Columnist Michael Kinsley is looking exceptionally prescient. Last May, in an article titled, "My Inflation Nightmare" in The Atlantic Monthly, he asked "Am I crazy or is the commentariat ignoring our biggest economic threat?" Kinsley's piece in The Atlantic Monthly anticipated a flood of articles in the world press exemplified by this UK Telegraph July 20 headline: “Gold reclaims its currency status as the global system unravels.” The evidence of the shift in the elite opinion stream is clear: the gold standard is returning to respectability.
Just 5 months later, the dollar is in a relentless decline, falling below $1,300/oz of gold, sinking against the Euro, hitting a record low against the Swiss franc. For those of us who lived through the Nixon/Ford/Carter inflation of the 70s, this sure looks like a precursor, a dramatic one. Kinsley may be playing Cassandra here. It wouldn’t be the first time for him. Kinsley pondering gold:
Kinsley: The only reason to buy gold is fear that the currency may collapse. Paper currency used to represent claims on a share of the gold in Fort Knox. Now it is just “fiat money,” backed only by the “full faith and credit” of the United States government.
Thirty years ago, we peered into this abyss and pulled back just in time. A stable currency is firm ground on which you can build a life. These days everyone is disenchanted with civic institutions and government. They hate the press, they loathe Congress, and so on. Studies by foundations puzzle over why. Was it the ’60s? No, it was the late ’70s and early ’80s, when government failed to deliver on its obligation to provide a stable currency.
Kinsley’s voice changes the public conversation. Until recently, there were three main critiques of gold, all relying more upon ridicule than reason:
Keynes dubbed the gold standard “a barbarous relic.” But Frederich von Hayek has been elevated above Keynes (by no less a figure than The New Yorker’s John Cassidy) as the key economist of the 20th century. Hayek had positive things to say about gold. He finally rejected it … out of fear of “fraud by government.” Hayek’s absolute pessimism about government is not shared by liberals nor by all free market conservatives.
William Jennings Bryan, famous champion of Creationism, declaimed that a “cross of gold” was responsible for the vicious depression after the Civil War. All evidence is that this depression was caused not by the gold standard but by its faulty resumption. Some still cling to the Bryanesque idea that the gold standard caused the Great Depression. But the architect of the great French economic miracle under De Gaulle, Jacques Rueff, called that era’s monetary policy merely a “grotesque caricature” of the gold standard.
Finally, some ridicule the gold standard as a kind of “ox-cart and clipper ship” romanticism, more nostalgic and outré than practical. Yes, there are some fringe proponents of gold. Yet there are serious economists, like von Mises, whose work rigorously establishes its intellectual bona fides. Hayek by now has been elevated by the liberal elites. Can von Mises be far behind?
The gold standard may be the only practical way out of a looming national crisis.
Interest payments on the national debt are credibly projected to rise, steadily and soon, to close to $1 trillion annually. This approaches the entire federal civilian non-entitlement budget. Technocrats are developing a Value Added Tax to fund this. That’s an act of desperation: a VAT is regressive. Tax the bread of waitresses to pay interest on the federal debt to bankers? Impossible to rationalize…. A VAT would also surely deliver European-style economic stagnation and unemployment. Gold-fueled growth is more equitable and is a recipe for prosperity rather than austerity.
The elites’ reassessment of Reagan as a superior president sets the stage. The gold standard is the unfinished piece of Reagan’s economic prescription. When Jack Kemp and Ronald Reagan took up the cause of Supply-Side economics, ridiculed as Voodoo, the Dow Jones Industrial Average stood in the mid-800s. The Supply-Side recipe — sound money, low tax rates, sensible regulation, and free trade—generated a (nonpartisan) wave of worldwide prosperity lifting billions from poverty worldwide.
Sound money was achieved through relying on the judgment and will of the Fed chairman rather than systemic reform. As the monetary disorders sweeping the world now attest this was a temporary and fragile expedient. Reagan considered the gold standard to be the ideal. Kemp explicitly pushed gold convertibility.
The gold standard is their “unfinished symphony.” Gold offers a way to create a fourth great wave of economic growth. The gold standard is the practical path to growth following Reagan’s rate cuts, Clinton’s free trade and welfare reform, and George W. Bush’s tax cuts.
No monetary system, including gold, is perfect. But the evidence is that the gold standard is a recipe for lower-than-predicted federal interest rates (quelling the coming fiscal crisis); lower corporate bond rates (jobs); and lower mortgage rates (relief to millions of upside down homeowners). The gold standard sounds picturesque. In reality it is a technical, pragmatic, non-romantic policy prescription. And it is re-emerging as respectable. Democratic and Republican officials would be smart to show as much astuteness as Michael Kinsley … and take a hard look at what a 21st century gold standard might offer.
Ralph Benko is Senior Adviser, Economics, to the American Principles Project. He was called upon by the U.S. Treasury Department to testify before the U.S. Gold Commission on the constitutional history of American monetary policy and served on detail as a deputy general counsel to a Reagan White House council and the Presidential Commission.