislatively fixed amount of dollars to buy an ounce of gold, while people of other countries must pay a far higher price in their respective currencies.

This high dollar forex value would cause Americans to buy even more 'stuff' abroad than they do now, while US exports would become prohibitively expensive abroad. The result: bad for US exporters, and bad for US manufacturers, who will be even less able to compete with imported goods than they are now. That will reduce the amount of jobs available inside the US and will cause a recession. US dollars will leave the country, US exporters would not be able to earn them back, while economic activity shrinks inside the US.

Not a pretty picture.

Under these conditions, the US current account deficit would rise to a multiple of the already unprecedented levels existing today. The entire world would become our "China". In effect, re-imposing a national gold standard would be like pegging all foreign currencies low to the dollar. US firms will export jobs since it will be even cheaper to pay foreign labor than it already is today, US consumers will spend more money abroad, while at the same time the country will dip into a permanent recession due to the lack of consumption of domestic goods and services.

[Editor's Note: The following is the crux of the matter. While the foregoing analysis definitely applies, the concept of prohibitive tariffs, a total "no no" in the socialistically educated, genteel corporate bankster world, changes the picture completely. Please note specifically how tariffs in the past made it unnecesary for the US federal government to tax the incomes of citizens living in the states. Could that be why socialists shun the notion of tariffs and reslting "trade wars" so much? After all, a heavy, graduated income tax is one of the major planks in Karl Marx' Communist Manifesto.]

And here we finally come to the much-vaunted "additional measures" that would make such a system possible and workable despite all of the reasons just mentioned.

The only way to prevent all this from happening after a domestic gold standard is re-imposed, is to erect prohibitively high import tariffs to force US consumers to buy at home. (Maybe now you understand why these "additional measures" have such a small chance of passing any legislative process in the near future. If you have gone through the public school system in this country during the past five decades, you have been indoctrinated over and over with the "fact" that tariffs are evil and restrain trade, and make everybody poorer, because they force other nations to retailiate and start a trade war with the US.)

However, in the situation under scrutiny here, any so-called "trade retaliation" such tariffs might spur would not really hurt the US since, under such a gold-backed dollar system, nobody outside the US would dream of buying expensive US products anyway.

This is a crucial point in this discussion. Todays challenges present situations where conventional wisdom is just too - well - conventional!

In addition to stopping a huge dollar-drain, these high tariffs could actually help finance necessary (and I really mean only necessary) US government expenditures, so that an "income tax" of the kind that is currently enforced upon the American public would no longer be necessary. (Can you hear the "Dumbocrat" socialists and the "Repugnican" neocon megalomaniacs screeching: "What? No income tax??? How are we supposed to buy our votes in the future?? How are we supposed to engineer this society according to our misguided whims and desires, huhh?? Well, maybe it's time to give Dumbocrats and Repugnicans the boot, folks. After all, who got us here?)

The thus freed-up tremendous amount of additional disposable income (if Americans are no longer taxed on their domestic income) will spur an enormous amount of economic growth at home. The proceeds of these "tax savings" would naturally have to be spent by Americans in the domestic economy because the tariffs would make imports too expensive. This, in turn, would benefit US manufacturing ... etc., ... etc.

Pressing on:

The domestic gold shortage due to the price-ceiling effect, combined with the high forex valuation of the US dollar under a new gold standard, would lead Americans to buy their gold abroad (gold naturally must not be burdened with any tariff, if this is to work).

And here is the absolute crux of the matter:

Over time, this automatic tendency for Americans to look abroad for their gold needs (due to the price-ceiling-enforced shortage at home), in combination with the high US dollar's purchasing power abroad, would cause the US to re-attract much of the world's gold back to US shores. That way, this phonomenon would make up for the possibly catastrophic losses the US national gold stock has suffered because of the contnuous dollar-gold price manipulation over the previous decades (as suffficiently shown by GATA, and its team of researchers Frank Veneroso, Reg Howe, and others.)

Currently, much of this gold (in addition to other gold "liberated" from international central banks through past deceades of coordinated gold-leasing and short-selling efforts) has largely been diverted into Chinese and Muslim hands, where is poses a significant, if not overwhelming, threat to US economic (and therefore national) security.

Re-attracting this gold would then help preserve (or restore, depending on how bad things will get under our current and future US adminsitrations) US economic independence. However, such restoration of US economic independence, and even supremacy, would come about without the abusive aspects of the current fiat-dollar reserve system. Due to the nature of individual gold-buying in foreign lands, this re-imported gold would likely end up largely in private US hands, not in government hands, which in my humble opinion is where it belongs, in any case.

Wait a minute. This could be fantastic! Could this actually be the perfect solution to our current economic and monetary ills?

Interesting where your mind will lead you sometimes when you don't have a position to defend.

I don't really care about "my" position - even if it's "the" so-called 'euro vs dollar' position, and that is especially so if "my" position happens to suffer a fatal collision with the truth. I just want to find that truth, and do what's best for this country and its freedom under the Constitution.

Could this indeed be the way?

Possibly - but only under one condition:

For this to work, not only the current US federal reserve system, but the entire mess of fractional reserve banking would have to be utterly abolished and be forever made impossible by way of a constitutional amendment. Again, current political reality in this country will obviously not allow for such "radical" changes (I suppose after one hundred-plus years of quasi-socailistic rule and educational control, things that are innately compatible with the US Constitution are indeed considered "radical" by most Americans).

Fractional reserve banking, by its very design, encourages over-issuance of money -- which engenders monetary inflation -- which causes price inflation -- which impoverishes people -- which creates the necessity to "tax" the rich so the poor (thus increased in number) can be "fed" -- which makes the poor vote for more socialistic changes -- which gives socialistic politicians (of either party) more power -- who then feel compelled to perpetuate these changes so they can stay in power -- which is exactly what led Americans into this unholy mess. Too much power for the politicians, who are financed by the bankers who instituted this system in the first place. So, in the end: too much power to the bankers.

But I digress.

Point is: if the people of this country (you and I) were to suffer enough economic pain to eventually cause them (us) to muster enough insight and the requisite political will to make the changes outlined here, there is a chance this country can survive the coming dollar crisis intact. Wouldn't that be worth it?

Got gold?

Got standards?

So, why not have a gold-standard??

P.S.: If you want to do something about this in the political arena, please visit Nelson Hultberg's excellent site, Americans for A Free Republic and read everything in it. I originally devised this argument to "defeat" his suggestion that a new US national gold standard would be a workable solution to this country's economic ills. In doing so, I completely talked myself out of my own argument, and came to arrive at the conclusions stated in this essay.


Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

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