www.forbes.com
Is gold money?
That question, directed to Federal Reserve Chairman Ben Bernanke by Congressman Ron Paul in last week's hearings before the House Financial Services Committee, strikes terror in the heart of all central bankers.
Bernanke looked stunned and then answered, "No: Gold is an asset."
The rising price of gold reflects global uncertainties, he explained.
"The reason that people hold gold is as a protection against what we
call tail risks: really, really bad outcomes."
The daily headlines report those potential risks: governments
needing bailouts, from Greece to Harrisburg, Pennsylvania; the
possibility that the euro will splinter; runaway deficit spending in the
U.S.
With every headline, it is becoming increasingly apparent how much
the governing class has overreached. Those who believe in government are
simply running out of other people's money. For example, President
Obama's call to reverse the tax break given to owners of corporate jets
in his 2009 stimulus bill would supposedly raise $300 million a year in
revenue, enough to cover less than two hours of current deficit
spending. Even if the Federal government could tax 100% of personal
income in excess of $250,000 a year, it would collect little more than
half of the revenue needed to balance the budget.
These real world results mock the conventional wisdom that given the
power to spend, borrow, tax and print money, elite public servants can
manage the economy and protect the average individual against the
vicissitudes of life. Instead, government itself has become a source of systemic risk, and a direct threat to our prosperity and liberty.
At the center of this political upheaval is the quality of money
itself. "Is gold money?" is a show stopper because it raises the
questions: "What is money and what power should government have to
manipulate its value?
The answers to these questions reveal how our most basic trust in government has been betrayed.
When you or I accept dollars in exchange for providing goods and
services, we do so trusting that when we spend those dollars, they will
be accepted for an equivalent amount of goods and services. That's how
money frees us from a barter economy.
Trust is always an assessment of some future action. Making a
grounded assessment requires us to understand who is making the promise,
what action they are promising, and whether they are sincere and
competent to fulfill their promise.
When an individual, company or government has a good credit rating,
we are saying that we trust they will keep their promise to pay off
their debts in the future.
So it is with the value of money. Today Bernanke is making the
promise effectively to "do his best" to achieve the Fed's dual mandate
of achieving maximum employment and stable prices.
I do not doubt that Bernanke and his colleagues at the Fed have done their best. Here are the results:
- Three million fewer men and women are employed today than 2.5 years ago, when the Fed began an unprecedented era of monetary ease marked by zero interest rates and two rounds of massive, quantitative easing.
- The 12-month advance in the Consumer Price Index has been above 2% for the past five months, hitting 3.6% for the 12 months ending both May and June. Bernanke promised in his interview last December on 60 Minutes that the Fed "...would not allow inflation to rise about 2% or less." Yet the Fed has taken no action, nor articulated any policy change, that would fulfill his promise of price stability.
A poll
conducted by Rasmussen last week indicates that the American people are
losing trust in the Federal Reserve and in the future value of the
dollar. Fifty percent of those polled reported they are "very
concerned" about inflation, and 79% said they were at least "somewhat
concerned."
Is gold money? Technically, no, in that gold does not circulate as a
medium of exchange. But, as trust in the paper dollar continues to
erode, and the incompetence of the governing class to manage the economy
becomes more evident by the day, there is growing interest in and
support of making the dollar as good as gold.
A gold standard works because the U.S. government rather than the
Chairman of the Federal Reserve stands behind a promise that is explicit
-- a dollar is worth a fixed weight of gold. This promise can be
verified every minute of the day by observing the current rate of
exchange between the dollar and gold, and, under a classical gold
standard, by exchanging currency at a national bank for gold coins of a
fixed weight and purity.
In addition, a gold standard provides a transparent set of practices
to keep the promise. A rise in the price of gold signals too many
dollars, triggering quantitative tightening. A fall in the price of
gold signals too few dollars, triggering quantitative easing. Since
these Fed actions are made daily and at the margin, such adjustments are
not disruptive, but produce stability and trust.
Finally, a gold standard produces trust in the dollar because gold
has the unique characteristic of maintaining its buying power over time.
For example, if today's dollar were worth 1/35th of an ounce of gold
as it was under the post World War II Bretton Woods system, a barrel of
oil today would cost less than $3 a barrel, just as it did in the 1950s
and 1960s.
Steps to restore gold's legitimate role as money are afoot. In Utah,
gold and silver coins are now legal tender and exempt from sales and
income taxes. The Swiss Parliament soon will hold hearings on creating a
parallel, "gold franc." And, the central bank of Zimbabwe is
considering replacing its worthless currency with a gold-backed Zimbabwe
dollar.
The question: "Is gold money?" terrifies central bankers because it
highlights their inability to provide a currency that is better than one
whose quality is guaranteed by a fixed rate of exchange into gold.
Between Aug. 15, 1971 -- the day President Richard Nixon suspended the
promise that a dollar was worth 1/35th of an ounce of gold -- and
Feb. 1, 2006 -- the day Bernanke was appointed Fed Chairman -- the
dollar had fallen to 1/569th of an ounce of gold. Today, it is worth a
teeny tiny 1/1600th of an ounce of gold.
An acceleration in the dollar's decline and the inflation, political
and economic turmoil that would follow are among those "really really
bad outcomes" that people are trying to escape. Restoring the promise
that a dollar is worth a fixed weight of gold would guarantee its value
and eliminate the "tail risk" of monetary disorder that individuals,
businesses and government all over the world increasingly have reason to
fear. The benefits of price stability, low and stable interest rates,
an increase in high paying jobs and the spread of prosperity would
redound to the benefit of all.
